This is the second in a series of six blogs that summarize discussions by top executives, investment bankers, and ex-Federal Energy Regulatory Commission (FERC) Commissioners about developments in the U.S. utility and power sectors. The discussions took place at the virtual 34th Annual Power and Gas M&A Symposium on February 24, 2021.
Meredith Bearden, Associate Director at S&P Global Market Intelligence, moderated this panel that focused on, “ESG in 2021, How Companies Responded to the Turmoil of 2020”. She was joined by: (1) Molly Aeck, Managing Director of New Ventures at Southern Company, and (2) Brian Werner, Head of ESG Business Development for Corporates at S&P Global Trucost.
The Roundtable focused on S and G taking center stage:
2020 was a landmark year in many ways. The COVID-19 pandemic saw a black swan event that truly affected businesses and people around the world. At the same time, extreme weather events as well as highly-visible instances of racial injustice underscored some of the trends that have, and will continue to be, an area of concern. With this as a backdrop, Molly Aeck shared how her organization responded to the challenges that have come with the increased focus on all areas of ESG, bringing S and G into center stage. Brian Werner finished by looking at the information challenges with S and G.
A few highlights:
- Southern Company has been actively engaged in the economic and social development of the communities they serve for a very long time, but the S in ESG was brought into even greater focus in 2020.
- Externally, it is stepping up S across three key pillars: education equity, economic empowerment, and criminal justice reform. Internally, the focus includes increased hiring and retention of diverse groups at all levels of the company.
- Southern leverages Energy Impact Partners (EIP), a strategic investment firm, and venture capital generally as a tool to meet its innovation and sustainability objectives.
- While S is more difficult to analyze than E, that should not be a barrier to attempting to quantify some of the material issues.
Questions to the panelists:
Southern was one of the first utilities to set significant carbon-reduction goals. How has Southern been able to apply the learnings from that navigation on environmental issues to how it thinks about S and G? And how did 2020 change that at all?
Molly Aeck, Southern Company: Most of our focus historically was on E, and we have dramatically transformed our generation mix as a result. Coal decreased from approximately 70% of the mix to 16%, and is still declining. We have a goal to be net-zero goal by 2050 and by 2025 expect to achieve a 50% reduction in greenhouse gas emissions relative to 2007 levels, plus have more than 40% of our generation be carbon free. Since Tom Fanning became CEO just over a decade ago, we have met regularly with environmental NGOs and investors to talk about that transition, and our Board tied a portion of Tom's compensation to the net-zero goal. We were also the first large-cap utility in the U.S. to publish a sustainable financing framework, and have a full-time executive dedicated to ESG.
We were focused on S before 2020, though. Southern has been actively engaged in the economic and social development of the communities we serve for a very long time. Before the events of last summer, we had been a convener of revitalization efforts in underserved communities. Our foundations have deployed creative tools, including such things as loan guarantee pools to back up lending to low-income communities and a $50 million commitment to historically black colleges (HBCUs) to provide students with scholarships, internships, and leadership development.
That said, S was brought into even greater focus in 2020 given the deaths of African Americans, and we created an initiative focused on racial equity and social justice. The framework crosses six areas: supplier diversity, political engagement, social justice, community investment, talent, and culture. In each of these, we set specific commitments for what Southern will due to advance racial equity, and put forward the specific tactics that we will be using to achieve these ambitions.
With the transparency we show on E, investors are looking for the same level of transparency on S. Given this, we are committing to disclose workforce diversity data, we have engaged an outside expert to audit our internal pay equity review process, and are incorporating our racial and social justice work in our activities. This isn't a compliance exercise for us, but something embedded in our corporate values, just like safety.
What does S and G mean in the power and utility space from the perspective of where you sit? What specifically are you doing in these areas that is either unique or is really going to move the needle?
Southern's regulated service territory has one of the highest African-American populations in the country and was at the center of the civil rights movement. This made us mindful of several things and set us on the right path for some of the work that we are doing. Our leaders are very results oriented but, in this case, they understood we needed to stop and listen to understand the issues and their root causes, before jumping straight to a solution. And, we made sure not to just absorb our work on racial equity into a broad diversity, equity, and inclusion effort, but to focus on the realities of racial injustice.
When it comes to the specifics, we have both internal- and external-looking commitments. For example, Southern committed $200 million through 2025 to advance racial equity and social justice in our communities. We are stepping that up across three key pillars: education equity, economic empowerment, and criminal justice reform. The first two were already very familiar to us. We joined with Apple as a founding partner in the Propel Center, which is a global innovation headquarters in Atlanta for HBCU students and will serve as a digital learning business incubator to grow black entrepreneurship. Criminal justice reform was a new area for us, and we will step up our advocacy through our political engagement, through our policy positions.
For the internal-looking commitments, we are continuing our focus on increased hiring and retention of diverse groups at all levels of the company and goal setting at the business unit level to ensure diversity in each of the function areas. How effectively a company ensures a culture of equity and inclusion is one of the more difficult things to measure, but also one of the most important, so it's a big focus for us.
Southern is the founding partner of EIP. What does the EIP relationship mean to Southern, and how is that complementary to the firm’s goals?
We leverage EIP and venture capital generally as a tool to meet our innovation and sustainability objectives. Specifically, the reason Southern made the founding investment in EIP is to stay aware of disruptive technologies and opportunities for new revenue generation and operational efficiencies to help us source innovative partnerships. We gain a lot of strategic value from the climate impact lens that EIP applies to its investment decisions. Decarbonization can't happen through a single pathway, so EIP helps us cast a wide net. We need to invest in a diverse portfolio that include the most promising emerging solutions. Then we saw the opportunity to take a more proactive role in fostering diversity in the venture and energy tech space, which is desperately needed. There are a lot of companies led by underrepresented entrepreneurs in our region. But with the right access to capital, the right support, they can not only grow within our own service territory, but scale beyond that to work with other utilities across the country. The EIP ecosystem that's done great things to accelerate innovation in our industry can do the same thing for diversity.
What is coming in 2021 for ESG, whether for your own company or for the sector more broadly?
I think we will see companies continuing to respond to the issues that were the focus in 2020, including setting goals and metrics and enhancing transparency. We are excited about our sustainable financing framework and its ability to affect environmental and social change through how we invest our capital. Our subsidiary, Southern Power, issued a $400 million green bond under the framework, which made Southern a top U.S. corporate issuer of green bonds. In future financings, we have plans to allocate to the social category, as well for diverse supply spend programs that empower small businesses. So, I think we will see more and more companies issuing social- and sustainability-linked financing products.
What are the information challenges with S and G?
Brian Werner, S&P Global Trucost: Generally speaking, environmental impacts are easier to measure, but that was not always the case. Years ago, the methodologies had not been developed, and that is where S and G are now to a certain extent. Just because these areas are more difficult to analyze, that should not be a barrier to attempting to quantify some of the material issues. Information on things like gender diversity and labor practices is often available at companies, but many are reluctant to disclose it for a variety of reasons. Things are changing, though, as companies are being pressured by investors, employees, and customers to be more transparent, and that will only accelerate.
Since S&P Global is a company that provides ESG company-level scores, for example, we need to make sure that we are making it as easy as possible for companies to respond. We are transparent with our methodologies and want to make it straightforward to disclose information. We also want to continually evolve our requirements and the questions that we are asking for the impacts that are coming. We have done that with climate change and will continue to do it with S and G issues.
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