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ESG metrics continue to emerge as key criteria for power sector investment

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ESG metrics continue to emerge as key criteria for power sector investment

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A wind farm in South Plains, Texas. Third-party ESG analyses could come to include factors like the concrete and rebar used by a wind power generation facility.
Source: Vestas Wind Systems A/S

The rules by which environmental, social and governance considerations will be weighed by rating agencies, banks and companies are solidifying as those institutions establish formal ESG metrics.

"Trying to come up with appropriate financial products to incentivize our clients to do the right thing or to help them do the right thing by giving them interest rate savings or a more compelling financing structure is something that we continuously do," Ravina Advani, managing director and head of energy, natural resources and renewables at BNP Paribas SA, said on an ESG-focused panel at S&P Global Market Intelligence's 33rd Annual Power and Gas M&A Symposium. S&P Global Ratings, in its ESG Industry Report Card for banks in Europe, the Middle East and Africa, published on Feb. 11, identified BNP Paribas' sensitivity to environmental risks as typical.

The rising importance of ESG metrics has been felt throughout the industry, with Advani noting the increasingly common practice of companies hiring chief sustainability officers.

"We don't go to a meeting where ESG isn't discussed," Joseph Sauvage, vice chairman and head of global power at Citigroup Inc., said on an earlier panel.

A need for accuracy and consistency in companies' ESG data is among the most pressing considerations. While "there's a lot of bad data out there," according to Jeffrey Kotkin, vice president for investor relations at Eversource Energy, "it's getting a lot better."

In 2018, the investor-owned utility trade group Edison Electric Institute introduced an ESG template for its member companies to help standardize metrics like sustainability for investors.

"I think it helps to find the data faster if an organization is adhering to some sort of framework," said Brian Werner, head of business development NFC, Americas at S&P Global Inc. subsidiary Trucost. "That's helped improve the availability of data, the quality of data."

As institutions continue to adopt ESG guidelines, the meaning of what qualifies as being a responsible corporate environmental steward is taking shape.

"When we're leaning on third-party reports and information, the one challenge that we all face in the industry is just standardization," said Advani, who noted that third-party ESG reports often do not include information related to the environmental impact of projects' construction materials and installation. "What about the concrete and steel that's actually going into the ground?" she added.

"There are parts of that value chain that we haven't been asking and haven't been addressed so as we look to provide some of those financial instruments those are conversations that we're having with our clients," said Advani, adding that her team seeks to ensure there are "no contamination or geological issues" with any green investment.

As new technologies continue to emerge, some companies are betting that new power generation technologies will help them meet ESG goals.

DTE Energy Co., for instance, has a goal of achieving net-zero carbon emissions by 2050. "It's going to be through advanced technologies, things that don't exist today or need to be commercialized and operational, things like advanced small nuclear, biosequestration, carbon capture sequestration," said Joyce Leslie, the company's director of business planning and development.

Trucost is an offering of S&P Global Market Intelligence.