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In This List

Electric utility giants point to progress on ESG uptake

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Electric utility giants point to progress on ESG uptake

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Duke Energy Corp. is investing heavily in renewable energy projects, including solar projects throughout North Carolina, as part of the company's commitment to reduce its carbon footprint by 40% by 2030 from 2005.
Source: Duke Energy Corp.

As the Trump administration pursues policies to benefit the fossil fuel industry, the trend toward decarbonization among electric utilities in the United States is picking up steam.

Shareholders have been pushing for investor-owned electric utilities to be more proactive and transparent when addressing environmental, social and governance risks and several management teams are responding. The Edison Electric Institute recently announced the launch of a pilot ESG and sustainability-related reporting template to help electric utilities provide uniform and consistent information.

Duke Energy Corp., American Electric Power Co. Inc. and NiSource Inc. are among the investor-owned utilities to announce their participation in EEI's broad working group that helped develop the template.

Separately, PPL Corp. on Nov. 30 released its Climate Assessment report and plan to dramatically reduce emissions by 2050 in response to a request by its shareholders to analyze the costs and feasibility of limiting global warming to "no more than 2 degrees Celsius over pre-industrial levels," which is tied to the Paris climate pact signed in 2016.

President Donald Trump's plans to initiate a U.S. withdrawal from the Paris Agreement have so far done little to alter the course for utilities focused on clean energy and ESG risk management.

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"We have certainly paid a great deal of attention to ESG recently. It's why we've taken board members with us to visit our major investors ... to discuss and make sure they understand what we are doing in the area of ESG," Duke Energy Executive Vice President and CFO Steven Young said during an interview at the EEI Financial Conference. "I think we have a great track record of accomplishing things in this area. We've made commitments to reduce our carbon footprint by 40% by 2030 from 2005. A real future strategic commitment here. Part of that is an appreciation for the ESG influence that our investors are concerned with."

AEP Chairman, President and CEO Nicholas Akins noted the Ohio utility produces an annual corporate responsibility report to address ESG concerns.

"We've been able to use that corporate responsibility report on many of the discussions that we've had directly with investors that either had concerns or were evaluating different companies [as far as] what to invest in," Akins told S&P Global Market Intelligence. "So, it's been very beneficial because on the face of it we are still a large coal operator and in many cases, from an environmental standpoint, they would say 'well, we have a problem with this company.' But when you have discussions with them and show the progress that's being made, and what your focus is, you find that the best way to make environmental benefits is to invest a dollar in AEP."

In July, AEP announced plans to purchase the $4.5 billion, 2,000-MW Wind Catcher Wind Farm being built in the panhandle of Oklahoma.

"Really, the transition that AEP is making is a result of the expectation around customers and investors of the progress the company's making around clean energy, around the transition from a cultural standpoint, environmental and so forth," Akins noted. "As long as we're making that progress and can show we're making that progress, then we're in good shape."

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Doing their part?

Credit rating agencies believe utilities, by and large, have the inherent capability to proactively address ESG concerns. Still, shareholder groups see the need for progress.

"My first observation would be that none of this — neither the E nor the S nor the G — is new to utilities," S&P Global Ratings analyst Todd Shipman said. "They've been dealing with all of them, probably the first two more so and more effectively over time."

The analyst said utilities are "probably not as attuned to the kinds of challenges on governance."

"I think that's the one area where I think we see, from talking to utilities and utility holding companies, that more work needs to be done … to make sure that we and investors and bondholders and other creditors really understand companies and their recognition of the issues, all of these ESG issues," Shipman said.

For the unregulated power sector, the risk falls mainly on the environmental side and the question around "whether or not companies have been proactive in the past and looking forward about how they capture environmental risk," S&P Global Ratings analyst Michael Ferguson said.

"I would say, in general, that these coal-heavy fleets tend not to be highly rated," Ferguson said. "Now, you can make the conjecture here that that's due to the fact that natural gas prices are low and power demand growth is also low. But I would say that we kind of understand that longer term, [even] if there's not a federal policy on carbon right now, that there's presumably at some point going to be [more focus on carbon]."

Still, it appears unlikely that ESG risks will impact credit ratings in the near term.

"We're starting to see some elements that distinguish some utilities from others, but I think it's really early days. Certainly, I can't point to any ratings actions or anything explicit," Shipman said. "But I think that going forward I think you'll see that more."

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Lila Holzman, energy program manager for the nonprofit shareholder advocacy organization As You Sow, agreed that several investor-owned utilities are taking steps to improve their ESG reporting.

"One of the greatest challenges for investors has been the inconsistency with which utilities provide such disclosures on various actions including frequency, level of detail, presentation, and the underlying assumptions used in scenario analyses," Holzman said. "Voluntary reporting initiatives like those of CDP and the Edison Electric Institute have helped draw attention to the need for improved uniformity, and this process must continue evolving to meaningfully respond to shareholder concerns. Participation in programs like these are an important and proactive step that some utilities are beginning to take."

As You Sow and other investors have again challenged FirstEnergy Corp. to "evaluate how reduced demand for fossil fuels — especially coal — will impact its operations in an energy market moving to limit global warming to under two degrees Celsius."

While As You Sow fell short this year in a shareholder vote calling on FirstEnergy to prepare a report disclosing its "strategy for aligning business operations" with the Paris agreement, the advocacy group called the 43% vote at the May 16 meeting "impressive" and encouraging.

Holzman warned that utilities that refuse to respond to climate concerns "leave themselves and their shareholders vulnerable to risks being better addressed by peer companies."

"Proactive companies are those that plan for the ongoing energy transition away from fossil fuels and toward clean sources," she said. "Transparency and preparation help them to adapt to meet changes in demand in a profitable and sustainable way. Reluctant companies will be left behind and lose their ability to compete, putting their shareholders at risk."

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Exelon Corp. has been successful in convincing lawmakers in Illinois and New York to subsidize its nuclear assets largely based on their economic and environmental benefits. Time may be running out for the company to convince lawmakers in Pennsylvania to save its infamous Three Mile Island nuclear plant.
Source: Associated Press

Navigating nuclear

With coal plant closures expected to continue, Ferguson is interested in how companies with nuclear assets navigate ESG pressure from shareholders.

"Because nuclear obviously has environmental attributes in some ways, maybe in other ways not so much," he said.

Ferguson noted that Exelon Corp. has been mostly successful in securing subsidies, especially in Illinois and New York, for nuclear plants that otherwise would be retired.

"They've done so partially, I think, on the merits of those [plants] as environmentally sound assets because they do not emit carbon and because obviously replacing them would mean building new baseload generation," Ferguson said.

Morningstar Research Services LLC analyst Travis Miller said nuclear provides two ESG-related benefits.

"One is fairly obvious. The other is less intuitive," Miller said. "The obvious one is that nuclear emits no carbon. So, when we're talking about large generation sources that can serve very large markets, very reliably, nuclear is the only choice right now."

"The second point, the less intuitive point, is if you shut nuclear down and considering the fact that you have much less reliable other renewable energy or no carbon sources, you increasingly have to rely on fossil fuel generation."

Miller noted that SCANA Corp. has proposed purchasing a 540-MW gas plant to replace 40% of the projected power that would have come from the abandoned V.C. Summer nuclear expansion.

"So, it is not just indirectly a substitute. It's a direct substitute," Miller said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc. S&P Dow Jones Indices is a division of S&P Global Inc.