In a first-ever examination electric utilities and issues surrounding environmental, social and governance decision-making, analysts at Macquarie Capital (USA) identified their overall top pick and two most-improved companies compared to annual metrics beginning in 2014.
Analysts Angie Storozynski, Christopher Morgan and Josh Seide said in the report, issued Dec. 27, that more mainstream investors are developing interest in a company's actions around environmental, social and governance, or ESG, highlighting a recent effort by the investor-owned utility advocacy group the Edison Electric Institute to create a template to collect information from companies in a standardized way.
They cited research from earlier in December by Macquarie colleagues in Australia, who have developed a proprietary ESG rating on more than 200 Australian companies, that found companies with higher ESG scores have delivered higher returns with less volatility. They also found that improvements in ESG ratings over time are more predictive of a stock's "outperformance." Overall, the Australian analysts have found that social and governance factors — the S and G in ESG — are better at predicting a stock's future performance, but the U.S. analysts said the E — environmental factors — appears particularly relevant to U.S. electric utilities.
The Macquarie analysts created a peer group of 21 large U.S. electric and diversified utilities. Specific factors examined included, for environmental, water used for electricity production, carbon emissions and wind and solar capacity as a percentage of generation capacity; for social, the percentage of the workforce composed of union members, women and minorities; and for governance, the percentage of women on the company's board of directors and the percentage of independent directors.
Edison International tops rankings
Edison International was named Macquarie's top ESG pick for U.S. utilities. The California-headquartered company ranked highest in the environmental category because it has divested most of its fossil-fueled generation capacity, shut its nuclear capacity and contracted for a comparatively high percentage of electricity from renewable resources. The analysts noted that the company's utility subsidiary, Southern California Edison Co., could be found to have some liability for recent wildfires in Southern California, but they said because a lower percentage of its leverage comprises short-term or floating rate debt than compared to other utilities, Edison International's dividend is less at risk.
Women and minorities comprise higher percentages of Edison International's workforce than at other utilities, and women make up 30% of the company's board, higher than the peer utility average of 23%. As for board independence, Macquarie analysts noted that the company's president and CEO, Pedro Pizarro, does not also hold the position of board chairman, whereas at about half of the utilities reviewed, the same person holds all three of the president, CEO and board chairman positions.
Based on data beginning in 2014, American Electric Power Co. Inc. was rated most improved, due to a broad shift away from coal-fired generating resources to gas and wind, and on the social front, an increase in the percentage of women and minorities in AEP's workforce. The Macquarie analysts said AEP, which has utility operations in 11 states, has made strides to empower employees, which has improved operational efficiency and has made the company more attractive as an employer. One-fourth of the company's board is women, and Nicholas Akins is the board chairman as well as company president and CEO.
Alliant Energy Corp., with utility operations in Iowa and Wisconsin, was ranked second-most improved since 2014. Alliant has increased the amount of wind-powered generating capacity in its resource mix while reducing the amount of coal, which has helped the company largely achieve its emissions reductions goals. Half of the company's board is women — the highest percentage among the peer group of utilities — and Patricia Kampling is the company president, CEO and board chairman.