Trends

Is sustainability a real competitive frontier for utilities?

Pamela Styles

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March 19, 2019


Blue sky with power lines.
Blue sky with power lines.

How could Sustainability be a real competitive frontier if public utilities are regulated? And, isn’t Environmental, Social, and Governance (ESG) / Sustainability just a cost these companies must endure — much like taxes?

However, one might think that the answer to these questions is “yes,” however…

Companies competing for capital could benefit from their ESG/Sustainability efforts for real ROI reward

As the ESG / Sustainability field continues to evolve into mainstream business and communications practices, it is becoming noticeable that some utility sector leaders have been quietly bridging their company’s sustainability program successes into their investor relations (IR) communications strategy.

Takeaway

The maturing ESG / Sustainability field appears to have had a profound impact on the utility sector — electricity, gas, and water — at large and on individual company competitive behavior.

Findings

When I conducted my first research using AlphaSense a year ago, the utility sector had the most significant ESG / Sustainability investor disclosure volume. I recently revisited this observation to see what another AlphaSense search might find. I looked for Sustainability-related references by the U.S. publicly traded utilities in a limited search of just their annual proxy statements and IR presentations over the past year. The results:

  • 101 publicly traded U.S. utility companies could be found in AlphaSense
  • Virtually every one of the companies referenced ESG / Sustainability (or related terminology) in their most recent proxy statement
  • In aggregate, 29% of these companies also referenced ESG / Sustainability (or related terminology) in their IR presentations. The chart below shows the breakdown. Leading the way — water utilities (45%), followed by electric utilities (38%)
  • An analysis of the various types of IR presentations where ESG / Sustainability references were identified is shown in the table below

Types of IR Presentations

Annual
Meeting
Investor
Conferences
Investor
Meetings
Analyst
Days
Quarterly
Earnings Call
Other
Gas Utilities x
Independent P&RE* x x x x
Electric Utilities x x x x
Water Utilities x x x x x
Multi-Utilities x x x x x

*Independent Power & Renewable Energy Producers

Competitive positioning

It’s not hard to see where this is going. We could fill the walls of a conference room brainstorming myriad scenarios in which Sustainability is rapidly presenting itself as a natural competitive frontier for the utility sector. Instead, I will leave you with several macro-level considerations:

  • Accelerating pressure to de-carbonize is coming from multiple external stakeholder groups, including investors choosing to engage instead of divesting their holdings in individual companies.[2]Balancing the timing and influence of these external pressures — versus practical migration of power generation assets to lower carbon impact — could affect relative competitive financial performance across sub-sector peers. For instance:

“Stranded assets will become an unprecedented problem for sectors relying on fossil fuels.”

  • How individual utility companies choose to modify and invest in their energy-producing assets and feedstock supply, in tension with external stakeholder bias, will matter at the top, middle, and bottom lines of their financial performance. Proactive IR communications will be critical in helping navigate each company’s journey through it all.

“The results are very consistent: Firms making investments on material ESG issues outperform their peers in the future in terms of risk-adjusted stock price performance, sales growth, and profit margin growth … At the same time, they need to be able to inform their investors how they are performing on those issues by communicating credible key performance indicators. Investors need to analyze the important ESG issues for the companies in their portfolios and manage hidden risks. Not all social and environmental initiatives are created equal.” – George Serafeim, Harvard Business School, April 14, 2015

Results of the 2016 presidential election will matter in terms of what, why, where, and how each company in the utility sector will need to adapt its Sustainability strategy and positioning.

“Energy has largely been a second-tier issue in this contest, although the divergence in the candidates’ views on this vital subject is stark … Stepping back from the details, and at the risk of grossly oversimplifying some complex and thorny issues, the key difference I see between the two candidates in this area is that Mrs. Clinton’s energy policies seem designed mainly to serve environmental goals, while Mr. Trump’s energy policies seem aimed at mainly economic goals … the choice here looks as binary as on many other issues this year. Just don’t interpret that conclusion … as an endorsement of either candidate.” – Geoffrey Styles, Energy Outlook, November 3, 2016

Lastly, we shouldn’t forget about the human capital impacts of ESG / Sustainability in talent recruitment and retention. As pointed out by Ceres in its “Roadmap for Sustainability, Electric, and Gas Utilities:”

“And all of these challenges require attention when these companies face a wave of near-term personnel loss — more than 50% of the workforce could retire over the next decade, by many estimates — and will need to recruit and train a new, skilled workforce.”

Human capital impacts of ESG / Sustainability are a big subject not just for the utility sector but for a host of other sectors. I will hope to dedicate future blog posts to this subject.

Wrapping-up

It would appear that utility companies overall may be under-utilizing their IR programs, which should be a critical strategic partner in the balance of managing ESG/Sustainability risk and return trade-offs in the immediate future.

Approach

Following two search paths, I focused my AlphaSense research on the utility sector.

First, filtering for proxies over the last 12 months, eliminating duplicates, then counting the number of U.S. companies; then, I searched within this group for keywords (see chart above).

After reviewing those results, I searched the utility sector for company presentations that included the word “Sustainability” over the last 12 months. Next, I searched for the various types of IR presentations within this group. In both searches, I used the AlphaSense quick-scan feature to count only those companies where the keyword usage was within ESG/Sustainability context.

Pamela Styles is principal of Next Level Investor Relations LLC, an Investor Relations consultancy with dual IR and ESG/Sustainability specialties. 

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Pamela Styles

Pamela Styles is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.


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