Proactive ESG Reporting Could Give Energy and Utilities Firms a Competitive Advantage

Tyler Chase, Managing Director Energy and Utilities Industry Leader
Bob Hirth, Senior Managing Director Co-Vice Chair, Sustainability Accounting Standards Board (SASB)

It’s becoming increasingly difficult for energy and utilities companies to dismiss the important role of environmental, social and governance (ESG) reporting in their long-term success. Investors not only want to incorporate ESG data into their decision-making but they also now expect to have that information. And even if a growing firm doesn’t yet need to worry about meeting investors’ expectations, it can be confident that when that time comes, supplying ESG data will likely be an investor requirement, and it will be important to be ready.

Knowing what ESG information to report, and how, can also provide an important competitive advantage for energy and utilities companies that aim to go public one day, or perhaps, be acquired by a public entity. Leading public companies have already been ratcheting up their efforts to respond to skyrocketing demand for ESG data from investors.

Research from the Governance & Accountability (G&A) Institute found that 85 percent of S&P 500 companies published sustainability or corporate responsibility reports in 2017. In 2011, only about one-fifth of those businesses reported on ESG performance and related issues, according to the G&A Institute. That, obviously, is a dramatic increase in ESG reporting activity over a six-year period.

Now, newly released industry-specific sustainability accounting standards from the nonprofit Sustainability Accounting Standards Board (SASB) are likely to create even more pressure on companies. The standards will also help them to be more transparent about business practices that impact the environment and society. The standards, created for 77 industries, including energy and utilities, are meant to provide information on what quantitative and qualitative metrics should be reported to investors, and how. These standards reflect six years of study and market consultation by SASB and are designed to include only the “likely to be material” sustainability disclosures of interest to investors.

This focus will only get much stronger as other organizations weigh in and collaborate on these expectations. In fact, the SASB, the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC) have announced a two-year project to collaborate on the standardization of sustainability reporting frameworks as well as on other frameworks that promote further integration between nonfinancial and financial reporting. This joint effort to harmonize frameworks will only raise the level of investor interest.

Climate Change Projections Just One Factor for Investors’ ESG Data Demands

The hunger for timely and transparent ESG data will continue to deepen, especially among investors backing energy and utilities companies that are operating in an increasingly carbon-constrained world. The energy and utilities industry, by the nature of its operations, produces some of the most potent greenhouse gases: carbon dioxide (CO2) and methane.

Any pressure that these businesses were already facing due to the trend toward carbon capture and sequestration (CCS) — a strategy and set of technologies that the EPA says can greatly reduce CO2 emissions from coal- and gas-fired power plants and large industrial sources — has been amplified by scientific reports warning of the consequences of climate change. (The Fourth National Climate Assessment is one of those reports.)

California’s Low Carbon Fuel Standard (LCFS) program may also increase ESG reporting pressure on energy and utilities companies. This statewide policy, which went into effect in 2011, is intended to reduce the life cycle carbon intensity (CI) of transportation fuels, or the total greenhouse gas emissions from production to consumption. The LCFS requires fuel producers and importers to reduce the carbon content in their fuel by 10 percent by 2020.

California’s policy faced a bumpy road initially — including a barrage of lawsuits and the oil industry lobbying for its elimination. However, it has endured, and is making a difference. That fact may prompt other states, such as Colorado and New Mexico, to adopt a similar model. Whether or not that happens, investors may still look to energy and utilities companies to proactively embrace LCFS requirements just because it’s good for the environment.

Some industry organizations are also trying to make it easier for energy and utilities businesses to report ESG data. For example, the Edison Electric Institute (EEI) and the American Gas Association (AGA) recently announced that they have integrated ESG and sustainability reporting metrics related to natural gas operations into the EEI ESG/sustainability template. AGA’s new ESG metrics build on EEI’s previous work and are meant to provide simple, transparent and voluntary sustainability reporting for natural gas distribution, transmission, storage, gathering and boosting operations.

Getting Started With ESG Reporting: Questions to Consider

It’s important for energy and utilities companies to understand that ESG issues are also business issues that can drive financial risk or return. How an organization wants to approach ESG activities and reporting on these issues to investors is not so simple, however, because it depends on several factors.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the World Business Council for Sustainable Development (WBCSD) issued recent guidance for applying enterprise risk management to ESG-related risks. The guidance notes that “Each entity will have its own definition of ESG-related risks based on its unique business model; internal and external environment; product or services mix; mission, vision and core values and more.” The document also explains that the resulting definition may be broad or narrow and may evolve.

Below are some basic questions that can help energy and utilities companies get started with defining their ESG risks and opportunities and laying the foundation for effective ESG reporting:

  • What are the company’s current ESG activities?
  • What is the status of the firm’s ESG reporting? Are those efforts adequate given reporting by competitors?
  • How much investor ESG-related communications and how many requests for additional ESG data is the company receiving?
  • How efficient is the process to obtain ESG data, and is there an opportunity to streamline it?
  • Should the company adopt one or more recognized ESG reporting frameworks or standards (such as SASB)?

Additional tips for getting started with ESG reporting include collecting any current ESG ratings on the company and determining which areas need improvement based on those scores. That information can be used to create future ESG goal-setting as part of the company’s strategy-setting process. Companies will also need to consider the degree of board risk oversight that may be required for ESG reporting and identify the process and internal controls for ESG data and how that information is (or will be) verified for accuracy. As part of that evaluation, a decision can be made if any third-party assurance would be desirable.

Energy and utilities companies that take a proactive approach to ESG reporting may see their ESG ratings and rankings rise as a result. ESG reporting provides a valuable opportunity to inform the marketplace about the good things the business is doing for the environment and society, as well as for its employees. It can also help energy and utilities firms focus on opportunities to use resources more efficiently and cut costs. Also, these businesses can earn a reputation for transparency by directly issuing timely, accurate, qualitative and quantitative ESG data that many of today’s investors need to inform their decision-making. And all of the above can lead to positive bottom-line results for energy and utilities companies — namely, more customers and higher revenues.

Add comment