Environment, Social and Governance (ESG) factors have more than reached a tipping point for business. So how should utilities approach ESG to optimize shareholder returns and stakeholder outcomes? Here are some reflections.
ESG and utilities—the status quo
ESG is big news these days for investors and other stakeholders. With myriad ESG reporting frameworks in use, and growing regulatory demands, companies across industries are under pressure. Meanwhile, investors are increasingly focused on ESG, exemplified by Larry Fink's CEO letter this year, which pressed for more consistent disclosures.
So, what’s the state of play with ESG in utilities, and how can they drive better business models and shareholder returns at the same time? Many utilities are engaging in ESG to some extent, for instance through publishing ESG reports or dedicating parts of their investor presentations to the topic. But in my experience, ESG reporting tends to exist before a comprehensive ESG strategy has been created within the business. And many companies are still struggling to articulate what ESG means for them, and how to respond comprehensively (beyond reporting).
The perfect conditions for ESG
If I look back ten years, ESG wasn’t a frequent topic of discussion with my utilities clients. But since then, it has rocked up the agenda of investors and corporations. Much has been written about why, with increasing environmental and social awareness from a range of quarters; general ESG regulatory shifts and industry-specific requirements; large investors looking for minimum ESG standards. And from my own perspective, two additional factors might have accelerated ESG: 1) more money in the market (with central banks injecting liquidity in the wake of the 2008/2009 financial crisis), and 2) an increasing trend toward passive investment. Against this backdrop, active investors have become the marginal investors that can influence the price of the stock. And with ESG investors now one of the significant classes of active investors, ESG performance is explicitly linked to stock performance.
What does that mean for companies?
Companies should consider: 1) who their shareholders are; 2) what they are looking for; and 3) what makes a company attractive—besides fundamentals—to craft a clear ESG strategy. Accenture analysis suggests a positive correlation between a well-executed ESG strategy and shareholder returns. If the correlation holds true, no company can afford to ignore this growing imperative. For more on this theme also read Accenture’s capital markets blog on ESG.
And let’s remember the consumer, too. Accenture's research indicates customers are increasingly purpose-driven, with 47% of consumers expecting brands to translate their values into new and innovative products and services, and 43% prepared to walk away when disappointed by a brand’s words or actions on a social issue. Meanwhile, COVID-19 has amplified consumer attention towards purpose and ESG. For instance, Karmarama (part of Accenture Interactive) reports a rise in negative commentary on Twitter around UK energy bills during the recent COVID-19 lockdown, with “cash” mentioned three times more than normal in relation to energy utilities, and “bills” twice as often.
Getting strategic on ESG
It’s time for utilities to create a holistic ESG strategy. And that means 1) innovative solutions (e.g., renewables, products and services, electrification, etc.) that support the transition to a low-carbon economy and 2) marrying this with operating responsibly as a business, for employees, customers, and society at large.
I counsel my clients to think about how to generate ESG impact (not just transparency). Example of environmental + societal outcomes combined: PG&E is investing US$130 million in 7,500 electric vehicle (EV) charging stations. And importantly, at least 15% of those charging stations will be sited in underserved communities. Utilities should also consider their own employees’ futures: as carbon-intensive assets are decommissioned, utilities will need to reskill and upskill their people for a digital and low-carbon future.
And it’s about more than “doing good things.” It’s about a cohesive narrative for multiple audiences—including investors. Any investor relations team will tell you that investors want a strong and clear story: the journey the business is on; the strategy; the stakeholders; the metrics that show progress; the challenges and the successes. And ultimately, how these elements drive business success and profitability.
It all comes back to managing shareholders and stakeholders, and their expectations, as a route to business performance. And with ESG increasingly a lever for performance, I encourage my clients to consider: how can you move along the ESG spectrum? There are three stages in my mind: 1) compliance/CSR (meeting mandatory requirements for license to operate); 2) performance and shared value (proactive strategy focusing on shared value); 3) ESG leadership and social impact at scale (repurposing business models to drive societal value and business competitiveness). And moving along the spectrum takes leadership commitment, and rigorous measurement (back to Larry Fink). Investors and stakeholders are watching!
Utilities need to elevate their approach to ESG to meet the expectations of investors, regulators and others. Contact us to find out more about how! [Andre Begosso with research by Ashley Rintoul]