Utilities and ESG

Institutional investors, ratings agencies and consumers want better reporting on corporate environmental, social and governance (ESG) performance. Few industries feel the pressure more than utilities, which are essential to decarbonization efforts and highly exposed to climate-related risks, from violent storms and flooding to forest fires. In this brief paper, we discuss the challenges and opportunities of ESG reporting for utilities and provide a practical analysis of the major reporting regimes. Our goal is to help utilities embrace the spirit of ESG as they master the intricacies of reporting, use ESG to build alignment with the full array of stakeholders, from investors and ratings agencies to employees, customers and communities, and drive business performance.

Navigating the ESG disclosure process

Utilities, especially the largest operators, have been filing voluntary ESG statements for several years. More recently, under pressure from investors, many are going beyond standard industry frameworks, such as those provided by the Edison Electric Institute and American Gas Association, among others, to meet guidelines set by the Sustainability Accounting Standards Board (SASB) and Financial Stability Board Task Force on Climate-Related Financial Disclosures (TCFD).

We help utilities navigate this complex and changing landscape, develop KPIs to measure progress, and build alignment on ESG issues with key stakeholders. We also help them create proper governance and risk-management processes and develop execution strategies to integrate ESG into the entire organization, from daily operations to long-term planning.

SASB and TCFD reporting

SASB attempts to establish industry-specific standards for the disclosure of material ESG metrics and context, while the TCFD provides a framework to disclose climate-related risks and opportunities through existing reporting processes in four categories: governance, strategy, risk management and metrics and KPIs. We reviewed 19 recent utility SASB- and TCFD-aligned disclosures to understand the trends and challenges.

Strategy remains the least robust disclosure area in utilities ESG reporting—few firms consider their selected scenarios in the planning process or quantify the outcomes of these scenarios. In our review of 19 TCFD-aligned disclosures, we found that only six included any quantitative results of scenario analyses, and only nine disclosed both transition and physical risks. Eight said senior management was responsible for identifying and assessing climate-related risks and opportunities; 11 identified enterprise risk management (ERM) as the responsible body.

Common themes in climate risks and opportunities (TCFD reporting)

We expect reporting practices to coalesce around a single set of standards and become more comparable in the next few years. Until then, ESG standards will vary significantly and comparability within sub-sectors will be limited. In our view, the ideal metrics will be those that help key stakeholders understand how a utility will measure ESG progress consistently and transparently and translate insights into action and performance improvement, irrespective of the selected disclosure framework.