UK - Electric Utilities and Transition
Are electric utilities governance and strategies fit for the energy transition?
Old and new energy
Are utilities fit for the transition?
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Are electric utilities governance and strategies well equipped for the transition to a greener world?
Florent Deixonne, Head of SRI and Deborah Slama Yomtob, SRI analyst in charge of voting and engagement activities at Lyxor Asset Management present their findings in a report on nine US and European electric utilities with the largest carbon footprints.
Florent Deixonne, Head of Sustainable and Responsible Investments, Lyxor Asset Management
Deborah Slama Yomtob, SRI analyst in charge of voting and engagement, Lyxor Asset Management
The role of utilities
Preparing for change
Replacing fossil fuels with clean energy is a key element in limiting climate change. Disclosures on the strategy that electric utilities have for this is particularly important, as they are at the forefront of the energy transition.
To try to define best practices and raise levels of knowledge about the issue, Robeco and Lyxor Asset Management have assessed the climate-related disclosures of nine US and European electric utilities with the largest carbon footprints.
Their findings have been published in a report entitled ‘Are electric utilities’ governance and strategies fit for the energy transition?’ The analysis will allow investors to identify best practices on climate-related disclosures in the utilities sector, which can support future engagement activities.
Climate change poses serious risks to the stability of the global economy and is likely to impact many economic sectors. One of the sectors with the most significant exposure to climate-related risks is utilities, as this sector lies at the core of the energy transition.”
Carola van Lamoen, Head of Active Ownership at Robeco
Serious stability risks
The global economy is at stake
The assessment was based on how effectively the nine utilities were adhering to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) launched by the Financial Stability Board in June 2017.
They have four core elements:
- Risk management
- Metrics and targets
Would you hold a utility in your portfolio?
- No - my ESG criteria means I can't hold any utility issuers
- Yes - any issuer type
- Yes - but only if it's a Green Bond
All nine companies are focusing on decarbonisation in the long run, setting ambitions for 2030 and even 2050. Three have made the ambitious commitment of becoming carbon neutral by 2050.
All nine have also incorporated the management and oversight of climate-related issues into existing governance structures. Eight of them explicitly report that their board of directors is responsible for monitoring these issues.
Three companies have a committee dedicated to sustainability issues, but only one explicitly tasks a risk management committee with the oversight of internal controls related to sustainability.
Three companies link the remuneration of their CEO to their climate strategies, using metrics to assess performance-related pay.
All nine companies have committed to not developing any new coal capacity, and to reducing existing exposure, but transparency remains a problem.
Could remuneration better incentivise CEOs?
Issues are being addressed
“It is encouraging to find these issues are being addressed by the companies’ top management and boards of directors,” says Florent Deixonne, Head of SRI at Lyxor. “However, only a minority of companies disclose the areas of attention and tasks being undertaken by the board and their committees, and explain how management and board interact with each other. Such disclosures would facilitate investors’ assessment of the extent to which climate-related issues receive appropriate board and management attention.”
Linking climate change to pay
In terms of financial incentivisation, only three of the companies link the remuneration of their CEO to their climate strategies. “Remuneration is an important tool to align executives’ and staff’s interests with metrics and targets that promote business resilience, and thus create long-term value,” says Déborah Slama Yomtob, SRI Analyst in charge of voting and engagement activities at Lyxor.
As the energy transition is challenging the business model of electric utilities, remuneration policies are important to incentivise management into aligning the corporate strategy towards a low-carbon economy.”
Déborah Slama Yomtob, SRI Analyst in charge of voting and engagement activities, Lyxor Asset Management.
Utilities need to invest for a cleaner and greener future
No to coal
All nine companies have committed to not developing any new coal capacity, and to reducing existing exposure. “More transparency is needed on the retirement schedule of coal-fired plants,” says Robeco engagement specialist Cristina Cedillo Torres.
“The timing of this is important to understand the future financial impact on companies and the investments that will be needed to develop alternative generation sources. Carbon neutrality can only be achieved if new technologies and supporting infrastructure are developed. Some examples of this are battery storage, smart grids, and carbon capture and storage.”
Carbon neutrality can only be achieved if new technologies and supporting infrastructure are developed. Some examples of this are battery storage, smart grids, and carbon capture and storage.
Cristina Cedillo Torres, Robeco engagement specialist
Wider climate action
As active sustainable investors, Robeco and Lyxor’s engagement with electric utility companies forms part of the wider Climate Action 100+ Initiative, a global investor coalition with over 370 signatory asset owners and asset managers with USD 35 trillion in assets under management.
The initiative aims to secure commitments from boards and senior management to implement a strong governance framework which clearly articulates the board’s accountability and oversight of climate change risk and opportunities, and to enhance disclosures in line with the TCFD recommendations.
Download full report
Make it happen
You have the power to change the world
One small step to make it happen
Whether you think utilities are leading or lagging the way to carbon neutrality, one thing is clear - finance has the power to change the world, and investors have a critical part to play. Green bonds are great instruments to direct capital towards eco-friendly projects.
Our Green Bond ETF launched in 2017 was the first of its kind in the world. Since then, it’s been awarded the prestigious Greenfin label, a national certification for private investments in a green economy introduced by the French government. The label solidifies its credibility as a fund committed to financing the green economy.
The choice is yours
We believe fossil-fuel companies have a powerful role to play in helping accelerate the low-carbon transition.
Yet we appreciate that some investors’ ESG principles and priorities may not allow for such holdings in their portfolios, which is why you wouldn’t find them in our ESG-screened Green Bond ETF.
This variant of our original fund comes with an issuer-level ESG filter designed to exclude companies involved in fossil fuel and nuclear power, controversial businesses or which operate in violation of the UN Global Compact.