Engaging with electric utilities on climate change strategies

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.

Its findings have now 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,” says Carola van Lamoen, Head of Active Ownership at Robeco. “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.”

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: governance, strategy, risk management, and metrics and targets.

The highlights of the report are:

• All nine companies are focusing on decarbonization 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.

“It is encouraging to find these issues are being addressed by the companies’ top management and boards of directors,” says Florent Deixonne, Head of Governance and Responsible Investment 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.”

In terms of financial incentivization, 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 incentivize management into aligning the corporate strategy towards a low-carbon economy.”

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.”

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 360 signatory asset owners and asset managers with USD 34 trillion in assets under management.

The initiative aims to secure commitments from boards and senior management to (among others) 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.