New York - Few industries are as critical to creating a low-carbon future as electric utilities. Currently, the industry's progress appears to be stalled. Emissions from both electricity and heat production rose to 14.8 gigatons in 2022, the highest level ever. Moreover, 90% of power sector emissions come from electricity generation. Considering that Net Zero targets require power sector emissions to fall by nearly 9% per year to 2030, the industry is far off track.1
For investors to properly assess corporate performance in addressing financially material environmental, social and governance (ESG) issues, and analyze the risks and opportunities presented, companies must disclose relevant information. This is currently lacking, according to "Electric Utilities: Real Transparency — A Missing Ingredient in Our Journey to a Sustainable Future," a report from Signal Climate Analytics sponsored by Calvert Research and Management and hosted on the Calvert Center for Responsible Investing.
The news isn't all bad. Signal found that over the past decade, the number of utility companies disclosing data related to their climate impacts has increased significantly. Currently, 78% of the top 50 electric utilities disclose current performance in "keystone metrics," the key performance indicators (KPIs) that assess company performance related to GHG emissions and climate impacts. This is important, as investors need this transparency to effectively price externalities.
However, only 19 companies declare their near, mid- or long-term targets, and only eight disclose both current and future emissions intensity targets. The report concludes that real transparency is needed by all stakeholders to make informed decisions that will help avoid the worst consequences of climate change.
The full report is available here.
Calvert's approach to electric utilities
At Calvert, we take a holistic approach to environmental risk when examining utilities, factoring in both absolute emissions and emissions intensity. We evaluate the trajectory of emissions reductions by looking at company targets, our own estimates, or both. We also devote substantial time to evaluating quality of service, including affordability, reliability and safety. These are important aspects to be managed with the end consumer in mind as utilities transition from generation fleets to low-carbon technologies like wind and solar.
Finally, we look at governance and the overall quality of regulation — which we view as an extension of governance — to influential stakeholders like regulatory commissioners and politicians. We also assess physical risks like hurricanes and wildfires. We believe the most compelling opportunities are found in utilities with aggressive investment plans, supported by strong operational performance and constructive regulatory environments.
Going forward, we see the possibility for further policy intervention. For example, a carbon price would promote transparency and reduce risks associated with emissions to enable clearer decision making on the part of investors and other stakeholders.
Bottom line: Transparency on emissions is vital in the utilities sector because environmental impact is the most prominent risk utilities must manage. Investors must have comprehensive and easily comparable data to appropriately price these externalities.
1. International Energy Agency, "Electricity." https://www.iea.org/energy-system/electricity.