Major investors find electric utilities are not on track to meet decarbonization goals

Electric utilities are failing to align their businesses with the Paris climate agreement goals and investors’ expectations, according to a new scorecard of major emitting companies.

The Climate Action 100+ Net-Zero Company Benchmark assesses the climate plans and performance of 159 large companies in several sectors, including electric utilities, oil and gas, automobiles, and more. The Climate Action 100+ coalition includes hundreds of investors that collectively manage assets worth more than $54 trillion.

Among the companies scored in the assessment are several large U.S. electric utilities: AES, American Electric Power, Dominion Energy, Duke Energy, Exelon, FirstEnergy, NextEra, NRG, PPL, Southern Company, Vistra Energy, WEC Energy, and Xcel Energy. The assessment also scored Berkshire Hathaway, the parent company of Berkshire Hathaway Energy.

Electric utilities fail investors’ climate expectations on lobbying and investment plans

Overall, each of the utility companies assessed mostly failed to meet the criteria that the investors established in nine categories. In several categories, every U.S. electric utility failed. No U.S. electric utility met more than two of the nine criteria. Berkshire Hathaway failed to even partially meet a single one of the criteria.

In one category focused on whether companies have aligned their capital expenditures with their decarbonization goals, the investors found that only one U.S. electric utility, WEC Energy, partially met the criteria, while all others totally failed.

A recent report by the Sierra Club and Dr. Leah Stokes, an assistant professor at UC Santa Barbara, similarly found that despite a growing number of decarbonization commitments by electric utilities in the U.S., most have so far failed to turn those goals into concrete plans to close coal plants, stop building new gas plants, and invest in clean energy.

All U.S. electric utilities also failed to meet the criteria for the Climate Action 100+ investors’ assessment of their climate policy engagement, which considers whether a company’s lobbying positions and trade associations support policies that would help meet the Paris Agreement goals. Duke Energy, Southern Company, Dominion Energy, Vistra Energy, and Berkshire Hathaway totally failed to meet the climate policy engagement criteria, while the other electric utilities partially met the criteria.

The growing scrutiny from major investors has led utilities to disclose more information about the trade associations they fund, and whether they agree with those groups’ lobbying efforts on climate policies. But recent disclosures by Duke Energy and Southern Company provided few details about the companies’ own lobbying efforts, and greenwashed the lobbying efforts of major utility trade associations like the Edison Electric Institute and American Gas Association.

Utility “net-zero” goals assessed as being too narrow

While a host of utilities have set long-term goals to reduce their carbon pollution to “net-zero” by 2050, most did not earn credit even for the goals themselves from the CA 100+. For the criteria used to evaluate the companies’ long-term goals, the investors assessed whether the goals covered not only the emissions from the power that the utilities generate in their own power plants, but also the emissions associated with any electricity that they buy from other entities and sell to their customers, known in carbon accounting as “Scope 3” emissions. For utility companies that also own gas distribution subsidiaries, Scope 3 emissions would also include the carbon associated with the gas that they sell to their customers when it is burnt in buildings.

Dominion, Duke, Southern, WEC Energy and Xcel’s net-zero goals did not cover those Scope 3 emissions, according to the investors’ assessment. All of those companies own gas utilities. 

Climate Action 100+ does not directly assess company’s decarbonization strategies

A few U.S. electric utilities met the Climate Action 100+ criteria for “decarbonization strategy” – a surprising result at first glance, especially for companies like Duke Energy and Southern Company, each of which are retiring coal plants slowly while continuing to invest in new gas infrastructure. However, a closer look at the details of the “decarbonization strategy” criteria shows why: the benchmarking considers only whether “The company identifies the set of actions it intends to take to achieve its GHG reduction targets over the targeted time frame. These measures clearly refer to the main sources of its GHG emissions, including scope 3 emissions where applicable.”

Importantly, Climate Action 100+ explains that “the benchmark does not interrogate the quality of company decarbonisation strategies directly” and notes: “We encourage investors and other stakeholders to analyse specific company decarbonisation strategies more closely to determine their robustness and credibility.”

Duke Energy and Southern Company both received “F” grades in the report by the Sierra Club and Dr. Stokes.

Most utilities’ executive compensation policies don’t encourage climate action

The Climate Action 100+ assessment also scored companies on “climate governance,” evaluating whether the board of directors has oversight of climate change as well as whether the company compensates the CEO and other top executives for meeting a company’s emissions reductions and climate change performance goals. The assessment found that only Xcel Energy and Duke Energy met the climate governance criteria. NextEra and Berkshire Hathaway totally failed to meet those criteria, while the other U.S. electric utilities partially met the criteria. 

A report from the Energy and Policy Institute last year reviewed 19 electric utilities’ executive compensation policies, and found that only Xcel Energy’s executive compensation policies actually incentivized emissions reductions. In some cases, utility executive compensation policies even remain directly at odds with reducing emissions by transitioning away from fossil fuels. 

Since EPI’s report was published, Duke Energy has added a new “climate metric” to its executive compensation policies, but the company’s 2021 proxy statement does not make clear whether those incentives are tied to specific emissions reductions.

Southern Company partially met the Climate Action 100+ climate governance criteria because it met the executive compensation components of the criteria. However, Southern Company’s executive compensation policies allow CEO Tom Fanning to earn a bonus for the addition of carbon-free resources, even if the company does not shutter coal plants or it builds more gas power plants.