Utility trade associations say utilities are disclosing climate risks to investors. Major investors disagree

The trade associations for investor-owned electric and gas utilities claim that their member companies already provide investors with sufficient information about how utilities are navigating climate risks, such as reducing carbon and methane pollution and managing increased threats to power plants and transmission lines from climate change impacts like wildfires, drought, and flooding.

But major investors disagree, and have explicitly called on large utilities to provide more detailed and consistent information about how they will reduce emissions this decade, whether executive compensation is linked to climate targets, and more.

The disagreement over whether the utilities’ voluntary disclosures are adequate comes as financial regulators are weighing updates to rules for how companies must disclose climate-related risks. 

In March, the Securities and Exchange Commission (SEC) requested public input to update the rules companies must follow to disclose climate risks to investors. The SEC expects to publish the new rules early this year, according to SEC Chair Gary Gensler.

The SEC received hundreds of comments from investors, advocacy organizations, companies, trade associations, and more – including a comment from the Edison Electric Institute (EEI) and American Gas Association (AGA), the trade associations for investor-owned electric utility companies and gas utility companies.

The EEI/AGA letter urges the SEC to limit new climate risk disclosure rules for their member companies, arguing that the trade associations’ own templates are sufficient. In response to questions from the SEC about which climate risks can be quantified and measured, EEI and AGA argued that quantitative measures should be limited to things like carbon emissions, while “A qualitative description of the utility’s electric fleet transition, ESG goals, and GHG profile enables investors to assess its strategy and progress.”

“Our experience with the EEI-AGA ESG/Sustainability Reporting Template indicates that this modest number of factors has fulfilled investors’ ESG disclosure needs to date,” wrote EEI and AGA.

Major investors group seeks more consistent climate information from utilities

While EEI and AGA claim that the EEI-AGA ESG/Sustainability Reporting Template “has fulfilled investors’ ESG disclosure needs,” many of the world’s largest investment firms don’t seem to agree. In October, the Climate Action 100+ group of investors published a report which noted that the varying ways in which utilities disclose their decarbonization goals can “make it difficult for investors to accurately compare their existing carbon footprint and evaluate their ambitions.”

The way power companies currently express their climate ambitions and the metrics they choose to disclose to investors often varies. Some variation is understandable as it reflects different business mixes and strategic priorities. However, this can make it difficult for investors to accurately compare their existing carbon footprint and evaluate their ambitions. Consistent disclosure that captures both the specific actions the power sector needs to take to align to net zero (see Exhibit 1) and allows progress to be clearly tracked and compared against stated ambitions, is needed. Such a framework is also in the interests of companies seeking to communicate genuine net zero commitments.

Climate Action 100+ is a group of hundreds of major investors, including some of the top shareholders of US investor-owned utilities like BlackRock and State Street Global Advisors.

In the report, Climate Action 100+ pointed to problems such as utilities seeking to shift their emissions by changing ownership structures, among other inconsistencies in the data they disclose to investors. The Climate Action 100+ report also calls on utilities to assess emissions from “all energy related sales” including of methane gas and heat, and argues that: “Companies should set targets to decarbonise their whole energy portfolio (i.e. electricity, heat and third party-generated electricity) but also set targets explicitly relating to electricity generation.”

In addition to advising utilities on climate disclosure practices, the investors’ report provides utilities with guidance on their decarbonization strategies, including to avoid offsets, minimize reliance on carbon capture, and “focus primarily on minimising the use of fossil fuels and particularly coal.” 

The report follows scorecards published by Climate Action 100+ in March, assessing the climate plans and performance of 159 major companies, including several large investor-owned utilities. Each utility mostly failed to meet the climate risk disclosure criteria that the investors established in nine categories, and some failed in every category. In some categories, such as how utilities lobby on climate policy issues and allocate capital toward decarbonization goals, no companies fully met the criteria. The next iteration of the investor groups’ scorecards will be published in March 2022.

EEI/AGA sustainability template allows utilities to publish incomplete and misleading information

One major way that the sustainability reporting template developed by the utility trade associations fails to provide investors with complete and consistent information is straightforward; utility companies can omit any data or information they don’t want to publish. A document explaining the EEI/AGA template explicitly notes that “Companies may elect to include or exclude any of the topics outlined herein.”

Utilities can also use the EEI/AGA sustainability template to publish misleading claims about their decarbonization efforts.

For example, Arizona Public Service Company regularly claims that its current energy mix is “50% clean,” and that it aims to be 65% clean by 2030, including in its recent qualitative reports that follow the EEI/AGA sustainability template.

But APS’ claim that its energy mix is “50% clean” relies on counting energy savings from demand side management and energy efficiency as “clean energy,” as the company notes in its latest 10-K. In a statistical report, APS reported that in 2020, renewable energy accounted for 8.5% of its energy mix, while nuclear accounted for about 27%. Combined, nuclear and renewable energy accounted for 35% of APS’ energy mix, far below the “50% clean” claim that the utility uses in the EEI/AGA sustainability template report and its marketing materials.

How should utilities disclose executive compensation connection to climate risks?

Among the variety of prompts to solicit public input, the SEC sought comments about disclosing the connection between executive compensation and climate change risks:

“How, if at all, should registrants disclose their internal governance and oversight of climate-related issues? For example, what are the advantages and disadvantages of requiring disclosure concerning the connection between executive or employee compensation and climate change risks and impacts?”

EEI and AGA responded that utility companies should not be required to provide any new disclosures to their investors about whether their executive compensation policies encourage decarbonization, writing: “We believe that decisions as to metrics used for executive compensation purposes are best left to compensation committees, and required disclosure regarding executive compensation decisions already exists.”

The Climate Action 100+ group report encouraged utilities to “prominently disclose” how they connect executive compensation to decarbonization: “The link between executive remuneration and climate targets should be prominently disclosed with who it applies to, share of the pay linked to the target and the impact of under/over performance explicitly stated.”

Among major US electric utilities, those details are rarely “prominently disclosed.” EPI published a report in 2020 analyzing the executive compensation policies of 20 large investor-owned utilities, including whether those policies encourage decarbonization. That report found that only one utility, Xcel Energy, has executive compensation policies that clearly encourage decarbonization, while some utilities like DTE Energy and Arizona Public Service still have executive compensation policies that actively discourage decarbonization, such as linking executive pay to the operation and availability of coal plants. Many utilities, including Duke Energy, Southern Company, American Electric Power, and Dominion Energy, include various environmental metrics among the criteria used to determine executive compensation, but fail to link executive compensation to clear climate targets like reducing carbon pollution. Utilities’ disclosures to investors also varied widely in the clarity and level of detail in describing whether and how they link executive compensation to decarbonization goals.

One of the largest utility companies in the US, Berkshire Hathaway Energy, appears to provide no details about whether its executive compensation policies are linked to decarbonization goals. For one year, the company wouldn’t even say how much it paid its CEO. And while EEI and AGA urged the SEC to leave executive compensation issues to compensation committees without additional disclosure to investors, in the case of Berkshire Hathaway that “compensation committee” consists of just one person – CEO and Chairman Bill Fehrman, according to its latest 10-K annual report.

At Berkshire Hathaway’s annual meeting in May, a majority of non-insider shareholders voted for a shareholder resolution urging the company to begin publishing annual reports that disclose its climate risks. However, the shareholder proposal did not pass because so much of the company’s stock is owned by Warren Buffet and other company executives. A statement by the investors supporting the resolution, including California Public Employees’ Retirement System, explicitly noted: “We consider the Company’s current level of disclosure to be insufficient for investors to fully appraise its material climate-related risks and opportunities.”