ESG and Utilities: Managing Environmental and Governance Frameworks to Foster Sustainable Operations

Environmental, Social, and Governance (ESG) standards remain a significant consideration in modern utility companies as investors, regulators, and consumers consider advocating for sustainable business practices. Managing the dynamics of environmental and governance issues is crucial for a utility company that strives to be sustainable and profitable. The changes within the last decade, including new regulations, stakeholder pressures, and market trends, heightened the focus on implementing sound ESG initiatives, making utilities key players in transforming the world’s economy into a low carbon, ethically driven one.

The Climate Imperative: Accelerating Decarbonization Efforts

Therefore, it is crucial to urgently raise the pace of decarbonization. Utilities remain the key drivers of decarbonization in 2024 and beyond, with more countries seeking to achieve their annual net-zero goals. 

According to the August 2021 PwC Power and Utilities ESG Survey, 43% of utilities expect to achieve net zero before 2050 and another 20% by 2050.

Utility companies are required to mitigate their emissions directly and to manage Scope 3 emissions, which involve all the entities involved in the utility companies' value chain. Other requirements that have affected utilities include the European Union's Corporate Sustainability Reporting Directive and the newly established California regulations on Scope 3 emissions. These laws mandate companies to report the environmental effects of their operations and of their suppliers and contractors. Hence, utilities are shifting their supply chain strategy by embracing green procurement, sourcing materials and suppliers' adherence to environmental requirements.

Furthermore, climate change-related disasters, namely storms, floods, and wildfires, damage utility infrastructure and functionality. This underlines the importance of integrating climate risk mitigation into the utility industry's ESG policies to ensure their grids and plants are prepared to withstand climate disruptions. The Task Force on Climate-related Financial Disclosures (TCFD) framework is a valuable tool for utilities to identify and report on climate exposures. 
Other key standards are the Sustainability Accounting Standards Board (SASB) and recommendations from the Edison Electric Institute (EEI) and the American Gas Association (AGA).

Governance: Strengthening Accountability and Compliance

The third component of ESG is Governance, which calls for utilities to conduct themselves responsibly and in a manner that is conspicuous to regulators, investors, and the public. In 2024, governance will no longer be limited to the ethical and legal responsibility in the organizations of corporate governance; it will also focus on the functions of corporate accountability, stakeholders, and ethical governance principles. For utilities, this implies enhancing board members' awareness of sustainability issues and the structure and quality of decision-making to support sustainable ESG objectives. Another aspect of good governance is managing the risk of greenwashing allegations, which may arise when firms are accused of exaggerating or misreporting their ESG compliance. Despite the expectations earlier, now, with new regulations in the EU and growing consumer concerns, it is becoming imperative for utilities to report their sustainability progress accurately and honestly.

Companies must ensure that ESG reports are clear, detailed, and exhaustive to meet stakeholder demand and include environmental, economic, and social responsibilities. This encompasses matters relating to labour rights, natural resource management, particularly in diverse ecosystems, and water management, which has lately received greater consideration in stakeholder evaluations. 

Technology and Innovation: Major ESG Success Factors

By analyzing various factors, it can be concluded that technology is essential in supporting utilities in achieving ESG plans. Machine learning is proving effective in helping utilities fine-tune their grids and operate the current generation more efficiently and cost-effectively while reducing emissions. For instance, predictive analytics enables identifying the time when equipment will likely fail because of extreme weather conditions to allow utilities to implement appropriate measures and, thereby, decrease the number of equipment failures. Furthermore, there is an effort to use blockchain and other digital tools to monitor emissions in the Supply Chain to meet the requirements of Scope 3.

With solar, wind, and battery storage costs declining, more utilities are incorporating these distributed generation sources into their systems to manage carbon emissions. Additionally, smart grid technology enables utilities to optimize energy consumption, minimize wastage, and supply customers with energy consumption data, which is also relevant to ESG objectives.

Challenges Ahead: Balancing Profitability and Sustainability

At the same time, there is always a conflict between generating profit and maintaining sustainability in business. ESG offers one way to promote long-term sustainability within companies. Yet, for utilities, generating profits while minimizing the negative effects on the environment and society remains critically important. Thus, decarbonization is time-consuming and sometimes expensive, as using renewable resources means redesigning power plants or other facilities and retraining people.
Consequently, utilities face political pressures, economic, and operational challenges in regions where fossil fuels are still dominant. ESG is still a political issue, especially in the U.S. The utilities must appropriately handle issues around ESG, especially in an election year.

Nevertheless, the advantages of adopting the ESG strategy are evident: Companies that incorporate sustainability into their key operational and managerial strategies will likely achieve greater recognition, establish new markets, and appeal to the growing population of ESG-conscious consumers and investors. Moreover, enterprises that do not respond to these changes face the risk of becoming less competitive as consumers and investors pay more attention to sustainability.

The Road Ahead for Utilities and ESG

Utilities must plan for a post-2024 world and develop their ESG plans to better fit the market and comply with Environmental, Social, and Governance standards. The organizations should consider making ESG a team effort and incentivize the executives to prioritize meeting the ESG goals. 

The effective implementation of ESG factors across departments, strategic planning, and leadership strategies is crucial to addressing climate change risks, resource conservation, and shareholder and other stakeholders' expectations. The ESG goals can be achieved with the right strategy, skills and capabilities, policies, processes, measurement framework, technologies, and a clear distinction of responsibilities and accountabilities.

Views expressed are personal. Nirpendra Ajmera is the Chief Audit Executive at Qulliq Energy Corporation