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September 22, 2021

Utility Companies and Corporate Governance: ESG Practices

Before adding utility companies to their portfolios, investors are looking at more than just the bottom line. The importance of utility companies establishing and supporting good corporate governance, includingeffective ESG (Environmental, Social, and Governance) practices, is gaining momentum—on Main Street and on Wall Street. 

Utilities face increasing criticism from social and environmental activists and numerous ESG reporting structures. There’s increased pressure to be good corporate citizens, addressing and acting on climate change. Investors are taking notice. Companies with poor ESG track records are considered business and financial risks—investors are looking at utilities that score high in their commitment to good sustainability and ESG practices. 
 

Why Utility Companies Need Good Governance 

This shift is precipitated by a change in utility company investors, which used to be mainly individual investors and small brokerages. Now, big-name institutional investors are gobbling up utilities, keen to take advantage of their steady returns and relatively low risk. But utilities investors are focused on governance, particularly a clear commitment to good ESG behavior, and poor performance is definitely a watch out.

As a response, forward-looking utilities are making sure that ESG practices are ingrained in the foundations of their board operations.  Well-functioning boards of directors can ensure they’re practicing ESG behavior that adds value for their diverse stakeholders.

Utility companies need to drive better business models while managing sustainability and ESG, to optimize returns for their shareholders and stakeholders. The good news is well-executed ESG strategy tends to be reflected in positive shareholder returns.

The Role of Utility Company Boards of Directors

Ensuring effective corporate governance should be a priority for all boards, and good ESG practices are important for companies across industries. But utility companies also have to manage market regulations, private ownership, politics, and other relationships, so governance takes on an even more complicated role for them. Utilities that foster a cohesive, well-functioning board will be equipped to manage all the legal, regulatory, and industry-standard compliance that’s inherent in their day-to-day operations—and ensure good ESG behavior—all while developing the company’s strategic and operational direction and plan. 

6 Ways Utilities Can Achieve their ESG Goals:

  1. Integrate ESG practices into your business strategy. Determine a clear and comprehensive strategy for stakeholders that includes a comprehensive ESG structure.
  2. Invest in technology. ESG is fueled by innovative technology, including AI, machine learning, big data analytics, IoT, board portal software, and more.
  3. Consider materiality. Determine if any ESG risks will have a  material impact on the company.
  4. Improve your ESG rating. There are several ESG research firms that produce ESG scores for companies across industries. Engage with them to determine your scores, and opportunities for improvement, and work to increase your scores year-over-year.
  5. Set a good example. Everyone in the organization needs to accept responsibility for being good corporate citizens. Senior management should set the tone through its strategy and decision making.
  6. Quantify. Analytics should include reporting on ESG efforts, providing a definitive link to good corporate governance and long-term profitability.

Savvy investors know that a utility company’s commitment to ESG is tied directly to their success. They recognize that strong ESG practices create value. Bolstered by the Biden administration’s focus on climate initiatives, pressure to practice good ESG behavior is coming from multiple stakeholders. It’s no surprise that investors are also taking a hard look at ESG.

The evidence is clear that utilities company boards of directors need to take their commitment to ESG practices very seriously. It’s crucial to long-term profitability. The key to a utility company’s successful ESG behavior is an effective and well-functioning board of directors that’s dedicated to being good corporate citizens and recognizes that good ESG practices are good for business and good for the planet. 

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