Why ESG is Important in the Utility Industry
Let’s look at what Environmental Social Governance (ESG) is and how it’s implemented. ESG was first mentioned in a United Nations Principles for Responsible Investment report in 2006. Soon after, ESG became a tool for investors to evaluate social, environmental, and governance risks that could affect a company’s stock price. Today, it has evolved into a brand assessment and reporting strategy that has far-reaching ramifications on a company’s bottom line.
ESG works something like this: Using self-defined criteria* important to their unique businesses, companies large and small assess their own ESG performance and the risk associated with their findings. They then tout areas where they excel and set goals to improve areas where they lag. (*The Securities Exchange Commission has proposed potential guidelines which means additional guidance and regulations may be coming.)
Once this information is made public, companies can leverage it to reap related benefits. Of course, ESG data can also reflect poorly on a firm. But positive or improved ESG reports can influence the actions of myriad entities, from partners and employees to investors, communities, and more.
So, how does this relate to EHS?
There’s a lot of overlap between the two. According to our own anecdotal survey of EHS professionals, 62 percent of respondents have been asked to provide ESG data, reporting, or engaging information.
At their core, ESG and EHS perform related functions.
- ESG presents a framework that investors and others can use to evaluate a company through the lens of environmental, social, and governance-related responsibilities and risk
- EHS is a business function that relates to workforce health, safety, and environmental training, policies, procedures, risk identification and mitigation, and federal, state, and local government compliance
While both ESG and EHS can help companies avoid costs and decrease risks, ESG factors can also draw investors, attract new customers, retain employees, tap into new markets, and more.
What does ESG mean for utilities?
Your first question may be: How does this impact me? I’m not a public company. While ESG is often discussed in conjunction with stock prices and investors, it’s important to remember it can impact stakeholders at companies of all sizes. While customers can’t necessarily switch utilities, they can influence their elected officials, who in turn influence regulators. Large utility customers – who could be public companies – are more invested in the impact their suppliers make on the environment and their community and are asking all suppliers for EGS information. Many large customers are looking at their power company’s behavior and performance.
Investors look closely at an organization’s ESG performance before deciding on capital investments. And, younger employees want a company’s vision and priorities to align with theirs, which is increasingly important in the tight labor market.
Many utilities are already addressing ESG questions from their stakeholders whether they’re investors, customers, or regulators. Deloitte identified sustainability as one of the key trends for utilities in 2023 which relates directly to the E in ESG. And, while the E tends to be the one that gets the most attention in the power industry, utilities need to address all three pieces.
The environmental area covers a lot. And, almost all of it impacts utilities. Whether it’s carbon footprint and greenhouse gas emissions, environmental incident management, or water usage, utilities must address all these areas.
To address climate change issues, many utilities are setting goals for their generation as they transition from fossil fuels to renewables. These goals range from net zero carbon by 2050 (meaning their carbon emissions are offset by other efforts) to 52% renewable by 2030 to zero carbon (not carbon emissions) by 2045.
New technology also plays a big part in the Environment section. Innovations in battery storage, distributed energy resources, and smart grid technology are just a few of the key advances that contribute to a utility’s impact on the environment.
On a daily basis, utilities also need to focus on managing hazardous chemicals and understanding waste management and water and energy consumption across company plants and facilities.
The S highlights many more areas than you might think. This is where EHS is heavily involved as this area reports on employee health and safety, compliance, training, and more aspects of an EHS professional’s job. External and internal stakeholders are taking a close look at an organization’s employee demographics, diversity, equity and inclusion (DEI) practices, and community impact.
According to a 2020 U.S. Bureau of Labor Statistics report, the power industry workforce is 85% white and 80% male, making it one of the least diverse today. Not only is DEI important to employees and investors, it can be linked to a stronger bottom line and an ability to attract talented candidates.
All utilities offer some level of safety training. Between OSHA and NERC, the training requirements are extensive and designed to protect employees. Utilities must make sure their training program is designed to change employee behavior and prevent incidents, not just check the box for compliance.
A big part of Social for utilities is community impact. Most utilities, particularly cooperatives and municipalities are heavily involved in their communities, providing volunteer opportunities for employees and contributing to charitable organizations. However, utilities need to look at the overall impact they have on their communities.
As organizations work to meet their Environmental goals by retiring coal plants, they need to consider the impact of a power plant retirement on the community. Some estimates put the average financial impact from a plant closing at $165 million. That’s a significant effect, especially when many plants are located in smaller, rural communities. It’s not just the workers at the power plant who are affected. It’s local restaurants, shops, and schools.
Finally, utilities need to mitigate the impact their decisions have on the most vulnerable populations. They need to ensure reliable and affordable power to all customers.
Governance tends to be the quietest piece of ESG. While not quite as attention-getting as the environment and social components (until something goes wrong), it’s still critical for a utility. Governance covers areas such as ethics and anti-corruption, harassment and discrimination training, data privacy, and cybersecurity. It also includes governing-body diversity such as board and executive management make up. Of course, Governance includes the regulator compliance all utilities must address.
As part of Governance, utilities must mitigate and manage risk, enforce policies, and track corrective actions. An organization’s safety performance falls under governance – is it preventing accidents? Are workers trained in the safe use of all equipment?
Governance controls include having a code of conduct and tracking worker acknowledgements of the code. It also includes third-party management such as suppliers and contractors to ensure compliance with company standards. Checklists, audits, and inspections are all part of governance.
Of course, cybersecurity is a key piece of governance for utilities. NERC’s CIP standards cover all registered entities and require comprehensive efforts to protect assets that manage the reliable operation of the Bulk Electric System.
How do you get started?
So, how do you get your hands around this beast? While every company’s goals and challenges are unique, the most important part is getting started with something. Here are some general guidelines. They are broad as it depends on what metrics you want to improve on:
- Gather existing data – You’re probably collecting data on many items related to ESG already. It may be on paper or in spreadsheets, but the data you have is a good starting point. Consider adding a proper ESG/EHS system to make reporting easier.
- Research your framework options – An ESG framework is a system for standardizing the reporting and disclosure of ESG metrics. It helps to know the potential frameworks you might use and the metrics you want to track.
- Assess other company’s ESG efforts – Check out ESG reports for top brands and your competition. What are they reporting on? What frameworks do they use? How can you mirror or adapt their efforts?
- Identify stakeholders – Once you have the framework in place, identify the internal stakeholders you need to make top-level decisions and provide the ongoing data necessary to report on your selected metrics.
- Select tech tools – You need a way to efficiently collect, organize, and report on ESG factors. You may have an internal solution. Or, you may need to move from paper and spreadsheets to an EHS Platform. You can’t get the insights you need without a flexible platform that dynamically integrates with other systems.
- Phase your rollout – Communicate your initial goals with your employees to get them on board. Employees are critical to this process as they are both data gatherers and sources of data points (HR info, training, etc.). Don’t overwhelm them – start by initiating three new processes in the first three to six months. Then introduce more as you can.
Remember, ESG is a broad effort and will take time. Reporting on and improving ESG metrics as part of your company’s overall goals is a long-term effort. Getting started with something now, sets your company and employees on their way.
ESG isn’t just for investors. It’s a critical tool with multiple advantages – not to mention nuances. This primer should give you the basic information you need to take the next steps toward making ESG a reality – and an advantage – for your company and workers.