For a very long time, utility business strategies have focused on safety, liability, and affordability, with ESG being a relatively recent addition to business as usual in the sector. This ESG focus has been driven by increasing regulation and legislation, pressure from investors, and the interests of other stakeholders, including customers. Utilities are also facing big challenges around the clean energy transition, grid modernization, and the impact of climate on the sector, and the sector’s impact on the climate. This creates a huge opportunity for ESG leaders to win the climate transition, with Sustainalytics noting that ‘few industries are expected to change as radically in the coming years as the Utilities’ industry’. The sector has a great base to work from to help in this ESG transformation. ESG excellence in the sector so far has been built on a great health and safety track record, for instance. However, ESG excellence can also create new opportunities to draw investors, attract new customers, retain employees, and tap into fast-growing clean tech markets.
According to Scope Ratings, utility companies that are unwilling, or reluctant to put greater focus on the long-term sustainability of their business will be increasingly seen as less creditworthy if their approach ‘impairs their competitive position and/or financial risk profile and cash flow – today or in the future’. Issues such as resilience to physical climate risks, and the risks of ‘stranded assets’ are weighing on utility companies which could affect their access to capital. Conversely, solar energy continues to be the fastest-growing energy source in the sector, and companies leading in clean energy are scoring higher when it comes to ESG scores too. One notable example is that of NextEra Energy, which achieved an ‘ESG Pulse’ of 0.99 out of 1 over the last year, a standout performer based on ESG Pulse’s ESG Analytics AI-based methodology.
In the table below we have mapped out some key ESG sector themes and material issues as described by Scope Ratings, Sustainalytics, and the Sustainability Accounting Standards Board standards (SASB).
| ESG themes in the Utility Sector | Points to consider | Themes related to credit rating | Material Issues (Financial & Sustainability impact) | SASB material issues |
|---|---|---|---|---|
| Energy Transition | The sector as a whole has made significant progress in ‘greening’ power-generation portfolios over recent years, yet much electricity production is still based on fossil fuels. The sector is significantly exposed to the cost of decommissioning legacy power-generation assets. Similarly utilities have to reassess the skills gap and upskill their people for the clean energy age. | Future capex associated with the transition in generation, transmission and/or distribution. Rewards companies with low ‘Clean up’ risk, and prominent banks have shown limited willingness to provide future funding to companies that need external financing for maintaining ‘dirty’ infrastructure assets. | Energy Mix & Emissions Environmental Innovation | GHG Emissions Air Quality |
| Energy Efficiency | Gradually increasing energy efficiency of end-use sectors (such as industry, households, transportation and services) through technological innovation is changing consumption behavior, shifting power generation towards decentralized systems. Safe, efficient, innovative companies are winning investors and customers. | Energy, Resource, Cost, and Asset-efficiency | Waste Efficiency | Energy Management Water & Waste water management |
| Digitalization | Electrification and digitalization presents opportunities and threats. Utilities, regulators, and consumers can enjoy enhanced performance, transparency, and control Safety, efficiency and sustainability insights can be enhanced, helping improve power grid efficiency and resiliency. | Utilities with a good grasp of digitalization tend to be better at strategic planning, helping boost cash flows and credit worthiness in turn. | Physical Risks Stakeholder management | Customer Privacy Critical incident risk management Systemic risk management |
| Regulation, incentivization and political intervention | Utilities are typically tightly regulated entities. Regulators are giving greater scrutiny to stranded cost recovery. Secure, reliable, affordable electricity is a focus in the EU. These themes are part of a global trend. | Entities with strong credit quality operate in markets characterized by a supportive institutional framework that creates stable and protective regulations, as well as environments with minimal political interference. | Regulatory risks | Product Design & Lifecycle management |
According to ‘RBC Capital Markets’, utilities currently lead all S&P 500 sectors in ESG sentiment, and valuation premiums for Utilities ESG Darlings appear attractive compared to history. Key themes driving ESG news-related activity in the sector are improving operational emissions, and the transition to low- carbon alternatives. In the US recent policy actions, such as the Inflation Reduction Act, have added tailwinds to decarbonization efforts and opportunities in new energy ventures for Energy and Utilities companies. These have been tempered however by the new administration’s commitment to fossil fuels. Despite these political headwinds, companies such as Pacific Gas and Electric, the utility giant in California, continue to invest in renewable energy, including solar and wind projects. This has enabled it to provide its retail customers with 100% greenhouse gas-free electricity in 2023. These changes are also driven by stakeholder expectations: Customers, investors, employees, communities, and advocacy groups are now demanding greater emphasis on sustainability and ESG practices. To build transparency and trust, the most forward-looking utility companies (according to the ‘Beyond the energy transition: Utility Sector & ESG’), are learning to use ESG reports to inform decisions on strategy, investment, and risk management, in a virtuous circle.
Despite some roll-backs on clean energy commitments in the US, the market for Clean Energy Infrastructure is predicted to grow at a CAGR of 9.2%, to reach $1.8 Trillion USD by 2033, compared to a CAGR of 6.9% for the Utility Sector as a whole. According to the International Energy Agency (IEA) The global market for these technologies is set to rise from $700 billion in 2023 to more than $2 trillion by 2035 – close to the value of the world’s crude oil market in recent years. For ESG more generally, a recent survey by PWC found that 44% of Utility companies now link executive pay to ESG goals, and 48% of those surveyed said they will increase Utility ESG investments in the coming years. Furthermore, 43% expect their company to reach net zero before 2050.
The UAE has committed to achieve net zero emissions by 2050 and is on track to triple the share of renewable energy by 2030, at which point the contribution of clean energy generation is projected to increase to 32%.1 Abu Dhabi National Energy Company – better known as TAQA, the Arabic word for energy – plays a key role in achieving those goals. TAQA is the UAE’s largest utility and is one of the largest listed integrated utilities in Europe, the Middle East, and Africa. TAQA is committed to investing in low-carbon energy, and the company’s commitment to sustainability sends an important signal to other power and water businesses in the MENA region. Furthermore, State-owned energy company ADNOC announced earlier this year that it will allocate $23 billion to decarbonization projects and technologies and lower-carbon solutions, Al Mazrouei, VP of marketing at ADNOC also reiterated at a recent event that beyond UAE’s borders the company remains committed to tripling renewable capacity. However, ADNOC, and the MENA region more generally, is not without its incongruities. For instance, ADNOC is also accelerating its goal to increase hydrocarbon production capacity to 5 million barrels per day by 2027 from its previous 2030 target. Furthermore, at a company level, there is much work to be done to transform. One example is the Dubai Electricity & Water Authority PJSC, which is engaged in water desalination and distribution and its generation, transmission, and distribution of electricity, throughout the Emirate of Dubai. It scored 31.8 in Sustainalytics ESG rating, with the rating provider deeming it ‘High Risk’. That puts it in the bottom 50% for the industry as a whole on ESG performance. According to a UAE study, to address the ESG challenge, companies within the UAE’s energy and utility sector must ‘devise robust strategies that promote sustainability, encourage innovation, and achieve operational excellence in response to an evolving market environment’. Thankfully, the study also finds that the UAE is helped in this task by a ‘stable political environment’. Furthermore, it is hoped that the UAE’s Sustainable Finance Working Group (SFWG), with its emphasis on ‘Green Bonds’, along with the UAE’s Net Zero commitments, will accelerate ESG progress in the sector going forward.
In the utility sector and the energy sector more broadly, the convergence of Net Zero and ESG can yield multifaceted benefits to ESG leaders. For instance, it can help align organizational strategies with global sustainability imperatives, amplifying the sector’s contribution to climate change mitigation and societal welfare. While there is much work to be done, especially for UAE’s largest utility companies, by focusing on ESG success the UAE utility sector can reduce climate and financial resiliency risk and enhance energy accessibility, affordability, and reliability in the region.
