During their quarterly earnings conference calls with analysts, investors, and lenders, CEOs across Corporate America increasingly are fielding more questions about their companies’ performance on a variety of environmental, social, and governance (ESG) measures. Large investors – such as mutual funds, pension funds, hedge funds, and private equity (PE) funds – want to know, among other things, how a company plans to decarbonize its operations.
That’s partly because of a growing awareness in the business community that better performance on ESG measures reflects a better-run business, with reduced waste, lowered risks, and increased returns.
Two years ago, an article in the McKinsey Quarterly found:
The overwhelming weight of accumulated research finds that companies that pay attention to environmental, social, and governance concerns do not experience a drag on value creation — in fact, quite the opposite: A strong ESG proposition correlates with higher equity returns. Better performance in ESG also corresponds with a reduction in downside risk, as evidenced, among other ways, by … higher credit ratings.
ESG used to be thought of as a way to do well by doing good. But that has evolved: “ESG is not a values-based system anymore. Instead, ESG now is seen as a core way to create value in the market,” according to Rev. Kristen Spaulding, senior program director for the Investor Network at Ceres, a Boston-based sustainability non-profit that works with investors and companies on issues including ESG.
“Investors are motivating companies to take action on sustainability,” Spaulding told EnergyTech. “Today, ESG issues are top-of-mind concerns for boards of directors.” Soon the conversation will include regulators: The Securities and Exchange Commission is drafting a rule on ESG disclosures, expected to become public later this year.
Around the world, investors with more than $100 trillion in assets under management (AUM) — roughly four times the size of the U.S. economy — have signed on to the U.N. Principles for Responsible Investment (PRI) (Figure 1). They want the companies in which they invest to operate with an eye beyond maximizing next quarter’s profit. These investors are not afraid to vote with their wallets by selling the stocks of companies that fail to measure up.
The growing influence of ESG investors can be seen in a bare-knuckled proxy fight earlier this year that saw three advocates of decarbonization elected to the board of directors of Exxon Mobil Corp. ExxonMobil subsequently expanded its carbon-free businesses. Chevron Corp., said to be another ESG investor target, tripled the size of its low-carbon energy capital spending – from $3 billion to $10 billion by 2028.
Tina Berg, director of sustainability operations at 3M, recalled that before the COVID-19 pandemic hit, 3M employees conducted energy walk-throughs of their facilities, held energy treasure hunts, collaborated with the corporate team or external partners, and integrated employee ideas at sites to find energy-conservation opportunities. Globally, she said, 3M identified numerous energy-savings opportunities, and those delivered $17 million in energy cost savings in 2020.
ESG goals are varied and dynamic. There is no single set of widely agreed-upon definition of ESG, though a consensus appears to be coalescing around the criteria and metrics proposed by the Sustainability Accounting Standards Board (SASB). Still, companies are being prodded to act now – before standards and/or regulations are implemented.
Into this fast-changing environment, investors are all over the proverbial map, said Ceres’ Spaulding. Some want companies they own to invest in wind and solar generation while others are pushing the envelope, advocating less-proven technologies like battery energy storage systems (BESS) and even carbon capture, use and storage (CCUS), where carbon in removed – either from industrial processes or from the atmosphere itself – and stored underground or put to beneficial use.
Berg of 3M said the company has been actively evaluating BESS options where possible.
Neal Bartek, project director for microgrids at ENGIE – a large independent power producer and energy services provider to large businesses across North America – said as the ESG market evolves, customers are taking a more strategic and portfolio-based approach to energy technologies.
A few years ago ENGIE would bid on stand-alone solar projects, but now customers are seeking a portfolio of options that include solar, battery energy storage, microgrids, and on occasion EV charging infrastructure, Bartek said in an interview. “We encourage our customers to take a holistic look at a portfolio of energy solutions instead of looking at one technology, like just solar or just energy storage, for example.”
Bartek estimated customer interest in microgrids has doubled or tripled in the last few years. But whereas in prior years, when a microgrid would rely on diesel or natural gas to generate electricity, now it is increasingly hooked up to solar generators and battery storage.