In just the last few years, investors have dramatically shifted how they evaluate companies across all parts of the energy industry. That includes natural gas utilities and producers.
Investors are increasingly turning their attention to value stock companies—those capable of demonstrating capital discipline and the delivery of a steady dividend. But more and more, these investors aren’t only looking at strong financial performance. They’re also considering how gas companies’ environmental, social and governance, or ESG, strategies create value and manage risk for the long term.
While people who know the term ESG may primarily associate it with reducing emissions, broader investment considerations include pipeline infrastructure and safety, resource scarcity, labor practices, data security, talent management, board and management diversity, executive pay, business ethics and an overall commitment to responsible stewardship.
Investors are increasingly seeking this information from all companies, not just those in our industry, but they often find the information to be confusing, inconsistent and scattered. A cross-industry CFA Institute survey revealed that investors’ top sources of ESG information were from public information and third-party research, not the companies’ own communications or filings.
How and to what extent a company discloses relevant ESG information affects the ratings issued by investment research firms like MSCI, Sustainalytics and ISS. That disclosure can also be the determining factor in whether or not a company is included in certain indexes and funds that investors are growing rapidly. It’s true that in some cases, the main consideration for ESG fund stocks is a particular company’s industry class, with some funds excluding companies in fossil fuel industries, among others. But this remains a moving target. Disclosure can help ensure that raters don’t just engage with companies by using artificial intelligence to scrape ESG information from publicly available sources.
At the same time, while there’s no doubt that ESG standards, predominantly led by low-carbon and other natural resource objectives, are becoming more important to investors, companies with risk management practices that address broader ESG industry, regulatory and societal risks are more likely to drive long-term sustainable performance and shareholder value. As noted above, ESG isn’t all about reducing emissions.
The debate over adoption of common ESG reporting standards continues to heat up in the United States. Earlier this year, an effort to establish greater global uniformity suffered a setback when Congress rejected a proposal to introduce European-style ESG reporting standards. Indeed, with the economy becoming increasingly globalized, particularly with respect to the trading of critical energy resources like natural gas, a standardized global language will likely remain a topic for discussion, as ESG reporting may help streamline capital flows and trade that is dependent on consistent disclosure.
Despite ongoing debate at the national level, within the electric and gas industry, much progress has been made. Working together, the Edison Electric Institute and the American Gas Association have developed the first and only industryfocused and investor-driven ESG/sustainability reporting template, which includes ESG metrics for natural gas operations. This template is expected help gas and other energy companies provide capital markets with more uniform, consistent and transparent ESG/sustainability data and information.
Additionally, the Sustainability Accounting Standards Board has proposed ESG-related reporting standards to “help companies and their investors develop a more robust understanding of key risks and opportunities that may influence their ability to create a sustained value over the long term,” according to its blog. That resource aims to arm investors with the right questions to ask companies and to help companies appreciate the importance of ESG-related information to guide investment decisions.
While discussions on mandates and how to report ESG continue, there is still hope for aligning investor appetites for ESG disclosure with how natural gas companies can minimize risk while shaping their ESG narrative. As PwC explored in Mind the gap: the continued divide between investors and corporates on ESG, companies should consider the following approaches to establish credibility with investors:
As reporting conventions and standards continue to evolve, the natural gas industry is primed to tell its own story, leverage its expertise to drive recommendations for reporting information, and educate investors on the realistic risks and, importantly, the opportunities that the natural gas industry can capitalize on in this increasingly globalized economy.
Casey Herman is the U.S. power & utilities leader and a partner at PwC, and Sara DeSmith is an assurance leader for sustainability services at PwC.