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Moody's Issues Underwhelming Report About The Effect of ESG On Electric Utilities

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Rakesh  Sharma's picture
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I am a New York-based freelance journalist interested in energy markets. I write about energy policy, trading markets, and energy management topics. You can see more of my writing at Rakesh Sharma  

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It’s a bird. It’s a plane. It is another report with ESG metrics.

 

The culprit this time around is ratings firm Moody’s Analytics which has added to the confusing mélange of definitions for Environmental, Social, and Governance (ESG) factors with a new report. The report quantifies the effect of ESG initiatives for 71 companies across the globe. Included in the list are 30 electric utilities from the United States.

 

The overall effect of ESG issues on credit quality for electric utilities is moderately negative, according to the report. The assessment is a rap on the knuckles and will not seriously affect access to credit markets for companies. That should be good news for a sector widely considered to be the biggest contributor to global warming.

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The Moody’s report does little to clear up the mess the confusing mess of jargon and metrics for ESG. It does not cover new ground and simply regurgitates existing facts and previous ratings issued by the firm.

 

A Redefined ESG

During the economic crisis precipitated by the pandemic shutdown, utilities rushed to sell bonds to fund their operations and, increasingly, finance their transition away from fossil fuels. The latter types of bonds are sold under either the ESG or green bond label and the amounts are substantial. New York-based utility Consolidated Edison was among the biggest issuers of green bonds last year.

But their bonds were hardly environmentally sound. Utilities window dressed existing projects in green garb to raise fresh capital from investors.

They are not the only ones. ESG metrics are portrayed as moral imperatives for corporates to correct societal ills. The factors assessed are those that directly affect society and environment. For example, Standard & Poor’s, another ratings firm, uses greenhouse gas emissions, waste and pollution, water use and land use to measure a company’s contributions to the environment in its ESG score.

The Moody’s report is not on point with this messaging. Instead of using fossil fuel dependency as a metric, the firm uses physical risk to operations as a criteria for environmental risk.

And, so it is that NextEra Energy, a utility that is often described as a renewable energy powerhouse but actually derives a substantial portion of its revenues from natural gas, is penalized not for the fossil fuel sources present in its electricity generation mix but for its highly negative exposure in coastal regions. (The Florida company also reaped a revenue increase of approximately $30 million for its natural gas pipeline unit from the February Texas outage event).  

The ratings agency’s faux pas extends beyond American borders. The Korean Electric Power Corporation enjoys Moody’s ratings of Aa2 for its bonds and its $500 million green bond issue last year was oversubscribed. Even as it was hawking its green credentials to investors, however, the utility was investing in new coal-fired power plants in Indonesia and Vietnam.

At the other end of the spectrum, however, ESG metrics played a major role in the firm’s ratings for PG&E and Edison International, both of which are at risk from wildfires in their service territories. Again, this is hardly news for those who have been following PG&E’s story in the last five years.

To their credit, the report’s authors admit that there is little correlation between exposure to ESG issues and credit quality. The utilities which ranked near the top and bottom are, in fact, particularly affected by non-ESG factors, such as those relating to their sovereign owners. Jeffrey Cassella, author of the report, told Utility Dive that utilities could improve their scores as they exit fossil fuels and invest in clean energy.

But a reading of the report shows that they shouldn’t be particularly bothered about the move. “While many utilities face physical climate risks and carbon transition issues, most companies benefit from well-defined regulatory frameworks that enable utilities to recover compliance costs stemming from increasingly stringent environmental regulation,” the report’s authors write. In other words, as long as ratepayers and government funds backstop utility balance sheets, their credit ratings are not likely to suffer.

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