What Does Gary Gensler as SEC Chief Mean for the Energy and Utility Industry?

The new Securities and Exchange Commission (SEC) chief Gary Gensler knows how to break up a party. Gensler, who was confirmed yesterday, was head of the Commodities and Futures Trading Commission (CFTC) during the Obama administration and is largely credited with bringing order and regulation to the swaps market, which had run amok under the previous administration.

While the staid utility industry is hardly comparable to the market for swaps, Gensler’s appointment could still have far-reaching consequences for it. This is because he comes to the SEC position at an interesting time for publicly-listed utilities and energy startups.

A Change in Priorities

The Covid-19 pandemic has recast priorities for investors. Climate and societal impacts, instead of financial metrics, have become top priority to evaluate companies. Investors are demanding environmental disclosures and metrics that measure the effects of these criteria.

Within the publicly-listed electric utilities ecosystem, that priority shift is most noticeable in the burgeoning market cap of NextEra. The Florida-based utility is already being touted as the next energy giant to compete with the likes of ExxonMobil. In the last five years, its share price has jumped by 146% while that of Southern Co. and Duke Energy, two of the biggest polluting utilities, increased by only 31.3% and 28.17% respectively.

The other major trend of the current trading environment is the rise of Special Purpose Acquisition Companies (SPACs). SPACs are blank check companies that acquire startups and go public. They have accelerated the shift towards renewable energy by making it possible for startups in this sector to access public markets. But their ambitious market capitalizations are a stark contrast to their revenues.

Gensler’s agency controls the levers of both these shifts. Its stance on climate change disclosures and SPAC listing rules could determine winners and losers, and who gets access to funds, in the markets.

Climate Change Disclosures

During Gensler’s confirmation hearing, when Senator Patrick Toomey (R-Pa) told him that securities laws were not the “appropriate vehicle” for climate change politics, Gensler said that the investor community should decide “what’s material to them.”

Gensler’s response differs from that of his predecessor, former chief Jay Clayton, who was pulled up by Senator Elizabeth Warren (D-MA) last November for not having a “standardized framework” to disclose climate risk to investors. That framework could be coming soon under Gensler’s tenure.

Last week, the agency released a report criticizing ESG funds that claimed to be green but actually aren’t. “The rapid growth in demand, increasing number of ESG products and services, and lack of standardized and precise ESG definitions presents certain risks,” the agency wrote. If and when an SEC-mandated ESG definition does arrive, it could present problems to publicly-listed utilities.

Again, Duke and Southern have announced ambitious emissions reduction targets and posted glossy reports on their website. But they are not enough. The colorful reports and fancy buzzwords are not enough to shield the dirty fumes of fossil fuels.

Here’s an example: Between 2016 and 2019, the share of fossil fuel – coal and natural gas - in Duke’s energy mix hovered between 63% and 64% even as the percentage of hydropower and solar remained constant at 1%. In fact, natural gas’s share bumped up to 42% in 2019 from 38% in 2016.

No wonder then, a recent post from the Energy and Policy Institute accuses the utilities of “greenwashing” the activities of their trade associations and relying on vague statements about climate change that belie the lobby groups actual activities. A more stringent form of disclosure, in the form of climate risk, has already been implemented in some states. (I wrote about it earlier). A mandatory environmental disclosure in the markets could bring more accountability to environmental concerns relating to use of fossil fuels for electricity generation.  

Reining in SPACs

SPACs are another area where Gensler could have a significant impact. I’ve written earlier about how SPACs could accelerate the shift towards renewable energy. But there are riders involved. Most SPACs trade at hefty and unrealistic valuations, when you consider their current revenue. Climate change SPACs are among the most egregious and ambitious of this lot since the market for their products and services is currently small.

The SEC has mostly looked the other way as SPACs flooded the market with offering. In the last two weeks, as Gensler’s confirmation date came closer, the agency has thrown a wrench in the SPAC machine through repeated warnings about accounting practices that benefit SPAC sponsors. The result may be that some SPAC companies may have to restate their financial results to correct previous accounting practices. This could complicate the equation for some climate change startups, bringing down their valuations and make it harder for them to raise future funds from public investors.