Addressing Climate Change Requires Creating Utilities With Purpose

Environment, social, and governance (ESG) reporting has become a mainstay of corporate and investment decision-making. Corporations are increasingly making ESG disclosures to assess and limit risks, bolster their reputations, and attract and keep customers. In a new paper, we focus on one subset of public corporations—large, investor-owned electric utilities (IOUs)—and their progress or, lack thereof, toward meaningfully achieving ESG goals.

We begin with a discussion of the debate over ESG and an analysis of IOUs’ ESG commitments, focusing most closely on the actions utilities intend to take to reduce their carbon emissions.

The ability of IOUs to mitigate their climate change impacts is critical to the clean-energy transition, and their ESG commitments appear to reflect this. Some utilities have announced plans to be carbon neutral by specific dates, and many more have committed to deploying more clean and renewable energy.

Yet, our analysis demonstrates that utilities’ ESG commitments will fall far short of reducing carbon emissions as substantially as the global community has deemed necessary. To begin with, they lack transparency and enforcement mechanisms, which means it will be difficult to ensure for years that utilities are improving. And the actions that utilities claim would help to achieve ESG benchmarks, such as plans for near- and long-term capital expenditures on renewable energy projects, would not cumulatively make sufficient emissions reductions. At the same time, utilities are undercutting their own promises, acting in ways that block progress toward more clean energy. They often hide behind front groups that oppose new wind and solar projects and advocate for building more fossil fuel infrastructure such as natural gas pipelines. Their ESG commitments are not only unlikely to make sufficient progress on climate change, but also obscure utilities’ role in hampering that progress.

We recognize that applying ESG criteria to public corporations can itself be controversial. Most notably, a debate rages over how to balance a company’s financial performance with its commitment to ESG, including the nexus between adopting ESG criteria and maximizing shareholder wealth. We do not aim to resolve this debate but instead observe that an interesting feature of it is that relatively little distinction is made among the types of public corporations that owe duties to their shareholders and make ESG commitments. Here, the specific characteristics of utilities and their regulatory environment are important to their ability to meet ESG benchmarks.

Implementing ESG commitments is vastly different for IOUs than other public corporations. Utilities are monopolies whose profits are determined by state laws and administrative agencies known as public utility commissions (PUCs). This introduces a level of complexity that does not apply to other firms. We detail the many ways that cost-of-service regulation—the way that PUCs regulate the rates monopoly utilities may charge—frustrates progress toward holding utilities accountable. For example, their profits are determined in administrative proceedings that IOUs can bend to their advantage through the deployment of powerful resources. IOUs have a core incentive to seek to maximize profits in these proceedings, at the expense of pursuing broader social goals that are embodied in ESG criteria. Under prevailing state utility laws, for example, utilities are rewarded for spending on large power plants and other expensive infrastructure projects, even if different strategies might be more useful for addressing climate change. The result is not surprising. Over the past several decades, we and others have identified IOUs’ wide-ranging abuses of the regulatory system, such as their ability to earn profits well above those of other large corporations and their consistent and well-funded opposition to more widespread deployment of household rooftop solar systems (which does not earn profits for utilities).

Simply changing ESG disclosure requirements or modifying the utility regulatory system will not change a utility’s profit maximizing incentive, nor will it address the abuses of the regulatory system. Therefore, more sweeping structural changes are necessary. One model for reform is socially focused corporations, such as public benefit corporations, but utilities’ unique features require a different approach. We argue that utilities must be required to change their corporate charters to become ‘purpose-driven,’ describing the central features and benefits of this approach. As things stand now, for example, a utility typically has no duty to answer to anyone other than its shareholders, which in turn allows it to manipulate state regulatory proceedings to maximize profits and downplay other objectives. We propose that this change with language in the corporate charter that focuses on broad stakeholder involvement. Effectively, this would involve converting utilities’ voluntary ESG promises into enforceable commitments by changing an IOU’s basic corporate form. We describe this and other requirements of this transformation, such as opportunities for robust enforcement by utilities’ customers and others. Finally, we outline the authority that state PUCs must acquire to oversee this transformation and call for them to make it happen.

These changes would make IOUs more accountable and less driven solely by profit. In turn, this would lead to a more rapid clean energy transition and an accelerated response to the threat of climate change, with broader stakeholder engagement.

Joel B. Eisen is Professor of Law at the University of Richmond School of Law

Heather E. Payne is Professor of Law at Seton Hall University School of Law

This post first appeared on Columbia Law School’s Blue Sky Blog (here).