How Are Energy and Utilities Companies Managing ESG Risk?

Susan Dziubinski: Hi, I'm Susan Dziubinski from Morningstar.com. Our equity analysts have been taking deep dives into the impact that ESG issues are having on their respective industries. Today, we're taking a look at what impact ESG issues are having in the utilities, integrated oils, and midstream industries, and what companies are best positioned to benefit.

Travis Miller: Renewable energy in the U.S. is becoming a huge part of the energy landscape and it's only going to grow during the next decade. Right now, renewable energy makes up about 10% of the power generation mix in the U.S. That, we think is going to grow to over 20% by 2030. State policies are a big growth driver and corporate renewable energy purchases from companies like Facebook and Amazon and Google are all driving a lot of renewable energy growth. A lot of people now know utilities like NextEra Energy and Xcel Energy, even First Solar on the solar manufacturing side, as big players in this renewable energy growth. But there are many other utilities that we think benefit from this growth in renewable energy. Investments in Edison International, NiSource, CMS Energy, those should all pay off with some very good growth in dividends and earnings over the next decade as they invest in renewable energy and all the infrastructure that goes with it. One place that investors haven't looked at before, where we think there's value, is in those distribution and small wires and transmission wires that allow renewable energy to connect to the load centers. Again, in this realm, Edison International is a big player, CMS Energy is going to be a big investor, and NiSource connecting in Indiana and elsewhere in the Midwest the renewable energy to their system.

Allen Good: Integrated oils are increasingly coming under investor pressure to reduce their greenhouse gas emissions, and they have responded. Most firms have set targets to reduce their carbon emissions footprint in the coming years. In our latest report, we take a look at these targets and the methods by which they plan to reduce emissions. We focus on such issues as increasing natural gas, selling off high-carbon oil-producing assets, and investing in renewable assets. In our report, we take a look at how effective these methods will be in reducing the GHG emissions footprint, as well as the impact on the financials and returns of firms going forward. We find that most firms are likely to hit their very long-term targets largely by investing in renewable power. Most of the European integrated oils are leading on this front, firms such as Shell and Total. Meanwhile, many of the U.S. firms like Exxon and Chevron are lagging.

Stephen Ellis: So, we've just published a deep dive on ESG and midstream, and ESG has always been a real hot topic for investors. And this piece, I think, is really differentiated because it focuses on, "What is the impact of ESG issues on competitive advantage, on moats, on valuations and uncertainty?", the key data points that all Morningstar investors should be thinking about.

So, we think there are three key takeaways from this piece. First, pipeline spills, which are a top-of-mind topic for investors--there's always a lot of discussion around the latest billion-dollar spill. We've analyzed over 6,000 spills over the last 20 years, and we would know that the cost of an average spill was only about $1.6 million, and a spill that's more than $100 million in cost only accounts for 0.1% of spills. Second, we also looked at carbon. Carbon tax is an ever-present industry issue. And in a scenario where there's a $75 carbon tax, we would note that A, the industry is going to pass through the majority of those costs to end consumers, so, they're not going to be impacted; and B, it is a sort of uncertainty. So, we have boosted our uncertainty rating for DCP Midstream.

Third, we would also look at community relationship issues and stewardship issues. And with pipelines, it's always a big issue because we have indigenous tribes complaining about pipeline pass, and we also have issues with stakeholders like regulatory agencies. Pipelines can be delayed and can cost billions of dollars. The most recent example here would be Equitrans, which is MVP Pipeline. So, we've definitely taken a deep dive and looked at the industry across from that space. And finally, I think from an investment takeaways perspective, framework, I think, really highlights a number of firms that score very well on our ESG framework, also undervalued and these would include Enterprise Products Partners, Cheniere, Enbridge, as well as Plains All-American.