Once again, Innovest Strategic Value Advisors, a global socially responsible investment (SRI) research firm, has produced a report demonstrating the financial value of environmental, social, and corporate governance best practice. The most recent report, released earlier this week, assesses 26 electric power producers in the US. The electric power sector is particularly exposed to the risks of regulation and litigation, as it emits approximately one third of the air pollution in the country.
As with almost every other Innovest sector report, the half of this group of companies with better environmental, social, and governance ratings generate better financial returns on average than the remaining half of these companies that lag in these areas. Innovest applies both the EcoValue21 (EV21) rating, which examines 60 aspects of environmental risk and opportunity, and the Intangible Value Assessment (IVA), which analyzes 80 aspects of social and governance performance. Innovest’s ratings mimic bond ratings, ranging from AAA (best) to CCC (worst).
Both the EV21 and the IVA ratings find proactive companies outperforming laggards by over 900 basis points (or 9 percentage points) in average total shareholder return (stock price appreciation plus dividends) over the 3-year period ending December 2003.
FPL Group (ticker: FPL) and Pinnacle West Capital (PNW) both earned AAAs in the EV21 and IVA ratings.
On the other end of the spectrum, FirstEnergy (FE) ranked dead last in both EV21 and IVA ratings, with a CCC grade in both. Allegheny Energy (AYE) also earned a CCC in both ratings.
Interestingly, FirstEnergy itself financially outperformed the North American electric utility sector over the three-year period in question. In the aggregate, however, social and environmental laggards financially underperformed the leaders.
Looking at electric companies through the lens of nuclear power production and distribution, Allegheny would appear more responsible than FPL and Pinnacle West. Allegheny commits only 3 percent of its operations to nuclear, whereas FPL and Pinnacle West commit 28 and 34 percent, respectively. (FirstEnergy commits 41 percent of its operations to nuclear.)
However, Innovest leaves screening decisions up to its clients, and instead assesses the relative performance of companies in regards to all their operations.
"In our model, we try to avoid any bias against any particular issues, either fossil or nuclear," said Carla Tabossi, the senior analyst at Innovest who authored the report. "We do not look at risk as an absolute metric in isolation but only in the context of what makes economic sense over the long run."
"Specifically, we will look at nuclear as a source of risk (for example, due to safety concerns, potential radiation, and waste disposal constraints) and also opportunities (for example, climate change mitigation) with the only goal of assessing how these issues currently and potentially can impact corporate profit," Ms. Tabossi told SocialFunds.com.
Illustrating this approach is the revelation in FirstEnergy’s EV21 rating that the company "reports reduction of 6.7 million tons of CO2 annually, mainly by increasing nuclear generation." Investors who prioritize emissions reduction of CO2, the primary greenhouse gas associate with global warming, might regard this fact highly in their investment decision, whereas anti-nuke investors might abhor the replacement of one environmental liability with another.
However, a closer look at FirstEnergy’s record on nuclear safety might give even the former investor pause. In February 2002, the US Nuclear Regulatory Commission (NRC) shut down FirstEnergy’s Davis-Besse reactor due to a hole in its pressure vessel, and ordered the inspection of the vessel heads in all US pressurized water reactors. Less than a year earlier, the NRC fined the company $80,000 for allegedly retaliating against workers that questioned safety at the Perry nuclear power plant.
Contrast this with FPL’s record on nuclear safety: "the Company is committed to maintaining the highest standard of nuclear safety in the design, operation, and maintenance of its nuclear power plants," reads FPL’s IVA rating. The company maintains "[r]elatively lower size of operations and above [average] operating performance as reported by the World Association of Nuclear Operators; Seabrook station is among the US’ top performing facilities," reads FPL’s EV21 rating.
And whereas FirstEnergy commits 55 percent of its fuel mix to coal, FPL’s 4 percent commitment to coal is exceeded by its 7 percent commitment to wind and equaled by its commitment to other renewables.
"FPL Energy’s industry-leading position in wind energy (1/3 of US installed capacity) will likely provide for increasing corporate value as the market and regulators reward clean power sources," states FPL’s EV21 rating. "It also operates one of the world’s largest solar plants in California and conducts 7 PV [photovoltaic] pilot projects."