February 11, 2008
In nearly every community across the United States, utilities are visible and participating in the common good. It's about corporate social responsibility -- or the idea that companies and the cities in which they prosper are irrevocably linked.
Some might call it public relations. But it's a new era and one that is still reeling from the high-flying 1990s when illicit corporate conduct seemed to have run amok.
Companies may find adherence to federal regulations cumbersome, but no entity wants to be front page news -- with the masses watching their corporate brass hauled off in handcuffs. Their business reputations have currency and as such they must project a positive public image.
The wave of corporate goodwill gives rise to two competing thoughts: The first is that big business must serve equally all of its stakeholders. By spreading goodwill to its customers, employees, vendors, neighbors and shareholders, companies will do better over the long haul. The other side says simply that it is the role of government to extend a helping hand and not the primary function of businesses or their shareholders. By maximizing profit, the logic goes that companies are creating jobs and prosperity that can far exceed anything they might try to do on the side.
The concern with solely focusing on profits, of course, is that businesses will lose sight of the bigger picture and suffer the plight of Enron, et al. By incorporating a broader perspective into the fabric of their cultures, enterprises can help insulate themselves from bad decisions. The shift today is to multi-task among the different stakeholders, albeit community outreach efforts are often unfocused and haphazard.
While incumbent utilities may have a lock on their respective territories, they take their community citizenship seriously. It's even truer now, given all the attention that is being paid to global warming. Companies such as Duke Energy and American Electric Power, which are big users of coal-generated power, have turned the corner and are now at the forefront of implementing new technologies and helping to craft legislation to deal with carbon dioxide emissions that contribute to climate change.
The evolution is occurring because activists, regulators and investors have united to make companies live up to higher standards. Major U.S. firms that include Wal-Mart, General Electric and Dow Chemical have championed the cause of sustainability. The efforts, they collectively say, are not just environmentally beneficially but also economically prosperous. GE, for example, says that its "eco-imagination" campaign is lucrative.
According to Columbia Business School and in a story that appeared in the Economist, $1 out of every $9 under professional management in this country involves a "socially responsible investment." Such funds consider environmental and social matters -- all with an eye of making money for shareholders.
"There is no evidence that (environmental, social and corporate governance) or socially responsible investing on their own add value," say analysts at Goldman Sachs, in the Economist piece. But those sources do say that if such investments meet all requisite fundamentals and if shareholders are in it for the long term, then investments with a higher purpose can beat market averages.
Corporate Image
Indeed, the tie between good governance and profitability is not really quantifiable. But the two concepts do equate. International Shareholder Services says that the issue has expanded beyond one of regulatory compliance to one that is now a business imperative. Two-thirds of the global institutional investors it surveyed said that good governance is both the right thing to do and that it also gives enterprises a leg up.
The United Nations-sponsored Principles for Responsible Investment is a collective effort that tries to leverage corporate goodwill. The group, which represents 3,000 companies with $5 trillion in assets, has committed itself to incorporate "sustainability" issues into investment analysis and decision-making while encouraging community-oriented thinking into business-specific practices. Companies have also agreed to report their activities and progress in implementing the principles.
The world's largest institutional investor and state pension fund, California-based CalPERS, says that such socially conscious investing can enhance investment returns. For its part, CalPERS commissioned a report last year, along with the World Wildlife Fund, that looks into what they call the "true economic value" of electric and gas utilities after factoring in their carbon footprints. While they acknowledge that the data they received was incomplete, the two gave their highest marks to Pacific Gas & Electric and its lowest ones to AEP, largely because of its huge coal-fired fleet.
A separate report by Boston's KLD Research & Analytics said Europe's top utilities are doing more to introduce environmentally safer technologies than some of their U.S. counterparts. It praised Scottish & Southern Energy, Spain's Ibedrola and Germany's E.ON, which plans to invest more than $4 billion in renewable energies by 2010. The key for all utilities, it adds, is to meet the burgeoning demand for electricity the safest and most environmentally sound way.
Studies show that the "true value of utilities is considerably less once the utilities' environmental costs have been incorporated into the analysis," says Russell Read, chief investment officer of CalPERS, in the report it underwrote. "It is imperative for utilities to disclose the environmental data required by investors so they can more accurately assess a firm's true value and associated risk."
While corporate altruism has its cynics, the reality is that businesses must now appeal to a broad range of constituencies. By being good citizens, they are endearing themselves to their own corporate families and to the communities where they serve. In turn, they are validating their corporate images and adding value to their enterprises.
More information is available from Energy Central:
• Wal-Mart Masters Energy Markets, EnergyBiz, Sept/Oct 2006
• Cost of Decarbonizing, EnergyBiz, Nov/Dec 2007
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Ken Silverstein EnergyBiz Insider Editor-in-Chief
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