- Environmental, Social and Governance (ESG) considerations have negative credit implications for almost all electric utilities that own generation, Moody's Investors Service said in a Tuesday report that looked at 71 global holding companies.
- Moody's noted that in some cases, ESG considerations are "key drivers" of credit ratings and pointed to downgrades the ratings company assigned to Pacific Gas & Electric, Edison International and FirstEnergy, due to wildfire related risks of the former, and governance concerns and a bribery scandal of the latter.
- "We haven't defined any companies having positive benefits from ESG considerations," said Jeffrey Cassella, a Moody's analyst.
The analysis Moody's rolled out this week represents "wave 1," said Cassella, in the firm's effort to quantify the credit impacts of ESG issues on a wider range of companies and entities.
Moody's is using an asymmetric 5-point Credit Impact Score (CIS) scale to assess the risk, with 1 indicating a positive impact of ESG issues, and 2 being neutral. The CIS is developed by analyzing individual environmental, social and governance scores for companies.
"The intention is to gradually roll out ESG scores for all of our rated issuers, but the next wave will be utility holding companies that don't have generation," he said, including transmission networks and gas distribution companies. That set of ratings will come out in the fourth quarter, or late in the third, Cassella said.
Overall, Moody's new report concludes "ESG issues have a moderately negative credit impact on most regulated utilities with generation." For some, however, it is more acute.
PG&E was given a CIS-5, meaning ESG issues have a "very highly negative" impact on the rating of an issuer or transaction. Edison and FirstEnergy were both scored CIS-4, meaning "highly negative."
"ESG risks for these three entities have been material in one shape or form, and have severely impacted their ratings," Cassella said.
There were 50 companies with a CIS-3 score, "indicating that ESG considerations have a moderately negative impact on credit ratings," according to the report. In North America, only Berkshire Hathaway Energy Co., Hydro-Quebec and British Columbia Hydro & Power Authority, scored a CIS-2. There were no companies in the report rated CIS-1, for which ESG issues would be positive.
Among environmental considerations, Moody's said, regulated utilities with generation "have the highest exposure to physical climate risks because the increasing frequency and severity of extreme weather events pose potential threats to the financial performance of the sector."
Consolidated Edison (ConEd) (CIS-3) was among utilities Moody's says have "highly negative exposure to physical climate risks because their service territories are located in coastal regions." The utility, which serves New York City, ranked higher for the environmental risk score and lower on governance risks.
ConEd issued a statement saying "as a coastal energy company, we have factored in sea level rise from climate change in our protections and anticipate further investments based on projected increases." The utility says it invested $1 billion to harden its system following Hurricane Sandy in 2012, and is now spending another $100 million over four years on its electric system in Westchester County.
Social risks, including waste disposal and provision of affordable service, are moderate and largely consistent across the sector, according to Moody's.
In general, governance represents a low risk for utilities, Cassella said, due to the highly-regulated nature of the sector. However, he said, there are instances where utilities appear to have brought risk on themselves.
The report notes "FirstEnergy and Exelon have been caught up in bribery scandals in their respective home states of Ohio and Illinois, which drives their highly negative scores for compliance and control considerations."
Exelon Corp., which Moody's tagged with a CIS-3, issued a statement saying an agreement with the U.S. Department of Justice (DOJ) had resolved its investigation into the holding company and utility subsidiary ComEd.
"The conduct at issue has been addressed through best-in-class remedial measures that include the implementation of new companywide policies. We have reviewed these policies and controls with the credit agencies," an Exelon spokesperson said in a statement.
In response to the Moody's report, FirstEnergy pointed to comments made April 23 by its Senior Vice President and Chief Financial Officer Jon Taylor during the company's first quarter earnings call.
"We continue to provide the rating agencies with regular updates on our business, and we are working with them to develop a clear outline of what is needed to return [FirstEnergy] to investment-grade credit ratings," Taylor said. "Key milestones include governance and compliance changes at our company, resolution of the DOJ investigation, and solid credit metrics."
Nether PG&E nor Edison replied to requests for comment on the Moody's report.
While so far it seems no utility has found a way to turn ESG concerns into a net-positive, that could change, Cassella said. There are a lot of companies facing climate risks and making considerable investments to mitigate them, he said. "Their scores could improve in that regard," he said, as they exit fossil fuels and invest in clean energy.
ESG issues and their impacts on credit scores can make it harder for companies to issue debt, and ultimately those costs can filter down to the consumer, said Cassella.
"When these risks get extreme, or very material, that obviously could impact the utility's ability to access capital markets," said Cassella.