A new report from MVC Associates and Board Advisory, USA Utilities Proxy Statement Review, finds that energy utilities are largely failing to either incentivize managers to achieve or reward them for achieving a cleaner energy future.
Written to coincide with the SEC’s open meeting on climate change risk disclosures, the report reviews the compensation discussion and analysis section of 32 utility company proxy statements. It found that with one exception, although a third of the companies paid some form of lipservice to environmental metrics, they “did not provide disclosure of specific performance metrics, specific targets or incentive payout levels that demonstrate direct line of sight accountability, pay-for-performance and executive compensation alignment to a cleaner energy future.” Only one company – Xcel Energy – “disclosed multiple performance metrics, specific targets and incentive design for Named Officers that directly aligned accountability and pay-for-performance with the need for utility transformation to a cleaner energy future.”
Incidentally, Xcel Energy is rated low governance risk by The Corporate Library.
A number of the companies reference energy efficiency, increasing renewable energy, investments in SMART grid and distributed energy, and green house gas reduction, but none were specific apart from Xcel. To be honest, even a reference is an improvement on the first time we at The Corporate Library looked at the inclusion of environmental metrics in compensation. Back in 2007 we published Whose Carbon Footprint is too big for their Corporate Boot?, a study of 24 companies in particularly carbon intensive businesses. At that time only two companies made any kind of reference to a link between compensation and environmental risk.
The situation may have improved, as MVC Associates demonstrates, but it is clearly far from adequate. And, MVC reminds us, this is of significant importance for shareholder value:
Most of these 32 utilities have been identified as those SEC filing utilities at greatest risk for shareholders and broader society resulting from a material change to regulation of Green House Gas emissions and/or a Carbon Tax. These utilities have a larger portion of their future revenues at risk given a possible carbon tax that would impact profits and dividends for shareholders.
January 27, the SEC put forward its new climate change risk disclosures. It highlighted four scenarios that might trigger disclosure of climate risks in a company’s annual report:
• The impact of legislation and regulation. When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material.
• The impact of international accords. A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
• Indirect consequences of regulation or business trends. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products.
• Physical impacts of climate change. For example, an insurance company may consider whether there is a risk of increased insurance claims in coastal regions as a result of severe weather or changes in sea levels.
Apparently two of the commissioners opposed the release – Kathleen Casey and Troy Paredes – who indicated that they felt the science around global warming is far from settled.
I’m not sure what planet they are living on, but it ain’t this one. There has been no serious opposition to climate change from real scientists – despite leaked e-mails – for at least five years, but the crackpot lobbyist scientists still somehow manage to get in front of SEC Commissioners. So there’s this one scientist telling me it’s not true and there’s 50,000 telling me it is, and I’m going to believe the one scientist? Hello, is that Earth…?
Paul Hodgson - Senior Research Associate
