Utilities urged to disclose ESG risks

Investors in public power bonds are looking for more disclosure from utilities on climate-related targets and power demand trends as extreme weather and grid-hungry infrastructure like data centers become more common.

That’s according to a draft recommended best practices in disclosure for public power electric utilities and joint action agencies from the National Federation of Municipal Analysts. It has been 20 years since the NFMA’s last best practices in disclosure for the sector, during which public power utilities, and the world, have seen shifting credit risks.

“The fundamental risks and challenges of the industry have remained pretty much the same — the need for affordability and reliability, and many of the performance metrics and financial factors are very similar,” said Dan Aschenbach, owner of AGVP Advisory and one of the authors of the NFMA paper. “I think the update does try to capture some of the new trends and how the industry has evolved.”

The public power sector accounts for a healthy niche in the municipal bond market with between $100 billion and $140 billion of revenue bonds outstanding in the sector, according to Aschenbach. States and local governments have issued nearly $70 billion in municipal bonds issued to finance public power investments in the last decade, according to the American Public Power Association.

The NFMA worked with a broad group in crafting the recommendations, including the industry, underwriters, bond counsel and others. The paper offers a roadmap for when issuers should disclose and what to include on official statements, annual reports and in interim disclosures in roughly 15 different areas.

Highlighting climate and regulatory risks has in recent years become more controversial, especially for utilities located in Republican states that have sought to prohibit investments that consider ESG factors.

The NFMA recommends that utilities disclose details of net zero emissions targets’ goals, emissions by type and metric tons, and current ESG-sustainability statements.
Regardless of recent ESG culture wars, that type of information has always been important to utility credit analysis, Aschenbach said.

“Several states have basically restricted investors from requiring this type of information but from a vantage point of understanding risk, environmental and governance factors have always been fundamental and making sure they’re well-documented in disclosure is important,” he said.

Investors also want to understand a utility or municipality’s strategy for the clean-energy transition, he added.

The buyside is also increasingly interested in resiliency as extreme weather becomes more frequent. Events like Winter Uri in February 2021 that crippled the Texas power grid and forced public and private utilities to pay sky-high prices for natural gas and power purchases illustrate risks from extreme weather.

In light of changing weather patterns, the NFMA recommends that utilities disclose their current and/or planned storm hardening and resiliency measures and costs, their financial and operational responses to natural disasters and their insurance and other financial tools to recover potential losses.

Rising electricity demand from data centers, electrification of buildings and electric vehicles marks another area investors are tracking. The NFMA recommends that utilities highlight their demand trends and the key drivers in change in demand over the last five years.

“This is a relatively newer pressure on the sector,” Aschenbach said.

The NFMA, which has written recommended best practices and white papers on approximately 30 different sectors and topics, is taking comments on the recommendations February 15. It expects to publish a formal report after that.