ESG Roadmap: The Utilities Sector

Goldman Sachs Research's ESG Roadmap Project analyzes sector-specific ESG challenges by examining data limitations, thematic risks, and forward-looking issues for investors over the next 18 to 24 months.

• Utility Sector ESG Challenges

  • Environmental impacts extend beyond decarbonization, with prolonged air pollution and waste issues expected during the transition.
  • Water consumption and water quality are identified as critical, long-term environmental concerns.
  • Affordability and resilience are primary friction points, driven by the massive capital required for grid modernization and renewable investment.
  • The report highlights a tension between consumer demand for green energy and the actual willingness of ratepayers to bear the associated costs.
  • Regulatory approval for passing these modernization costs to customers remains uncertain.
  • Distributed generation (e.g., rooftop solar) is growing, raising equity questions regarding who bears the cost of grid maintenance as customers opt out.
  • Social obligations have intensified due to the pandemic, increasing pressure on utilities to maintain power access and offer favorable payment programs during economic hardship.
  • Safety and security risks include physical employee safety, environmental threats like forest fires, and cybersecurity threats.
  • Cybersecurity risks are escalating due to the proliferation of smart grids, smart metering, and the Internet of Things, which expose consumer consumption data.

• Governance and Nuclear Power

  • While utilities perform well on traditional governance metrics like board composition and diversity, they face reputational risks regarding political lobbying, tax transparency, and political involvement where data is scarce.
  • Nuclear power is the world's second-largest provider of low-carbon electricity (after hydro), supplying approximately 10% of global total electricity.
  • The current investment climate for nuclear power is weak, primarily driven by high costs, long permitting and construction timelines, and local or political opposition.
  • Declining costs of solar and wind power may further reduce the economic viability of new nuclear projects.
  • The absence of nuclear power could necessitate a prolonged reliance on fossil fuels, resulting in higher near-term emissions.

• Investor Outlook and Data Gaps

  • Investors require more granular data and transparency regarding cybersecurity posture, despite corporate reluctance to disclose specific vulnerabilities.
  • There is a significant need for better information on governance factors that do not fit standard data categories, specifically lobbying expenses and taxes paid, which pose potential financial and regulatory risks.
  • The report emphasizes monitoring the interplay between social expectations, affordability, and the ability to deliver essential public services.