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Business & Money

Investors are asking utilities questions about environmental and social risks. Answers can be a challenge.
Fortnightly Magazine - June 2004

manages the Dow Jones Sustainability Index (DJSI). "Some utilities are really attacking the sustainability issue and trying to integrate it into their strategies, both in terms of environmental and social issues. They are trying to grasp the opportunities and reduce risks at the same time."

Investor pressure is also having a demonstrable effect. In late April, shareholder resolutions calling for greater transparency prompted agreements from Southern Co., TXU, and Reliant Energy to issue reports on environmental risks. And in February, AEP and Cinergy agreed to report climate-change risk exposures in response to shareholder resolutions.

"After a year of negotiations we withdrew our resolution because AEP recognized its fiduciary duty to reveal environmental risks to investors," Nappier said. "This kind of program was only a dream a few years ago, and it goes a long way toward establishing best practices to be shared by others."

Such best practices are still a work in progress, however. Various organizations are seeking to bring greater consistency to sustainability reporting. In general, sustainability covers risks and measures across a range of areas that can affect companies' strategies, and ultimately their financial health. These areas include, of course, environmental factors; health, safety, and other human resources policies; cultural diversity, both in the workplace and the supply chain; community relations policies; and various other social issues that affect companies' strategies and ultimately their financial performance.

Sustainability reporting approaches fall into three main categories. First are procedures that comply with formal standards, primarily those of GRI and its founding organization, the Coalition for Environmentally Responsible Economies (CERES). These standards provide a programmatic framework for companies to use in measuring and reporting their performance.

Second are stock indexes, especially the Dow Jones Sustainability Indices (DJSI) and the Financial Times Stock Exchange 4Good index, which track the stock performance of companies that adhere to certain prescribed principles.

Third are organizations and compacts, such as the e7 and the Global Environmental Management Initiative (GEMI), that require members to meet certain requirements or report certain information. Some of these organizations provide formal reporting standards; others don't.

Performance Measurement

U.S. utilities are taking up various sustainability mantles, to varying degrees. AEP, for example, publishes an environmental performance report every two years, and follows CERES guidelines. AEP is not, however, a member of either CERES or GRI, but it is a member of the e7 organization, which includes the largest utilities from the world's leading industrialized nations.

"We wouldn't be a very competitive company if we hadn't already been looking at these issues internally," says Diane Fitzgerald, AEP's vice president for governmental and environmental affairs. Although sustainability is an explicit part of AEP's environmental tenets, thus far the company hasn't issued a full-fledged sustainability report. "We are taking a serious look at enlarging our report to include economic and social benefits to our communities," she says.

The company hasn't decided which reporting approach it should take, however. "If we move to a standardized format, does that make it more credible and robust, or will we be criticized if we don't pick one of these standard formats?"