ESG: Sandy Nessing



Fortnightly Magazine - November 8 2021

Electric utilities in the United States like American Electric Power, Arizona Public Service, Evergy, Northwestern Energy, PPL Corporation, WEC Energy Group, and Xcel Energy, as outlined below by execs from these companies, have quite decisively accelerated their progress on ESG priorities, through investment, innovation, and a clear intent to be recognized as leaders in ESG at the same time that they continue to deliver safe, reliable, and affordable utility service to the communities that depend upon them, powerfully.

PUF's Steve Mitnick: What's your role at AEP in ESG?

Sandy Nessing: I lead corporate sustainability and have responsibility for ESG disclosure, managing the risk associated with ESG and our ESG profile. ESG started to influence mainstream disclosure about six or seven years ago. Our CFO at the time called me after an investor meeting where he was asked about ESG for the first time. From that point forward we had our eyes on ESG.

It can be confusing because some people think sustainability and ESG are interchangeable. I don't see it that way. I see ESG as the non-financial metrics and the measurement of performance.

Sustainability is the long game. That's where your strategy is, the actions you take and where you get the big picture. They're connected but also different.

We respond to as many as a dozen or more surveys a year, both on the investor side, plus supply chain. Our large customers care about it because they are getting pressure from their investors, suppliers, and customers.

Credit rating agencies are looking at our ESG scores and profile, the banks, the insurance companies, the proxy advisors are too, but it's also coming up in new business development and in supply chain. We're in somebody else's supply chain, and they're in ours. Today, ESG is affecting all aspects of business.

I like to describe it this way: who is driving the car and who is in the passenger seat? Governance has always been in the driver's seat. Governance is critical to business success.

The E is primarily climate for us, but also encompasses water, air emissions, biodiversity, and other environmental issues. The E is in the front seat with G because climate is such a big issue for our company and our industry. But the events of 2020 — the pandemic, the social and racial unrest — pushed the S from the back seat to the front seat.

What companies have now is ESG all in the front seat, coming at us at the speed of light. That's the landscape we operate in today. And it is constantly evolving, which makes it challenging to stay ahead of the curve. But that's what we have to do.

We're not just focused on what's happening here in the U.S. We also have to pay attention to what's going on in other parts of the world, particularly Europe, which is ahead of the U.S. in this space by at least a decade. This is important because our investors come from all over the world, and they have different expectations of us.

We are starting to see some of that international influence in the U.S. as the SEC prepares to initiate rulemaking for ESG disclosure. The EU's sustainable finance disclosure rule — SFDR — is a good example. Essentially, it requires asset managers to demonstrate that the financial products they sell as green, actually are green.

Although it's meant for asset managers, issuers — like AEP — are held accountable because we may be in their portfolios. The SEC is starting to look at this, too.

That's my role, watching all of those things and bringing that forward with a plan to manage them. Having controls in place to mitigate and manage risk, engaging with investors and third-party research organizations that are rating and ranking us, and trying to stay ahead of the curve on all of it.

One way we monitor ESG issues that could affect our business is through ESG materiality assessments. We did a full assessment last year, and just refreshed it. We use an AI tool that helps us look at what is happening on a global basis, since the risks are on a global stage. It's a valuable tool.

I can take that back to our risk executive committee, the executive management team or the board and say, here are what the relevant issues are today, but here's what's on the fringe that we need to keep an eye on.

PUF: AEP is a major company, historically used a significant amount of fossil fuels, and was aggressively addressing that. You probably get calls.

Sandy Nessing: Yes, we do. When I first came to AEP in 2006, our primary engagement with stakeholders was with NGOs. Climate was the main focus. There was a lot of pressure to address our carbon footprint, not just reducing carbon emissions, but through renewable energy and energy efficiency.

Fast forward to 2015 and that's when the shift began. Our engagement went from mostly NGOs to mostly investors and then a couple of years ago, large customers as they set their own sustainability goals. They care about these issues, too, and have expectations of us to help them meet their goals.

We have a core team that includes corporate sustainability, investor relations, and environmental services that meets with stakeholders on ESG issues and we bring others in as we need them. We're frequently on investor calls talking about our ESG performance.

That's an important part of what we do because we have to be out there telling our story, in terms of the transformation that is underway, not only in our industry, but within AEP. We have a legacy history of being a fossil heavy electric utility. We need to make sure the story of AEP's transformation is what leads.

We used to talk about ourselves as being the largest electric coal burning utility in the U.S., and we were the largest carbon emitter in the Western hemisphere. That was how people thought of us when they thought about AEP.

That's not who we are today. We've been going through this transformation for more than a decade and are a much different company.

As we work toward the future, we also have to thoughtfully and properly wind down the past. Affordable, reliable coal-fired generation made this country's economic growth and prosperity possible; we cannot forget our history in that regard.

We are at an inflection point; we have a clean energy strategy on the table right now, and if regulators are supportive, by 2030 our generating portfolio will flip to fifty-two percent renewable energy. We're in the process of writing a new chapter for our future.

For most of the people we talk to, whether it's an investor or a customer, or any stakeholder, we have to level set for them. The transition that's underway is a massive undertaking and it won't happen overnight.

It's not just flipping a switch and turning off a coal unit. It is a process that must account for the reliability and resilience of the entire electric power grid, the affordability of electricity for customers, and the people and communities affected by coal plant retirements.

This social and economic aspect of the energy transition that is playing out in the communities where our plants are located is significant. There are direct, indirect, and induced economic impacts.

We did an economic analysis of the retirement of a coal unit as part of our most recent climate report. We found that for every coal plant job that is eliminated when a plant closes, another two to three jobs are lost in the broader economy. Plants are like ecosystems in that way — there is a ripple effect from their closure through the local economy.

That impact will vary by the location and size of the plant, but on average, the financial effect is about one hundred sixty-five million dollars. That's huge.

When you think about where these power plants are located, typically in rural areas, they are the largest employer and taxpayer, with good paying jobs. Also, the impact employees have in the communities around the plant. Think about the scale of this impact as the whole country goes through this transformation.

We are successful when our communities are healthy and thriving. We share this perspective with our stakeholders because we want them to understand the whole picture, including how much we've already accomplished in a short period and the complexity of the transition that lies ahead.

PUF: How are you going to reach that 2030 goal, nine years from now, of fifty-two percent renewable energy?

Sandy Nessing: It is aggressive. We're working with our state regulators. Many states already have clean energy policies and/or mandates in place. In fact, many states have led the way — where the federal government did not — to implement a renewable portfolio standard or energy efficiency/demand side management standards.

The groundwork has been laid. Now we have to work through how we do it while maintaining reliability, making the grid more resilient, and keeping electricity affordable for our customers.

There is also an important competitive advantage that states have when they embrace clean energy. Without it, they would be hard-pressed to attract big tech companies that have one hundred percent clean energy goals.

A great example of the benefits of renewables for customers is AEP's North Central Wind Facilities in Oklahoma. This two billion dollar investment will deliver three billion dollars in benefits to customers over the life of the project. There is no fuel cost associated with wind and that's a major benefit for customers in managing their electricity costs, as well as being a win for the environment.

We are confident this is the right path forward and we'll work with our regulators to achieve the best results for customers.

PUF: How do you handle diversity and social questions?

Sandy Nessing: Diversity, equity and inclusion, workforce development, and how you care for your workers, are among the top ESG issues we are asked about on the social side. The pandemic has intensified that focus.

We get questions from investors about the diversity of our workforce, the diversity of our board of directors, and how we reflect the communities we serve. We also are asked about human capital management, which encompasses a range of issues from culture and pay equity to workforce development, hiring practices, and safety and health.

Some of these issues go beyond the S in ESG. For example, safety performance is also a proxy for governance. The result of this scrutiny of our social performance is that it is bringing parts of our organization to the table with external stakeholders for the first time.

Transparency is critical in managing your ESG profile. You may have a dozen policies that address key issues but if they are not public, you don't get credit for it. In fact, you lose standing when you're not transparent. There's a direct connection between transparency and ESG ratings and rankings.

For example, the release of our latest climate report, which is framed according to the Task Force for Climate-related Financial Disclosures, resulted in a nearly immediate boost in our ESG profile. What made it stand out was the level of transparency on transition and physical risks and opportunities associated with climate change. Our role is to help the organization get comfortable with that level of openness.

To help us move the ball forward on transparency and disclosure and manage risk, we established a corporate ESG committee three years ago. This cross-functional group meets monthly to monitor and evaluate emerging issues or trends as well as our risk mitigation strategies for ESG. The committee also works to integrate ESG within the corporate strategy.

PUF: There's a global competition for capital across industries and customers, whether it's the Googles, Amazons, Microsofts. Is this something that has to be a priority for the board?

Sandy Nessing: Absolutely, because your ESG profile can be a differentiator. It's important to stay on top of that, and make sure the ratings are based on accurate data. We invest a lot of time reviewing, correcting data, and questioning third party organizations about their sources and methodologies. It's a priority because of the impact a poor rating or ranking can have financially or reputationally.

The financial markets are also warming to ESG or sustainability-linked financing. There's a growing and competitive market for green bonds, social bonds, and sustainability-linked bonds.

We launched our first sustainable finance framework in August. We built into it green bonds, social bonds, and the ability to add sustainability-linked bonds in the future. Two days after launching, we issued our first green bonds to support the Oklahoma wind project.

Initially, the framework will largely support our clean energy transition. This includes renewable projects, as well as the transmission and grid modernization investments that support the growth of renewables. To give us more flexibility in how we might use the framework, we included options such as fleet electrification and broadband expansion.

When we convert our fleet to electric vehicles or extend broadband to unserved areas of our service territory, as we scale those pilots, this gives us an opportunity to seek capital funding to support them from new markets.

PUF: Where do you think ESG is going over the next two to four years?

Sandy Nessing: It's growing and will continue to intensify. We will see more regulation around ESG, in the U.S. at the SEC and through the EU's new taxonomy and sustainable finance regulations. Although we are U.S.-based, our investors are global, so we have to watch what is happening elsewhere.

The SEC's action in this space could help give clarity to what is material and narrow the list of metrics we are asked to disclose. I don't see any of these ratings, rankings or frameworks going away. There is some consolidation occurring, which is good. We see demand for more and targeted disclosure growing, as issues change and focus shifts.

The spotlight on social issues will continue to intensify as well. The pandemic and the social and racial unrest of 2020 brought these issues to the forefront. We'll continue to be pressed on a spectrum of ESG issues that will continually evolve. The one constant about ESG is that it's always changing and moving. The target never is the same.


ESG Powerfully conversations, some with Guidehouse's Dan Hahn and Michelle Fay: