Eye on Utility Cost of Capital
Martha Davis is a Professor of Business & Finance at Baker University and an Executive Advisor for Atrium Economics. Atrium Economics provides consulting, advisory, and regulatory expert witness services to energy and utility companies.
In the previous edition of this article, we explored the complex relationship between environmental, social, and governance (ESG) risks and the utility business model. We examined how credit rating agencies assess utility companies based on ESG factors, delved into their methodologies for determining ESG scores, and emphasized the importance of positioning utilities favorably for the future.
Now, we will delve deeper into the impact of ESG ratings on the utility cost of capital and subsequently, customer bills. ESG ratings are a topic of significant interest to regulators, who strive to understand and address the implications of ESG ratings on utility rates.
Environmental, Social, and Governance Trends
ESG criteria, which encompass considerations related to the environment, social issues, and governance concerns, are gaining increasing influence in shaping financial markets and industries.
Investors with a strong commitment to sustainability utilize the ESG framework to evaluate companies’ business practices and direct funding toward enterprises that align with ESG goals. This shift in investor behavior is compelling businesses to adopt practices that address climate change, improve relationships with stakeholders, and enhance transparency.