Across the United States, utility shareholders are looking to decarbonize their investment portfolios. Influential shareholder groups such as Vanguard, BlackRock, and Goldman Sachs, have signed on to the Net Zero Asset Managers Initiative, an international group of asset managers, that requires signatories to set climate goals in alignment with the Paris Agreement to ensure that global warming is limited to below two degrees Celsius. Signatories to the Net Zero Asset Managers Initiative commit to net-zero greenhouse gas emissions by 2050, as well as to investing in companies that align with this goal. Moreover, in accordance with the Paris Agreement, the Biden administration recently pledged for the United States to transition to a carbon-neutral power sector by 2035 and reach net-zero emissions by 2050.
For shareholders, success in reaching decarbonization goals hinges on how well their investment decisions align with a transition away from carbon-emitting resources. The Climate Action 100+, an investor-led initiative that focuses on ensuring that large corporate greenhouse gas emitters take necessary climate action, sets benchmarks in accordance with the Paris Agreement for climate change governance, emissions reduction, and financial disclosures. The Initiative found in its 2021 study that many utilities are failing to meet these benchmark criteria. Investments in utilities, or utility parent companies, that are still primarily reliant on fossil fuels (e.g., fossil gas, coal or oil) expose shareholders to a range of risks, including increased volatility of gas pricing, more stringent climate regulation, and increased competition with renewable energy.
The United States has become more intertwined with international markets, rendering domestic gas prices susceptible to changes in global gas prices. As a result, gas prices are becoming increasingly unpredictable, particularly in the wake of the COVID-19 pandemic and political conflicts. For example, in February 2020, U.S. natural gas prices were at $2.50 per thousand cubic feet, one year later in February 2021 prices had reached $16.29 per thousand cubic feet, and by March 2021 prices had fallen to $3.40 per thousand cubic feet. This level of unpredictability jeopardizes the profitability of gas plants, which in turn puts stock values—and the shareholder investments they represent—at risk.
Data source: U.S. EIA. 2022. "Henry Hub Natural Gas Spot Price." Available at: https://www.eia.gov/dnav/ng/hist/rngwhhdd.htm
In addition, stricter climate regulation and increased public sentiment against fossil fuels across the United States have prompted additional scrutiny of utility portfolios. Energy companies with substantial reliance on gas may be significantly impacted by such regulations, such as requirements to reduce carbon emissions or reallocate large amounts of spending toward climate adaptation and mitigation. For example, in New Mexico in 2019, the Senate passed the Energy Transition Act which mandates that electric utilities must only supply carbon-free energy by 2050. This legislation set in motion the premature closure of the San Juan coal-fired power plant, reinforcing the fact that stricter state legislation puts pressure on utilities to transition to clean energy. While this primarily affects ratepayers who see higher energy bills as a result, public opposition that arises from higher bills may generate animosity between investors and the public. The effects of increased public opposition to gas can arise not only in fluctuations of stock value but also in public perceptions of the shareholders that invest in a utility with a gas-heavy portfolio.
Moreover, renewable energy is now competitive with gas generation, making gas expansion a less economically sound expenditure for utilities, and the price of clean energy technologies is still falling. The U.S. Department of Energy has set a goal to considerably reduce the cost of solar for the residential, commercial, and utility sectors by 2030. As renewable energy continues to claim a competitive advantage in the energy market, utilities with a reliance on gas risk falling stock values. Shareholders are then affected by a decrease in stock values, putting their investment decisions at greater risk, particularly if they choose to sell.
Going forward, utility shareholders face important choices in how to balance their investment decisions, particularly those with gas-heavy portfolios. Utility shareholders wanting to decarbonize their investment portfolios must ensure that their client portfolios are aligned with the same goals to minimize the risks involved.
