ESG Oversight Lessons from the PG&E Bankruptcy Filing: Where External ESG Ratings Fall Short – and Why

Note: this blog was written for the National Association of Corporate Directors and will be forthcoming from NACD. Reprinted with permission.

by Gib Hedstrom

The recent news of California utility PG&E should cause pause in every corporate boardroom. On Monday January 14, 2019 The Wall Street Journal reported that analysts had pegged PG&E’s wildfire liability exposure to be as high as $30 billion – roughly triple the company’s market value of $9.12 billion. By Friday that week, The Wall Street Journal called this “the first major corporate casualty of climate change.” One week later, California investigators said PG&E did not cause the major 2018 fire (Tubbs Fire), but although that announcement caused a bump in stock price, it did not change the $30 billion tab, which the company itself has estimated. The company filed for bankruptcy on January 29, 2019.

But judging its external environmental, social, and governance (ESG) ratings, PG&E was doing fine. Clearly, this situation shines a spotlight on the serious limitations of external ESG ratings. It also highlights the need for companies across virtually all industry sectors to build robust ESG governance systems.

PG&E seemingly had its “ESG house” in order. External ESG rating organizations praised PG&E. Sustainalytics (the company providing data to Yahoo! Finance) rated the company as an “outperformer” (in 88th percentile on Environment and 82nd percentile on Governance). PG&E rated #1 among utilities and #22 overall in Corporate Responsibility Magazine’s 100 Best Corporate Citizens. Newsweek Green Rankings listed the company #1 among electric and gas utilities and #4 overall. And, PG&E was named to the Dow Jones Sustainability North America Index for the eighth time. Certainly there were apparently good reasons for high ratings.

  • The company’s recently-published 187-page 2018 Corporate Responsibility and Sustainability Report seems to “check all the boxes.” Sustainability is explicitly called out in the company’s mission, vision, and values. Board committees are in place; ESG materiality assessment has been done, ESG is incorporated in the company’s financial incentive plan, and the organization has a dedicated Chief Sustainability Officer, along with an outside advisory group. PG&E has a long history of ESG disclosure, bold goals to cut greenhouse gas emissions, and a record of early delivery on rigid California compliance standards (three years ahead of schedule). The list goes on.
  • PG&E has $34.5B worth of renewable energy contracts.
  • The company has discussed the California wildfires, noting actions PG&E is taking to address the “new normal.”

So we have a situation of high external ratings and a company apparently in compliance. Yet a $30 billion environmental liability exposure happened anyway. Clearly, there is a disconnect somewhere.

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What is the “Window of Opportunity”?

Board members, CEOs, and executives give far more than a nod to sustainability today. Many see a window of opportunity.

But here’s the rub: they only have from today until about 2020 to get this right. The year 2020 is a key marker; it is the year by which the foundations for achieving Vision 2050 must be in place.

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