What’s Driving ESG Momentum for the Energy and Utilities Sectors?

• Utilities currently leads all S&P 500 sectors in ESG sentiment, while Energy is showing signs of improvement.
• The need to improve operational emissions and transition to low carbon alternatives are the key topics driving ESG news-related activity for Energy & Utilities.
• Valuation premiums for Utilities ESG Darlings appear attractive compared to history, while Energy premiums are in-line with recent historical averages and well below historical highs.
• Both U.S. and global sustainable and traditional funds added exposure to companies with nuclear power involvement.
• This year’s proxy season ballots show higher shareholder support for climate commitment alignment and methane emissions disclosures.

In our latest report, we explore the key topics driving ESG-related news activity for the Energy and Utilities sectors and provide an update on sustainable fund positioning and performance trends. We also offer an update of proxy season trends for 2023.

In our latest report, we explore the key topics driving ESG-related news activity for these sectors and provide an update on sustainable fund positioning and performance trends. We also offer an update of proxy season trends for 2023.

Here are the main takeaways from our report:

Utilities ranks highest on ESG sentiment, while Energy is improving

Not surprisingly, the Energy sector has been a major underweight for sustainable funds lately. This positioning trend has been driven primarily by the Oil & Gas Industry and was a major headwind for sustainable fund performance last year when Energy outperformed the larger market. Utilities, on the other hand, has been an overweight position, particularly for European and Global sustainable funds.

Our assessment of ESG profiles reveals that Utilities leads all S&P 500 sectors based on current ESG sentiment signals, while Energy ranks in the middle and shows signs of improvement.

Emissions and Business Model Resilience drive ESG news activity For Energy & Utilities

We found that the most meaningful ESG topics for the Energy and Utilities sectors have been centered around environmental issues such as GHG emissions and Business Model Resilience. including balancing the needs of improving operational emissions and transitioning to low carbon alternatives, while evaluating the needs for an affordable and reliable energy supply.

Recent policy actions, such as the Inflation Reduction Act, have added tailwinds to decarbonization efforts and opportunities in new energy ventures for Energy and Utilities companies.

Utilities ESG Darlings appear attractively valued

ESG Darlings currently trade at valuation premiums to their sector peers on a relative FY2 P/E basis. But compared to recent history, we found that it varies by sector.

For example, premiums for Utilities ESG Darlings seem attractive compared to history, sitting well below their historical average. But valuation premiums for Energy are in-line with their recent historical average and are well below historical highs.

Sustainable funds increase exposure to nuclear power

Since early 2022, exposure to companies with fossil fuel and traditional Energy involvement increased across the board, especially for traditional funds. Consequently, underweight positions for sustainable funds didn’t narrow during this period. U.S. and global fund exposure to thermal coal stayed flat, while exposure for European funds declined.

Both U.S. and global sustainable and traditional funds added exposure to companies with nuclear power involvement, but exposure was even higher for dedicated sustainable funds. Within our sustainable fund universe, we’ve noticed this trend occurring in both diversified sustainable funds as well as climate-themed funds.

Shareholders show support for climate commitment alignment and methane disclosure

During the 2023 proxy season, we’ve seen higher shareholder support for proposals related to lobbying activities and their alignment with climate commitments (following the establishment of the Global Standard On Responsible Climate Lobbying in 2022) as well as for methane emissions, including the reliability of methane disclosures.

In terms of management proposals, we’ve noticed meaningful improvement in support for say-on-pay proposals for US Energy companies this season.

Our Commitment to ESG

ESG Stratify™ encompasses all of RBC Capital Markets’ ESG thought leadership and insights, including our monthly ESG Scoop series and industry-specific publications from our research analysts. RBC’s Equity Research Group delivers thorough, comprehensive assessments of companies spanning all major sectors, along with macro insights and stock-specific ideas to help guide portfolio management decisions.