For the second session in a row, Republicans in the state legislature have introduced bills to prohibit consideration of Environmental, Social, and Governance issues (ESG) by government investments (SB1013) or financing institutions (SB1014 and SB1167). All three bills were passed by the Senate on party lines, and SB1013 has been passed by the House Government on party lines.
These actions are in line with the national campaign against ESG run and funded (to the tune of $1.6 billion) by Leonard Leo of the Federalist Society. The goal is to prohibit consideration of the climate risk from fossil fuels. In the last week of March 2024, Jim Jordan, who chairs the House Judiciary Committee, held a hearing in Washington, D.C., to investigate if stockholders talking to each other and educating the public about climate dangers is a violation of the anti-trust act. Anti-trust is to stop industries from collaborating to set prices. If you are wondering how that applies, you are not alone.
ESG considers risk—which any good business should do. In fact, of 5,000 companies in 22 countries in 22 different industries, 79% of them consider ESG. In the business roundtable, 181 countries signed an agreement to pay attention to employees, customers, and the community in which they thrive. Apparently, this is against Republican principles. In fact, ESG supports a company’s strength and success.
The Texas Chamber of Commerce reported that when they passed the anti-ESG bills, they lost $600 million in state revenue and 3,000 jobs.
Arizona Corporation Commission (ACC)
But AZ marches on. In a public hearing concerning the APS rate case on February 22, 2024, the chairperson of the Arizona Corporation Commission (ACC), in response to public comment, said that no one he was aware of on the Commission applauds ESG (hearing video at 6:27) and that those concerns would not impact the Commission. Commissioner Tovar was not yet in the meeting.
The ACC has a specific statutory duty. It is not just a club where people can act on their singular concerns. It is the commission’s job to regulate public service corporations and protect consumers. A.R.S.§40-202.
It is the job of the ACC to ensure that charges are just and reasonable, adequate and efficient. A.R.S.§40-361. The corporation shall ensure the provision of service, equipment, and facilities that are safe, healthy, and convenient for the customer. The Commission may set standards (A.R.S.§40-322), make sure equipment is serviceable, of quality, and adequate, as well as require testing. If defective, the company must reimburse the consumer. It is ACC’s job to protect the public (B). That’s “social.”
It is also the ACC’s job to determine if equipment or facilities are safe and, if they are not, take action. A.R.S.§40-321. They can require a surety bond for the benefit of the customers. (C) That’s “governance.” Violations by officers and agents of a public service corporation are class 1 misdemeanors. A.R.S. §40-426. That’s “governance.”
Factors that must be considered by the ACC include environmental compatibility. A.R.S.§40-360.06. That includes social conditions such as:
- Development (A)(1)
- Fish, wildlife and plant life (A)(2)
- Recreation i.e., social uses (A)(4)
- Scenic, historical, and archaeological sites, i.e., social (A)(5)
- The total environment (A)(6)
They should look at the potential increase in costs (A)(8) that climate disasters create. They also must look at any applicable federal and state laws (A)(9). SEC now requires publicly traded companies like APS to post their ESG scores.
Even more, the ACC must give special consideration to the protection of areas that are unique in biological wealth or habitat for rare and endangered species. (B) One can’t know that without looking at the environment. With all this knowledge, the Commission must also balance, in the broad public interest, the need for an adequate, economical, and reliable supply of electric power with the desire to minimize the effect on the environment and ecology of this state. A.R.S. §40-360.07(B)
Failing to do so is arbitrary and capricious. Western Watersheds Project v. Kraayenbrink, 632 F.3d 472, 484 (9th Circuit, 2011) If a decision is reached without individualized consideration and balancing of environmental factors fully and in good faith, the courts must reverse. In the matter of RUBICON, Inc., 670 S.2d 475, 483 (1996)
The rights of the public, not just corporations, must receive active and affirmative protection at the hands of the Commission. Save Ourselves, Inc. v. Louisiana Environmental Control Com’n, 452 So.2d 1152, 1157 (La. 1984) When making decisions, the ACC must have a reasoned rational basis that includes those ESG factors they disdain, or the decision is arbitrary and capricious. Vecinos Para El Bienestar De La Comunidad Costera v. Federal Energy Regulatory Commission, 6 F.4th 1321, 1330 (D.C. Circuit 2021)
A rational connection must be explicitly made between the facts and the choices. If a factor intended to be relied on is completely ignored (like climatic changes brought on by rising temperatures), the decision will be arbitrary and capricious. Tucson Public Schools v. Green, 17 Ariz. App 91, 495 P.2d 861, 864 (1972); Johnson v. Mofford, 193 Ariz. 540, 975 P.2d 130, ¶16 (1999)
Wildfires show what happens when ESG is ignored.
The recent history of wildfires makes these factors increasingly important. In the PG&E fire, the second largest in CA, failure to invest in infrastructure (sustainability) meant bad poles with bad lines sparked the wildfire. PG&E agreed to a $45 million settlement related to the Dixie fire, in which a tree fell and hit company equipment, sparked the fire, which burned 1,300 structures.
In 2021, PG&E was fined $125 million for the Kincade fire, and the 2019 Easy Fire resulted in $1 million in fines. This obviously impacts a company’s bottom line. PG&E also remains under supervision. A federal judge called PG&E a continuing menace. PG&E is now burying 10,000 miles of power lines to avoid further wildfires—an expensive but long-needed upgrade.
The Camp fire in 2020 started when a suspension hook on a nearly 100-year-old tower broke and fell, causing sparks that started the fire. Failure of upkeep is governance. In that fire, PG&E pled guilty to 84 counts of involuntary manslaughter. PG&E estimates losses could run to $2.3 billion. The company filed for bankruptcy in 2019. In 2020, they left bankruptcy with a promise to pay $13.5 billion. The 84 people are still dead.
The Zogg fire cost them a $150 million settlement. The tree that fell on the structures and started the fire had not been removed because of poor recordkeeping. That’s governance. Other systems were also required to reduce future risk. For the involuntary manslaughters, PG&E will pay $4 million.
PG&E executives agreed to a $117 million settlement after being sued by the victim fund from the North Bay and Campfires. The claim was that the fires were the direct result of the executives’ actions or inactions resulting in downed power lines. The executives were sued for breach of fiduciary duties to act in the best interest and were directly responsible for the fires. The company failed to take proper care of the 90-year-old lines and did not properly maintain equipment or vegetation. That’s governance.
The 2023 Hawaiian fires were also sparked by powerlines. The Hawaiian Electric Company admitted that the fire was caused by power lines that fell in the high winds. The Associated Press reported there were bare electrical wires and unsteady poles – a failure of maintenance. Even the company admitted their poles were obsolete and did not meet the 2002 national grid standard. When a pole fell, it ignited a brush fire left dry by the drought. The fire burned down the town and killed 96 people.
The for-profit, investor-owned, publicly traded utility (like APS) admitted they should respond to the safety issues caused by climate change. The National Weather Service had warned of the high fire danger. The World Meteorological Association confirmed 2023’s record heat and warned of more in 2024 that will increase the risk of fire. Utilities must be aware of these issues to not only manage risk but keep the public safe. It is the job of the ACC to ensure they do.
Like in the CA and HI fires, Xcel Energy admits its equipment may have caused the largest wildfire in Texas history because of a failure to invest in infrastructure. Allegedly, a pole was not inspected or maintained properly, and it snapped off at its base. The Smokehouse Creek fire burned more than 1 million acres in the Texas panhandle. Xcel was already facing lawsuits over a fire in Colorado in which over 500 structures burned and two people were killed. The insurance company has already warned the company that it could face liability, and its stock fell almost 9%. A lawsuit on behalf of homeowners has already been filed.
All three of these utility-caused fires are the fault of poor governance, i.e., short-term profits over long-term sustainability, favoring current investors over the public and over long-term investors, profit gouging, and corporate greed. All of these are factors that the ACC should be considering, but they said they won’t.
ESG is about maximizing profit and sustainability.
Investment companies are now advising investors to consider environmental issues because it will impact bottom line. Companies with active ESG have a higher bottom line and better returns. Only a third of stocks on the Dow are ESG but those that are, outperform other stocks. (Dan Burrows, April 21, 2021, Kiplinger) My environmentally responsible account has outperformed the Dow Jones for eight years in a row.
“Sustainability issues represent one of the most important cost and revenue drivers in the modern corporate world.” (Plentisoft Feb. 19, 2024) Sustainable investments are often superior to traditional ones and mitigate long-term risks by paying attention to climate change. ESG investments contribute positively to society and the environment and increase financial return. Deloitte reports that ESG has undergone a transformation and now means active awareness of the risk of climate change and a greater sense of social responsibility, both of which are good for the bottom line.
The S&P 500 Environmental and Socially Responsible Index is designed to measure the performance of securities from the S&P 500 that meet environmental and social sustainability criteria. Ninety percent of the stocks on the S&P publish corporate social responsibility reports. If Arizona refuses to do business with a company that has an ESG score, they will drive most major business out of Arizona and our state pension fund will take a big hit.
Beginning in March 2024, the Securities and Exchange Commission (SEC) requires disclosure of climate-related risks for public companies. They must identify climate-related risks that may have an impact on the business, operations, and financial condition. Because of insurance risk, it is necessary to look at financial risk, loss of customers due to poor ESG practices, reputational risk, and regulatory risk. They must understand the insurance risk from incidents like fires, the risk of loss from degradation of standing, the risk of inability to meet financial obligations and the risk of failure in their operational and governance practices. Yet our ACC doesn’t even want to look at ESG, and our legislature wants to ban anyone who does business with them.
Insurance companies were among the first to notice the enormous impact of ESG (ESG: A growing sense of urgency). (PWC, 2022). Insurance is about managing risk, and managing risk is tied to ESG criteria. Increasing extreme weather events impact balance sheets and company value. Businesses that are not sustainable because they fail to face the risk will not be insurable, nor will they be favored investments. From 68-80% of global insurers are taking action on this issue.
Next to pension funds, insurance companies hold the most assets. They must factor in the risk of climate change. (KPMG Insights Industries Services Client Stories Careers About us ESG in insurance: S&P GLOBAL: CASE STUDY An Insurance Company Raises Its ESG Intelligence.) The kinds of risks included are flood, water stress, heat waves, cold waves, hurricanes, sea level rise, and wildfire. Arizona is particularly susceptible to heatwaves and wildfires.
Investors know. Insurers know. Regulators know. The companies with the best bottom line know. Arizonans know. Yet our legislators introduce and vote for bills that prohibit consideration of vital information to ensure that our tax dollars are safe and our pension is protected. Public service corporations who value immediate profit taking over sustainability burn down entire communities and murder people. Yet our ACC says they won’t consider public safety. Arizonans deserve better from our public servants. Remember this in November.