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July 27, 2022

The importance of granular data for asset allocation in the Electricity, Gas & Utilities sector

Marta Gonzalez Rincon and James Burke
Moody's ESG Solutions


According to the 2022 Renewables Global Status Report, investment in renewable energy and fuels rose for the fourth consecutive year,[1] reaching USD 366 billion, and a record increase in global electricity generation led to solar and wind power providing more than 10% of the world’s electricity for the first time ever.

However, energy demand is expected to rise due to population and economic growth and increased access to energy. Equally, electricity demand, across the World Energy Outlook (WEO) scenarios, is expected to grow between 30-36% by 2030 compared to 2020. Considering coal is the largest source of electricity generation worldwide, the increase in electricity demand will further challenge energy supply decarbonization.

The electricity sector was responsible for 36% of global CO2 emissions in 2021, which is more than any other sector. Thus, Electric, Gas & Utilities (EGU) companies can play a crucial role in the transition to a low-carbon economy and they also face particular transition risks that can lead to risks for investors. Financing the shift from fossil fuel to renewable generation presents opportunities for the investor community, alongside the need to manage risks. In particular, investors have the opportunity to align their financing with the transition by identifying top performers in terms of absolute emissions reductions in the EGU sector.

The IEA states, despite 2021 being a record year for renewables, it is not sufficient to cover the rise in electricity demand and predicts global CO2 emissions in 2021 are on track for their second-largest rise in history. This suggests that there may be variation between companies that are decreasing their energy generation related emissions by replacing fossil fuels with renewables, and those companies which may just be increasing their generation capacity through the incorporation of renewables, and therefore still increasing their emissions. Investors striving to integrate a climate focused strategy into their portfolio construction need to dig deeper beyond sector trends to understand what’s driving the performance in their own portfolios.

Putting portfolio performance in context

Where public company disclosures are available, Moody’s has collected and analyzed energy generation data, differentiated by source, and GHG emissions data, following the GHG Protocol, for over 10,000 companies, with 405 belonging to the EGU sector.

In this analysis, we assess the performance trend of a subset of 62 EGU companies which can be viewed as a proxy for a hypothetical portfolio highlighting the extent to which performance can differ from global trends even when holding a significant number of companies. The subset in our sample portfolio includes companies from different regions globally, selected because they each generate more than 50% of their revenue from energy generation and consistently disclose information on their energy generation mix and GHG emissions, which allows us to assess the relationship between their renewable and total energy generation. We first analyze the performance trend across all 62 companies and then we dig deeper into the company level. We examine the relationship between total renewable energy generation, total energy generation and Scope 1 GHG emissions, [2] over a 6-year period [3] for our assessed companies.[4]

Figure 1 places yearly renewable energy generation against total generation and Scope 1 GHG emissions for our sample portfolio. Firstly, it shows an increase in the generation of renewables, reaching 26,218 GWh in 2021 compared to 17,680 GWh in 2016.  Renewable generation fell compared to the previous year in 2017 and 2019 but significant growth was seen in 2021, with renewable generation increasing by 34.6% compared to the previous year.  While regional sector analysis shows more consistent growth in renewable energy, this shows that the performance of an individual portfolio may be more volatile, as it’s more affected by the actions of individual companies.

Figure 1. Scope 1 GHG emissions (tonnes CO2-eq ), renewable energy generation (GWh) and total energy generation (GWh) among assessed electric & gas utilities companies between 2016 and 2021

Source: Moody’s ESG Solutions

After remaining relatively stable through 2019, from 2020 renewable generation has started to take greater significance in the energy production of the EGU companies of this portfolio. By digging into what’s driving this change in the underlying companies and their long-term energy generation plans, investors can better understand if this jump is likely to continue over time. While it is true that this increase in renewables can have a positive financial impact on the portfolio, due to increased capacity and low operating costs of companies with renewable energy generation, attention needs to be paid to other trends, including Scope 1 GHG emissions.

Although the increase in renewable energy generation discussed above did outpace the roughly 30% increase in total energy generation, in absolute terms the additional energy generation came from predominantly non-renewable than renewable sources. This is because the increase in total energy generation represents more GWh in absolute terms than the increase in renewable generation. We thus expect that the 2021 data will show an increase in Scope 1 GHG emissions for this portfolio, demonstrating that its overall performance is limited in terms of delivering the absolute emissions reductions required to mitigate climate change. This information can inform investors’ own target setting, portfolio strategy adjustments and detailed risk disclosure, particular as they face increasing market and regulatory pressure to align their portfolios with the transition to a low-carbon economy and to disclose their climate risks and impacts.

Leveraging detailed datasets helps identify the drivers of portfolio trends

While understanding portfolio trends is important for determining the cumulative renewable energy investments and the GHG emissions of the portfolio, granular analysis provides investors the opportunity to identify top performers or companies that may be dragging portfolio performance down.

Even though emerging economies face more acute pressures due to increasing energy demand than developed economies, we have found that from the top 10 companies in our investment portfolio, in terms of share[5] of renewable energy generation in 2020, five are based in Latin America and one is from Asia Pacific, suggesting these pressures can be overcome while transitioning to a low-carbon economy.

In Figures 2 and 3 we analyze two companies, Company A and Company B, which both belong to the top 10 companies mentioned above.

Source: Moody's ESG Solutions

While Company A and B are both increasing their total renewable energy generation, each is taking a different path towards decarbonization. Company A’s emissions have increased over the 6 year period, whereas Company B’s have decreased.

It is important to note the variation between Company A and B’s total energy generation and acknowledge that companies of varying sizes present different challenges for investors. Companies with greater Scope 1 emissions will represent a greater proportion of a portfolio’s emissions than their lower emitting peers. This also means that understanding their trajectories may be even more important, as will effective engagement strategies.

While the overall portfolio analysis showed that renewable generation decreased from the previous year in 2017 and 2019, we can observe that this trend does not match the performance of Company A. Likewise, as a whole the portfolio of EGUs decreased total power generation until 2020, but Company A’s total generation increases year on year. Until 2020, Company A is increasing its renewable energy generation and reducing its emissions, suggesting the growth in total energy is coming from renewables. However, in 2020, its renewable energy production continues to grow, but is outstripped by growth in the Company’s total energy generation, derived from non-renewable sources and resulting in an increase in Scope 1 GHG emissions. This demonstrates that the share of renewable energy does not tell the complete story of the likelihood of decarbonization of a particular constituent company’s energy supply.

Whilst there are several avenues through which the energy supply can be decarbonized; from energy efficiency measures to reduction of energy-intensive activities, one of the most impactful ways EGU companies can contribute is through replacing their fossil fuel generating assets with renewable sources. Ignoring granular insights, such as the interaction between a Company’s energy generation mix and its scope 1 GHG emissions, may lead to misallocation of capital in companies within this sector if an investor is aiming to align financing with a reduction of emissions in the economy.

On the other hand, in absolute GWh, Company B’s increase in total generation is consistently less than its renewable generation increase, suggesting the Company is reducing its dependency on fossil fuel-based generation and the associated GHG emissions. Thus, a portion of its fossil fuel generation has been replaced by renewable generation, the associated emissions have not been emitted, and the company has decarbonized its energy system compared to previous years.  

Understanding an EGU company’s decarbonization strategy helps inform lenders and investors about how likely a company may be to meet its GHG emissions reduction targets and in turn how an investment in this company may affect the investors’ own commitments. Examining these targets can help investors identify how a company may be adjusting for the transition and can inform shareholder engagement or allocation. In this example, Company A has set a target but has not defined a baseline year. Company B, on the other hand, has set a clearly defined GHG emission reduction target of a 25% reduction by 2025, using 2015 as a baseline. This suggests that Company B has given investors more transparency, perhaps signifying greater commitment to decarbonize, which, from what we can see in Figure 4, appears to be underway. It also raises questions an investor may want to ask Company A, in terms of its baseline year and other intermediate plans to reach its target.

Conclusion: Embracing the opportunity to align investments to transition goals

As investors face increasing public pressure to align their investment portfolios with global GHG emissions reduction goals, there is an opportunity to both mitigate their own financial transition risk while improving their reputation and realizing business opportunities with strategic investments. However, this requires detailed data on company emissions, their share of renewable energy and changes over time, so investors can identify how well-positioned they are for the transition. Projections indicate that global electricity demand is decreasing in 2022 and growth in demand is expected to be less than 2021, given ongoing geopolitical and economic trends. This shift in demand may provide both companies and their investors with an opportunity to focus on managing their transition risks and identifying renewable energy investments, rather than prioritizing total energy growth. Understanding the macroeconomic trends within which a portfolio sits provides investors with insight into what the global trajectory may be and how their portfolios compare. Meanwhile, company-level data allows investors to develop meaningful strategies and adjust their holdings based on their own investment priorities.

Moody’s ESG Solutions provides insights and analyses on ESG themes and multi-stakeholder performance, climate-related risks and opportunities and global sustainable finance trends.

[1] Investment in renewable energy has generally been increasing for longer than four years, with some ups and downs, but has been steadily on the rise during the past four years.

[2] We look at Scope 1 emissions in this analysis since the aim is to measure emissions from the energy generation process, which constitutes nearly all of an EGU company’s Scope 1 emissions.

[3] Generation figures available for a 6-year period and Scope 1 GHG emissions are available for a 5-year period, with 2021 data becoming available throughout 2022.

[4] The EGU sector includes companies with generation facilities, thermal, nuclear and renewable. Our sample focusses on companies with good levels of disclosure, from all geographic regions, and excluded pure transmission and distribution companies because Scope 2 emissions are more material for those companies and we aim to assess only emissions coming from direct power generation.

[5] Defined as the proportion of generation from renewable sources against the total generation