ESG Integration in Practice:
by Aaron Ziulkowski, CFA, Investment Analyst and Manager, ESG Integration
November 29, 2021
At Boston Trust Walden, environmental, social, and governance (ESG) issues have been incorporated in investment analysis for over 45 years, a practice known as ESG integration. In this blog post, we highlight our process using IDACORP, Inc. (IDA) as an example.
Boston Trust Walden's Investment Process
We seek to invest in high quality companies with sustainable business models whose stocks are trading at reasonable valuations. We expect that a portfolio of such investments may generate superior returns with less risk than index benchmarks over full market cycles (one bear market and one bull market). Our in-house team of fundamental and ESG analysts collaborate to identify financially material ESG risks and opportunities and to assess them in the context of a company’s overall performance. Consideration of ESG risks and opportunities enables the Securities Research Committee to have a more comprehensive view of the overall financial quality and business model sustainability of a company. Taken together, ESG factors inform the Committee’s decision to approve or reject a security for investment in client portfolios.
IDACORP in Focus
We recently researched IDACORP, a vertically integrated electric utility serving approximately 600,000 customers in Idaho and Oregon. In researching the company, our analysts determined the company produced strong financial performance relative to utility peers demonstrated by a high degree of stability, superior profitability, and reasonable growth, all of which we consider quality markers. Also significant, the company operates in states with constructive regulatory environments, growing populations, and healthy economies – factors that would tend to support a continuation of past relative success.
On the ESG side, analysts began identifying financially material ESG issues specific to IDACORP, recognizing its specific business model and the regulatory environment, among other issues. Research indicated climate-change related risks and opportunities were likely to be the most material. The electric and gas utility industries are particularly exposed to climate-related transition risk. The Biden Administration’s recently announced goal of 100 percent carbon pollution-free electricity by 2035 is a case in point.
Research revealed that in addition to having significant hydroelectric generation, IDACORP’s portfolio of electricity generating assets included coal-fired capacity, accounting for about 20% of all generating capacity. Considering regulatory trends and technological evolution in the utility sector, the use of coal-fired electricity generation presents a long-term business model sustainability risk for many utilities.
Recognizing this risk, our analysts dug deeper, gathering more information relevant to IDACORP and benchmarking it to peers. Research revealed IDACORP’s carbon intensity (pounds of carbon emissions generated per MWh of electricity) was significantly better than peers. Analysts also noted that Idaho does not have a policy framework mandating a shift away from coal-fired generation. Nonetheless, IDACORP made the strategic decision to retire its coal-fired assets. It has worked constructively with regulators to shut down units in 2019, 2020, and has specific plans to close an additional plant by 2025, which would leave only one remaining coal-fired asset. Underpinning these specific actions is a corporate commitment to reach 100% clean energy before mid-century.
Analyzing and integrating the ESG data into an investment recommendation is the final step in our ESG integration process. Relative to other utility companies, IDACORP’s actions appear to mitigate certain regulatory risk. And with several generating plants already retired and specific plans to achieve net zero goals, we determined IDACORP is effectively managing the financial and business model sustainability risk of a transition to a low-carbon economy. Taken together with other components of fundamental analysis, the analysts recommended that the Securities Research Committee approve IDA as a potential holding in smaller cap investment strategies.
Getting to Net Zero
Earlier this year, Boston Trust Walden became a signatory of the Net Zero Asset Manager (NZAM) Initiative. In doing so, we committed to doing our part to accelerate global efforts to achieve net zero greenhouse gas emissions by 2050 or sooner. Investing client assets in companies like IDACORP that are committed to this same journey is one component of this process.
Stay tuned for more information on our goals and targets as part of the NZAM Initiative.
Past performance is not indicative of future results. The security presented is shown only to illustrate the firm’s investment analytics and its process for evaluating an issuer in the course of implementing its investment strategy. The security should not be viewed as a recommendation of the firm, and it should not be assumed that an investment in the security was or would be profitable.
About Boston Trust Walden Company
We are an independent, employee-owned firm providing investment management services to institutional investors and private wealth clients.