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The utilities sector has become the setting for a race to innovate away from fossil fuels and toward renewables. Investors should pay close attention to this sector given its highly dynamic nature at this time and strong potential for returns. Specifically, it is good to note who is moving quickly to incorporate the latest technology and manage the risks associated with old or new energy operations.
First, funding and the larger success of utilities has become closely tied to efforts to reduce carbon emissions and improve disclosure on these efforts. Those failing to recognize the need to mitigate carbon intensity will quickly lose popularity among asset managers. Simultaneously, it has become economically advantageous to embrace renewable energy innovations as they become more efficient by the day. As long as your utility investments are cautious of these trends, they will continue to provide a safe buffer in your portfolio.
Beyond embracing new innovative solutions, utilities will need to properly manage risks in the sector. For water-intensive constituents (e.g. hydropower, nuclear, and water utilizes), there is increased demand for strategies and disclosure addressing water use analysis and conservation across all locations. Almost all utilities are faced with an increased risk of extreme weather events and associated damages that demand infrastructural improvements in transmission. To ensure a smooth and productive transition to renewables, all companies will also need to establish a comprehensive plan for facilitating human capital development with training, fair compensation, and strong engagement. With regard to governance challenges, utilities are unique in that states tend to represent a large portion of ownership and voting rights, which presents a conflict between company-related and public policy interests. Overall, utilities face an array of opportunities and risks, and investors should consider how each company approaches the dynamic road ahead. Join Physis today to make a difference.
MSCI Industry Report – Utilities