With apologies to John Stuart Mill, the utilitarian approach could very well be the best approach for the utilities sector to approach their strategy. No pun intended, either…
In rudimentary terms, utilitarianism is defined as the "ethical doctrine that the rightness of an action must be judged according to whether it increases the sum of human happiness, or utility". Collectively, the utility sector can increase utility for all by continuing to invest in carbon offset projects such as carbon sequestration or power generation via renewable energy sources. An obvious reason as to why these initiatives can increase utility is that with fewer carbon emissions, damage done to the planet due to global warming will be mitigated, thus making our successors happy. Digging a little deeper, though, there is another group whose utility will be increased by a reduction in CO2 emissions. An important group, too: the shareholders.
With sustainability becoming an increasingly important part of corporate philosophy these days, the utilities sector has come under intense scrutiny due to the heavy GHG-laden nature of the industry. There is no doubt that their annual GHG tonnage emitted into the atmosphere is going to have to come down – and fast. But instead of looking at that as a challenge, utilities should look at that as an opportunity. That is, these same utilities are blessed with having the potential to make the biggest positive impact. Going forward, that will shine brilliantly in investors' eyes.
Let's take a quick step back and look at ExxonMobil (XOM). As the largest of the oil majors, they invested tens of millions of dollars over the course of quite a few years in order to keep the politics of the energy industry in their favor. In other words, so they could leave well enough alone and not have to change their business model after they already had established their position at the top. While tens of millions may seem like a large amount to some, this investment was actually a pittance compared to the tens of billions in profit they captured in 2005 and 2006.
However, this strategy likely will not work anymore. It appears that the last gasp of the way things worked yesterday has already been drawn out, and a new era has been ushered in – the sustainability era. And who better to pave the way for this new era than utilities? What strategy can the utilities take to do this? Easy – just employ the same tactics that ExxonMobil used, except leverage it in the exact opposite way. FPL and AEP have started investing in carbon offset projects – so why not also invest the same money as ExxonMobil to get the politics of the utility industry to change in their favor, not stay the same in their favor? In other words, they should push toward stricter emissions regulations now that they have started their carbon offset programs (pushing for a federally mandated cap-and-trade system would accomplish the same thing). This will pave the way for their peers to follow, and also their brand names will forever be linked to having helped move the industry forward. It's a golden opportunity for anyone in the utilities sector to build brand equity that will help attract capital from investors. And it's also an opportunity to create value for the shareholder in this new era.
Daniel Esty and Andrew Winston outline this principle in their book Green to Gold, a favorite of ThePanelist. Employing this strategy correctly is one way to separate the leaders from the followers. ExxonMobil used a variation of this principle for a long time and it worked quite well for them yesterday. Times are changing, though, and we will see who it will work for tomorrow. To ExxonMobil's credit, it recently seems to have eased its stalwart stance against global warming and has stopped providing funding for the same organizations who promoted such skepticism. That is a start, but if the company wants to continue to enjoy the same share price appreciation going forward, it'll have to do a lot more.
Utilitarianism is no more than creating the greatest happiness for the greatest number. And utilities have in their hand an opportunity to increase utility for all. ThePanelist will stay on top of this issue, so stick around to see who will succeed – and perhaps you'll find your own utility will be increased too.
Disclaimer: I do not give investment advice. Do your own research. Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security.
Disclosure: I do not own any of the stocks above, but may consider buying FPL and and AEP in the future. I will not consider owning XOM until the company takes a much more active role in the fight against climate change.