Wind cannot be complacent about ESG

In a world of broken climate promises and missed emissions targets, investors in wind energy have moral certainty.

It is, on face value, hard to find assets greener than wind farms. Every KWh of clean power counts in the fight against climate change – and wind energy will keep growing in influence in a low-carbon future. But cracks are appearing in the totemic Environmental, Social & Governance (ESG) movement.

According to a report published last month by EY, ‘The Emerging Sustainability Information Ecosystem’, a lack of standardisation in ESG reporting has exposed the movement to accusations of greenwashing and reduced its credibility.

This could be a great opportunity for wind companies. If investors tighten their definitions of ESG, then renewable assets should be in pole position for a new and more focused wave of ESG-related funding.

However, the wind sector has work to do, especially on the 'S' and 'G' of ESG. There are ongoing questions around the sustainability of the wind supply chain, around diversity, and on safety. If the understanding of ESG is toughened, will wind companies’ operations stand up to scrutiny?

ESG challenges

EY’s report highlights the lack of transparency and consistency around ESG rating systems. Complex, opaque weighting methodologies balancing different environmental, social and governance factors are muddying the waters for investors and businesses alike.

The report also highlights the challenges in quantifying environmental and social impacts, leading to further inconsistencies in rankings. Social factors – labour rights, human rights, gender and racial equality – are particularly hard to compare in a culturally and institutionally diverse global context.

In addition, ESG ratings place high significance on financial risks which, though important, is out of step with the concerns of socially conscious investors. The report says that institutional investors in sustainability-focused funds are more often motivated by the promise of steadier long-term returns.

EY has called for greater regulation at an international level to align definitions of sustainable assets, praising the EU’s efforts with China to find the 'common ground taxonomy'. In tandem with this, EY says any new ESR-type framework must remove obstacles for emerging economies by empowering local groups to gather rigorous sustainability data.

Ultimately, the lack of consensus about ESG’s main metrics and reporting functions erodes trust in the overall framework.

Given the current energy crisis, however, the political will for strong private sector involvement in environmental projects is there. A shift towards codified ‘sustainable investments’ could be looming – and the wind sector must ensure it is not caught off guard.

Wind opportunities

The wind industry should be proud of the leading role it plays in the energy transition. But that does not mean wind companies can depend on the sector’s position as a go-to for investors seeking sustainable assets.

According to Bernstein Research, wind energy has a lifetime carbon footprint 98% less than natural gas and 75% less than solar, producing 11 grams of CO₂ per KWh.

But achieving a global build-out of wind energy in line with net zero targets, this could still lead to significant emissions. Wind farm owners can, and should, do more to nurture lower-carbon technologies throughout the supply chain, such as green steel, hybrid electric offshore wind vessels, and blade recycling.

ESG also includes social and governance. But wind energy has some distance to cover on key metrics such as diversity.

For example, a study by the International Renewable Energy Agency (IRENA) showed that women make up 21% of the wind sector’s workforce – and just 8% of senior management. The sector has also been warned about potential human rights abuses, particularly when developing in emerging markets.

Wind’s ESG credentials are fundamentally strong. But ESG investing itself currently rests on shaky foundations. Investors already know that wind assets represent long-term value – but increasingly, they’ll be looking for the right wind assets to match their specific sustainability objectives. And wind businesses which shore up their sustainability offering now will thrive.

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ESG will be one of the issues discussed at the Financing Wind North America conference in New York this November. Secure your ticket now to hear from North American wind’s leading players first-hand. Click here for details