Don't wait to deal with a serious material risk
On the Maui wildfires and dealing with an uncertain world
You probably have seen the pictures of the orange sky along the east coast from a few months ago as wildfires in Quebec blanketed the Northeast US in smoke. I live in a rural area in Pennsylvania and was shocked that there was no burn ban during the smoky haze. After all, by June this year, Pennsylvania had seen three times as many acres burned than in all of 2022.
It seems like we aren’t paying much attention and planning for a future that might already be here instead.
Wildfires are tricky. They can start for simple reasons, like an exhaust pipe getting too close to a patch of dry brush on a windy day. But, if recent history has taught us anything, it is also that wildfires can be caused by electrical equipment and transmission lines managed by utility companies. Add severe drought and increasing extreme weather, including wind, and you have a recipe for disaster.
When Smokey says, “Only you can prevent wildfires,”
he means companies, too
For my non-US readers, Smokey Bear is the long-standing mascot of the US Forest Service for its Wildfire Prevention Campaign.
In early 2019, PG&E declared bankruptcy after liabilities built from California wildfires in 2017 and 2018. By early 2020, fines from those fires reached $2.1B, followed by the prosecution filing criminal charges in 2021 (which were dismissed) and more penalties in 2022. For an energy company, wildfire risk represents an Environmental risk with Social consequences that can be solved with quality Governance and action (and maybe a little new Technology, like underground wires, drones, IoT sensors, social media monitoring, and more).
Also in 2019, the Hawaiian Energy Company, under Hawaiian Energy Industries (HEI), recognized the need for better wildfire fire prevention around its equipment. Unfortunately, it invested less than a modern FTE salary + benefits into the issue over the years at $245,000.
And then, well, we’ve all seen the tragedy of Maui’s largest wildfires in a century unfold, destroying the town of Lahaina with over 100 dead and up to 850 still missing. Attention is quickly turning to the utility company due to a viral security video showing a massive spark around the time the local grid was having issues. GMA posted the video and a brief timeline here.
While the cause is unknown, what got me writing this week was the WSJ subtitle of the headline here:
Is it just me, or is there a suggestion that a decarbonization strategy might have distracted from a significant material safety issue?
Decarbonization is not a distraction but material to an energy company
The transition to clean energy is not necessarily universally material but is a transition risk that companies across industries need to monitor and pursue. While it falls under double materiality for most companies, clean energy and broader decarbonization efforts are simply table stakes. On the other hand, decarbonization is financially material for a utility company, construction, airline, or any other heavy-emitting industry because their business models depend on it, and the costs to transition are high.
Hawaiian Energy Company first committed to reducing emissions by 70% from generation in 2021 and has since been increasing its renewables portfolio. It announced 38% renewables in 2021 and was up another 1% in 2022 (adjusted for new calculation models). HEI also has a subsidiary, Pacific Current, focused on developing “projects that advance Hawaii’s ambitious environmental and economic goals.”
Related, the State of Hawaii has been on a clean energy journey in earnest since 2014 when the Hawaii Clean Energy Initiative (HCEI) set the goal to have the country’s first 100% renewable energy portfolio by 2045. In a show of progress, AES, another Hawaiian utility, shut down the island chain’s last coal-fired power plant last September.
For Hawaiian Energy Company to focus on a shift to renewables represents a material ESG opportunity. It could lower long-term transition costs to ‘catch up’ to others later. This opportunity (or risk, depending on how you look at it) was recognized in HEI’s Consolidated ESG Priority Areas (or what looks like a materiality matrix) from their 2022 ESG Report.
The top two priorities make a lot of sense. Decarbonization is a State priority, and HEI appears to be taking on Economic Health & Affordability through its transition risk approach and the projects that Pacific Current invests in. Consider these two priorities through the lens of the 2019 paper by D. Kapuaʻala Sproat, “An Indigenous People's Right to Environmental Self-Determination: Native Hawaiians and the Struggle Against Climate Change Devastation.” Kapuaʻala Sproat is a Professor of Law at the University of Hawaiʻi’s William S. Richardson School of Law and the Director of Ka Huli Ao Center for Excellence in Native Hawaiian Law. In her paper, she writes:
Understanding the innate spiritual connection that Kānaka Maoli share with native resources provides a crucial foundation for decision-makers and communities to come together to craft proactive policies to address climate change's catastrophic harms.
The Kānaka Maoli are also called Native Hawaiians or indigenous inhabitants.
Of course, it would make sense that Hawaii and its utilities would lead with a transition to renewables since the indigenous people are a critical stakeholder group. Native Hawaiians have a fundamental genealogical and spiritual connection to the environment (per Kapuaʻala Sproat’s paper).
So, was Decarbonization a distraction? It was undoubtedly material when considering stakeholders and the state’s commitments. While there is an impact perspective to consider here, decarbonization isn’t the same for all. Here, it is an ESG issue that HEI needs to progress on. However, that doesn’t mean it should not have also focused on its material risks, but is that what happened?
Material risk requires multiple stakeholders and action.
Per the priorities, Safety falls outside of the priority circle for some reason. This doesn’t mean it wasn’t a focus, but we know that the company didn’t spend much on wildfire programs and was waiting for government approval to raise rates to cover the cost of a newly proposed program (per WSJ). In 2022, HEI created a five-year, $190M plan called the Climate Adaptation Transmission and Distribution Resilience Program, which went to review by the state’s Public Utility Commission (PUC). Per HEI’s ESG report:
Key elements of this plan include strategic investments in critical transmission and distribution asset hardening, wildfire prevention and mitigation, hazard tree removal and advanced resilience performance modeling.
In case you missed it, there was a three-year gap between uncovering the risk and submitting the plan. While the docket was filed with the PUC in June 2022, meetings and public comments have kept it moving forward for a year (documents available here), but it remains without a decision. There appear to be no upcoming hearings scheduled on the docket either, according to the docket’s PUC page.
Time is one thing that we cannot afford, which is an acknowledgment in HEI’s docket filing.
Due to the urgency of addressing wildfire risk, the Companies plan to continue engineering assessments and scoping for Wildfire Prevention & Mitigation work prior to Commission approval of the Project.
Speaking of timing, per HEI’s ESG report, they used the Representative Concentration Pathways (RPC) 6.0 model for their future climate analysis, which is a high-emissions model. In its analysis, they call out the importance of preventing and protecting against wildfires under this scenario.
These climate risk scenarios are helpful to inform planning around adaptation efforts, but seeing this in the report makes me wonder just how useful they are for determining the urgency of these matters. While filing a docket for $190M of project work surely needs to be reviewed and considered (including for ESG factors), it seems there is no longer time to waste on adaptation to these issues as we now live in a wildly uncertain world ruled by imprecise predictions. Regardless of future climate scenarios, we need to act.
In consulting those who have been there
While the investigation is ongoing and HEI actively participates, there is interesting news about who the company is seeking advice from (per WSJ).
Hawaiian Electric officials have conferred with their counterparts at PG&E, seeking legal guidance on how to weather a crisis, people familiar with the matter said. The company is speaking with restructuring-advisory firms, exploring options to address its financial and legal challenge.
As we have seen, PG&E has been there before and can offer advice on the business side of the house. However, in 2023, PG&E also pledged $18B to adapt to risks relating to wildfires. One can only hope that HEI officials are conferring on more than just weathering the crisis but learning whatever lessons they can from PG&E’s adaptation efforts.
According to PG&E, the company believes they have put steps in place that would have prevented fires from the previous years. That is knowledge that is worth people’s lives. After all, Hawaiian Energy provides 95% of electricity to the State of Hawaii, which means there is a lot more risk waiting out there if their equipment or downed power lines did cause the issue. The company and PUC should consider working in concert quickly with communities and across technology to uncover new wildfire risks before they strike.
HEI’s latest ESG report is titled “Laulima,” meaning “many hands working together.” In the aftermath, multiple stakeholders must come together in recovery and new adaptation efforts, from those who have been there before to governments to communities. Still, in the face of our most systemic ESG challenges, this word takes on a new, urgent meaning.
Takeaways and a last word
As we saw with SVB, hindsight is always greater, and there is much that other companies can apply in advance of a crisis. These are all Governance issues at the intersection of ESG.
Decarbonization is not a distraction for an energy company but a material issue that may intersect with jurisdictional and stakeholders’ priorities. Every company will have these types of issues.
You can’t escape your ESG risks unless you face them head-on. Once-in-a-lifetime events are a thing of the past. If you are sitting on a life-threatening risk, or have been, escalate it and act.
Working through ESG issues often involves multiple stakeholders, including governments, who may not move with diligence and speed. With the pace of our changing world, we need faster decisions and action while keeping stakeholder input in mind to progress responsibly.
Perhaps the biggest takeaway is that we can’t longer ignore those calling for change. Returning to Kapuaʻala Sproat’s paper, she also stated:
…climate change's impacts, “while problematic for all peoples, fall disproportionately on Native peoples in the regions such as the Arctic and Pacific, where the environment is closely tied to indigenous lifeways.” In many cases, simply accepting the inevitability of global warming and adapting “will prove genocidal for many groups of indigenous people.” From Papua New Guinea, to the Arctic, to Bangladesh, “loss of homeland is already occurring and may accelerate as slow-onset and sudden disasters due to climate change compromise human habitats.” Because indigenous peoples share a spiritual and cultural connection to ancestral resources, any such loss will result in the loss of culture.
Those words take on an even deeper meaning after learning that the wildfire destroyed the Na ‘Aikane O Maui Cultural Center, “which helped young people learn traditional art and longtime families fight for rights to their ancestral lands.” The center is taking donations to help the community recover online, and you can help here.
The tragic events in Lahaina hit much differently than the fall of SVB. In writing this, I hope to call attention to how ESG can help a company address its material issues, especially those in waiting that could impact human life.
If we aren’t protecting people, what good is any ESG work?