Steep Price for Corporate Virtue

Virtue Signaling by individuals is questionable, but it only affects the person doing it. When a business virtue-signals, it can divert management's attention from key missions like serving customers and earning a profit for shareholders. Such is the case with Pacific, Gas, and Electric, now bankrupt, which curried favor with the green crowd. [bold added]

(Chronicle photo)

The California utility’s moves over the past 10 years to rely more on renewable energy sources such as wind and solar resulted in high scores on environmental, social and governance [ESG] metrics, which are considered by many investors to be a positive factor in choosing a stock and used by others to manage risk...

Both firms evaluate companies on a broad range of issues. Under the heading of environmental, for example, MSCI and Sustainalytics assess corporations on issues such as carbon emissions, raw-material sourcing and climate-change vulnerability.

ESG is a poor predictor of financial success:

2015 VW share price after cheating 

as of November 2018, Sustainalytics rated PG&E in the top 10% of its peers in the environmental category, and the firm had singled the California utility out in 2017 as one of 10 companies world-wide best positioned to take advantage of emerging ESG trends...

PG&E isn’t the only high-rated company that has faced an ESG-related selloff in the past year. Facebook shares have fallen more than 20% since its peak over the summer, a decline that many analysts attribute to its handling of a data-privacy controversy...

Similarly, Volkswagen was historically viewed as a strong ESG company before the 2015 disclosure that the German auto maker systematically cheated on emissions tests. In that case, MSCI raised governance concerns about the firm ahead of the scandal and later attributed “Dieselgate” to Volkswagen’s mismanagement....An investor who bought Volkswagen shares in April 2015 would show a loss of more than 35% on the investment.

With its very existence at stake, PG&E seeks to shed itself of long-term renewable energy contracts that gave it a high ESG rating.

PG&E has agreements to purchase power from about 350 energy suppliers representing $42 billion, according to Bankruptcy Court papers. The company says it entered into most of the agreements to satisfy California’s renewable energy requirements, and the contracts typically last for 15 to 20 years or more.

Renewable energy prices have fallen significantly since the contracts were put in place, creating an opportunity for PG&E.

When a company touts all the great things it's doing for the environment and "social justice", take a second look. If it's more than PR, do your portfolio a favor and walk away.