Target Rock Advisors

FAQ (Frequently Asked Questions)

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What changes have been implemented in 2013?

In addition to a number of new key performance indicators and sustainability assessment methodology improvements, we have launched our flagship Sustainable Utility Leaders Index (SULI). A description is available here. As a result we will be focusing our comparative analyses on SULI versus non-SULI companies rather than those in our 2012 High, Middle, and Low Sustainability and ESG indexes. Various wording throughout this FAQ and elsewhere on our website may, where relevant, continue to reference our old High, Medium, and Low sustainability categorizations.

What is the Target Rock Utility Sustainability Score?

It is a measure of the overall effectiveness of utility sustainability efforts, using a Triple Bottom Line (TBL) standard applied to the actual historical performance of forty nine U.S. domiciled, publicly-traded electric and combination electric and gas companies. Our initial product offering includes sustainability scores and rankings for the forty-nine utilities, three related stock indexes for the “high,” “mid” and “low” scoring utilities, plus an index for all of the 49 Utility Sustainability Focus group companies combined. We consider these benchmarks and indexes our Flagship products.

What do you mean by “sustainability” and “TBL?”

Sustainability is a characteristic of any entity or undertaking that enables it to exist and thrive into the future in a socially responsible way by balancing three major considerations: economic, environmental and social (including governance). For example, a utility that must make a decision about a new power plant needs to consider not only the economic effects on its bottom line and customer rates, but also how construction and operation of the plant would affect the environment, jobs, the local economy, water utilization and a variety of other factors. Socially, consideration needs to be given to the health and welfare of local residents, as well as construction workers and other employees, regional planning, public opinion and local political sensitivities. This all needs to be done within the context of a fair balance of often-conflicting objectives.

In addition to your Flagship products, does Target Rock offer other rankings and indexes?

Yes, there are a number of additional rankings and indexes that are derivatives of our Flagship products. These include a series of more traditional high, medium and low “ESG” rankings and indexes, as well as three separate rankings and indexes for the 49 utilities, each scored separately on just Economic, Environmental or Social considerations. We therefore presently offer a total of ten indexes: four from our overall sustainability Flagship products, three “ESG” products and three economic only, environmental only and social only products. While these indexes depart from the more strict application of TBL principles that Target Rock prefers, they do correspond generally with the structures of a number of other industry rankings and indexes that are popularly used for socially responsible investing. We think it’s important for our stakeholders to see how our approach benchmarks against others.

Of what value is the TRA Utility Sustainability Score?

It provides metrics and benchmarks that enable self-assessment and suggest areas of improvement for utilities seeking to enhance their sustainability profiles. The scores form a foundation for a ranking that recognizes sustainability leadership and also provides performance data for best practices analysis. It also serves as a foundation for the Target Rock sustainability stock index.

What are the TRA Utility Sustainability Stock Indexes?

After scoring and ranking the utilities on their sustainability performance, we subdivided them into three groups: high, middle and low sustainability performers. We then weighted the stocks in each group by sustainability score. Once we plotted the total return performance of the three indexes, it became apparent that the high sustainability index out-performed the two other indexes, as well as broader market measures, such as the Down Jones Utility index and the S&P 500 Utility index. While sustainability scores and total return performance appear highly related, we have not statistically demonstrated that good sustainability performance necessarily leads to better stock performance, although we believe the hypothesis that there is some level of cause-effect is true. Our work continues in this area.

Why do you consider it important to track utility sustainability performance groups other than the high performers?

Most investors are likely to be drawn to indexes that track the leaders in a particular Sustainability or ESG category. From an SRI perspective, this makes sense – these indexes reflect the industry’s Sustainability leaders today. However, we also feel it is important to include Medium and Low Sustainability and ESG performers in our family of indexes for two primary reasons. First, they provide a means to compare the relationship between sustainability practices and total return performance. Second, over time and in conjunction with our Utility Sustainability Scores and Benchmarks, they offer insight into which companies are improving their sustainability profile and could possibly move up into another index.

Does TRA make any recommendations regarding investments in the stocks of the indexes’ constituent companies?

No, we provide the indexes only as information on how the utilities in our ranking system have performed as a group over approximately the last ten years. We will continue to track the performance of the index in the future and compare it to other published indexes. However, we offer no investment advice. We produce data and analytics for investors to consider as a part of their overall investment decision process.

Why should utility executives care about their sustainability performance?

There are a few reasons. First, society is increasingly focused on sustainable and socially responsible behavior from companies, government and virtually all other organizations. Some want it because they fear global warming, some because of social injustices, some others because they believe sustainable practices lead to improved profit and yet others who simply think it’s the right thing. Whatever the underlying driver, a second reason is that there are literally trillions of dollars of funds under management that have as their objective investments in only sustainable and socially responsible companies. Any utility CEO, CFO or IR representative who is seeking enhanced analyst coverage, better investor relations or even possibly improved stock market performance should be interested in the attention a good sustainability score would get from the financial community.

Any other reasons why utility executives should care?

Even without consideration of the value of sustainable practices, we believe utilities are generally an under-appreciated asset class, especially as regards small and lower-end mid cap companies. The sustainability story not only identifies potential areas of enhanced equity performance, but also calls attention to the entire class, reminding investors of the inherent value proposition of utility investing: excellent dividend rates and reasonable upside potential. In other words, utilities as a group tend to provide solid, sustainable total returns in the long run…a not insignificant consideration for the rapidly increasing retirement population.

There are other sustainability scoring systems and indexes. Why Target Rock’s?

We’re unique. We’re really not competing with the others; rather we provide something that is altogether missing today. We are dedicated solely to the U.S. utility sector. Our screening process doesn’t require a utility to be a large or middle cap company to be included – we’re very democratic that way, and even the smallest cap company can score high and be recognized under our system. Our analysis is based on actual performance statistics drawn from a variety of governmental and proprietary databases, rather than simply on company self-reported plans and promises. Our analysis is supported by a select bench of deep utility industry experts with well over 250 years of experience in the utility and financial industries, including equities and fixed income analysis, econometrics, sustainability leadership and regulatory policy analysis. And finally, we believe that our approach is the most faithful to the TBL sustainability model, and weights economic considerations more fairly than other scoring systems. Of the very few scoring systems and indexes that even remotely resemble Target Rock’s, most focus heavily or exclusively on the ESG components at the expense of economic considerations. Economic considerations are not irrelevant to investors.

How does your scoring system compare to the grades provided by the CDP or other similar reporting regimes?

As its name implies, CDP is most concerned about carbon emissions and the reporting thereof, while emissions reporting and carbon disclosure form only 15% or so of the Target Rock score. Once again, sustainability is about the TBL - not just environmental or any one of the other two legs. And even environmental is about more than just carbon; for example we also look at sulfur dioxide, nitrogen oxides and mercury. Further, we do not make any attempt to independently judge the quality of disclosure reports as does CDP and other organizations; we care only about actual performance, as measured through independently reported data. As far as other rankings and scoring systems are concerned, they also have different foci. Some include only relatively large cap companies, others include few if any utilities, some emphasize only environmental, social, governance metrics, and yet others rely heavily on summaries of other sustainability and CSR reports.

Do you really mean that you care only about actual performance?

Not quite literally, but our true strength is measuring what utilities have actually gotten done, not how neatly or thoroughly philosophies are articulated, processes described or plans reported. Our approach is objective, quantitatively rigorous and unforgiving. As a consequence, there are a number of companies that the industry has grown accustomed to seeing on the honor roles of existing best in class listings that do not necessarily score highly in the Target Rock analysis. Conversely, a number of small and mid cap utilities that would normally never be included in other sustainability or ESG indexes do appear very highly ranked in our listings. Also, keep in mind that Target Rock’s approach examines many more dimensions of sustainability and it should not therefore be surprising that our scores vary from others.

How should the industry think about the Target Rock scoring system and stock indexes?

As I’ve said, we believe our system is powerful, objective and unforgiving, since it is data and algorithm-driven and the metrics are applied uniformly to all utilities. That being said, our model is still but one of a number of systems that attempt to measure sustainability and socially responsible performance in numerous – and often disparate – dimensions. The Target Rock scoring and indexing system should be thought of as an alternative, albeit highly informed, perspective on an eminently complex issue, as well as an effective tool for sustainability assessments.

Aside from the initial sustainability scores and stock indexes you described above, will Target Rock be offering other new products?

Yes, in fact we are very close to publishing a series of listings that identify industry leaders in some of the sub-categories of the three broad TBL assessment components. For example, utility demand side management, energy efficiency and conservation (“DSM/EE”) programs carry significant weight in the determination of the environmental component of each utility’s overall sustainability score. Further, DSM/EE is at the top of most governmental and corporate “green” strategies and certainly in the forefront of federal energy policy. Some utilities excel in this arena, but because of other scoring factors, fail to make it into the top sustainability listings. To provide the recognition that these companies deserve, Target Rock will soon publish a “DSM/EE Leaders” listing. We have other lists and indexes under development that we hope to release over the next few months.

Are there any other products or services you’d like to mention?

The model that we use to score and rank the forty-nine utilities can be used to identify areas of improvement and also re-calculate the scores and rankings under various assumptions regarding changes in operations. We offer access to this model by utilities that are interested is seeing how they would rank if they made operational improvements in certain sustainability-related areas.

How do we find out more about Target Rock, its scoring and index systems and other services?

In addition to information found elsewhere on this site, we welcome you to contact us.

How current are the data used in the 2012 Target Rock Utility Sustainability Rankings?

For the 2012 Utility Sustainability Rankings, all data used is the most recent available at the time of ranking (scores were finalized in January 2012). The majority of data sets were current as of January 2012. We should note however that the industry’s reporting of electric and natural gas utility operating data generally lags that of financial data. The results of the 2012 Utility Sustainability Rankings reflect 2010 electric operating data and 2009 natural gas operating data. Again, these data are the most recently available. This reporting lag doesn’t significantly affect our results since our scoring methodology compares utilities on a relative basis and – barring major events, acquisitions, or divestitures – aggregate operating data rarely changes materially in a single year. The one exception to note is that UIL Holdings Corporation’s 2012 Utility Sustainability Score does not reflect its 2010 acquisition of three gas utilities (The Southern Connecticut Gas Company, Connecticut Natural Gas Corporation, and The Berkshire Gas Company) from Iberdrola USA, Inc. UIL’s financial data reflects these operations.

What’s the origin of your company’s name, Target Rock?

Yes, there is a real rock called Target Rock. It sits just offshore on the east side of Lloyd Neck in Huntington Bay, which connects with the Long Island Sound about 25 miles east of New York City. This roughly fourteen foot boulder’s name comes from its former role as, well, a rock that was used as a target. It seems the British liked to shoot at it as practice during the Revolutionary War and the War of 1812. Despite originally being associated with war and used to facilitate a concentrated dumping of lead into a pristine marine ecosystem, it is now the namesake of the beautiful, protected and tranquil 80-acre Target Rock National Wildlife Refuge composed of mature oak-hickory forest, a half-mile rocky beach, a brackish pond, and several vernal ponds. The land and waters support a variety of songbirds, mammals, shorebirds, fish, reptiles and amphibians, many of which represent restored populations. During the colder months, diving ducks are common offshore, while harbor seals occasionally use the beach and nearby rocks as resting sites. NY State and Federally protected piping plover, least tern, and common tern depend on the Refuge's rocky shore for foraging and rearing young. We adopted the name for a few reasons. The words connote focus and strength. It’s a piece of local earth that both founders have supported and enjoyed for decades. And lastly, in a way, the history of Target Rock (the rock) can be viewed as a metaphor for the companies that Target Rock (the firm) analyzes – long-standing and enduring, and increasingly associated with change, sustainability, and environmentally friendly and socially responsible behavior.