Environmental Leader Conf-Denver 6-16

The Drive For Disclosure: What Matters, What Doesn’t and What May Be Transformational

Sandy Nessing Managing Director, Corporate Sustainability Environmental Leader Conference – June 22, 2016

American Electric Power www.aepsustainability.com

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American Electric Power


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Feeling the Heat on Disclosure


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Layers of Disclosure Finding Alignment, Rationalizing What Matters

Reporting is increasingly important to satisfy stakeholders, manage risk, identify opportunity

Different stakeholders, different agendas, different concerns

Frameworks, standards, ratings, rankings – how do you know what’s important?

All reporting should compliment each other Layering sustainability performance with financial disclosures

Materiality is essential and needs to be flexible, time-bound and heavily dependent on context


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Materiality Focus

Central to disclosure, investment performance

Speaks language management, stakeholders understand

Eliminates the “noise” – keeps you focused on what really matters

Competitive advantage – it is a strategic business tool

Identifies trends on the horizon

Helps to navigate stakeholder expectations, risks, opportunities

Helps mitigate exposure to reputational and legal risks

Demonstrated positive correlation between sustainability and financial performance when differentiating between material and immaterial sustainability issues*

*Source: Harvard Business School’s 2015 study, Corporate Sustainability: First Evidence on Materiality

“An ocean of definitions, principles, criteria, concepts and applications”


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Clarifying Materiality Principles


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Why It Matters according to PwC Research (2015)

• 87% of investors expect to consider climate and/or resource scarcity in future investment decisions in the next 3 years

• 84% expect to consider social responsibility and/or good

citizenship in that same timeframe • Companies that efficiently direct resources to material

sustainability issues and achieve positive performance are more likely to gain an advantage

Investors are increasingly focused on Environment, Social, Governance (ESG) performance

10 Sustainability Reporting proactively telling AEP’s story

Support AEP’s growth strategy

Leverage data/information

Growing investor interest

Employee Engagement

Corporate Accountability Report

Reputation and branding


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Environmental Divestiture Movement

A number of environmental investment screens have been recently imposed through:

legislation governmental influence self-imposed investment restrictions

This can impact AEP and the utility industry as a whole Examples:

Equity Investors: Legislation in Norway & California Self-imposed restrictions: Axa and Allianz insurance companies Fixed Income Investors: CA Dept. of Insurance Carbon Initiative


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Shareholder Activism

ISSUE: Persistent misperceptions about AEP’s environmental performance Shareholder activism a sign that clarity was lacking Stakeholder meetings validated it but also revealed alignment of future direction New disclosure in 10-K on evolving business model New focus of Corporate Accountability Report to be more transparent on specific issues

AEP’s approach to engagement: • Be accessible - engage and resolve • Be responsive • Provide transparency • Follow through

Goals: To prevent divestiture of AEP shares and bonds, promote AEP’s story of progress and transformation, and broaden our relationship with all stakeholders.


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AEP: Proactive Shareholder Engagement

Shareholder Holdings Request Resolution

Connecticut State Treasurer on behalf of Conn. Retirement Plans &Trust Funds

174,000 shares Board-sanctioned report evaluating risks from increased competition (distributed generation, energy efficiency) to long-term growth and plan for addressing them. Threatened shareholder resolution.

No separate report Additional Form 10K disclosures Board statement to reflect discussions, acknowledge shareholder concerns

Aviva Investors Asset management business of Aviva plc, the U.K.’s largest insurer

279,000 shares Opportunity to discuss carbon asset risk with AEP, stranded assets, resource diversity, carbon pricing

Held a 45 minute call that included the CFO, Corporate Secretary and Vice President- Environmental Services. No further action needed

As You Sow Acting on behalf of activist shareholders

$2,000 AEP stock

Submitted Shareholder Resolution: Separate report, quantifying financial losses from stranded coal assets under various scenarios

Following several discussions, agreed to same disclosure as Connecticut Shareholder proposal withdrawn


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Transparency Makes A Difference

The Value of Reporting:

sustainability-related

shareholder requests since

2006

12 withdrawn

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1 went to a vote

and failed

• Enhances reputation, relationships

• Supports/enhances business strategy

• Mitigates shareholder activism

• Transparency drives performance

• Recruitment/retention of employees

• Helps identify/mitigate supply chain risk

• Demonstrates responsiveness to shareholder concerns

• New partnerships, alliances

• Improved data leads to better accountability and

decision-making


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• Disclosure overload is real and growing.

• Materiality helps to navigate stakeholder expectations, risks, opportunities.

• Validate issues annually.

• Transparency enhances reputation, relationships

• Helps to manage risk, activism

Key Takeaways

• Not just about numbers anymore.

• Different stakeholders, agendas and concerns to address.

It really does make a difference.

• Refresh when material changes occur that affect your company and your stakeholders.

• Materiality is the link between sustainability and financial performance


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Questions?

Sandy Nessing Managing Director, Corporate Sustainability American Electric Power

www.AEPsustainability.com

[email protected]

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Environmental Leader Conf-Denver 6-16

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