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An organization is only able to fulfill its responsibilities to its many stakeholders through strong governance and a culture of ethics consistently embodied at all levels of the company. Some issues generally related to governance include the role of the board of directors and how the code of ethics drives the way a company operates. For Essential, we ensure this consistency through how we provide adequate oversight of our ESG activities and strategy, including how we keep the board of directors and leadership abreast of trends. Essential has carefully considered its structure to maximize its ability to carry out its significant responsibilities as a utility with the utmost integrity and ethical foundation.
Essential's corporate governance website includes the following governance policies for download:
These policies comprise a critical complement to this ESG Report and our data disclosures. As board-approved documents, they represent the most formal articulation of Essential’s ESG commitments to our stakeholders. The performance and achievements noted in our ESG Report are consistent with the directives and bedrock principles the board has explicitly outlined for the organization in these approved policies.
Our Chief Executive Officer is also chairman of the board. The board of directors deliberately determined that this structure of the combined chairman and CEO, along with the position of a strong lead independent director and independent committee chairs, is the most appropriate and efficient approach to managing the company. This provides clear accountability to the execution of Essential’s strategy and results. The lead independent director is elected annually and maintains special responsibilities and authorities to share leadership of the board with the chairman. These are listed in our Proxy Statement.
Under our bylaws, the board of directors may designate an executive committee and one or more other committees, with each committee consisting of two or more directors, except for the audit committee and executive compensation committee, which each must have at least three members. The board of directors annually elects from its members the executive, audit, executive compensation, risk mitigation and investment policy and corporate governance committees. The board may also appoint ad hoc committees. The retirement and employee benefits committee, which is comprised of senior management from Essential, reports periodically to the board of directors.
Fostering board diversity is a tenant of Essential’s corporate governance practice. When assessing a candidate, consideration will be given to the effect such candidate will have on the diversity of the board. Diversity of the board is evaluated by considering a broad range of attributes, including, without limitation, race, gender and national origin, background, demographics, expertise and experience. Each year, the directors complete a targeted questionnaire that is administered by a neutral, non-affiliated entity to assess the performance of the board and each of the standing committees. Every second year, directors complete a targeted questionnaire to assess the performance of the directors individually.
Both questionnaires elicit quantitative and qualitative ratings in key areas of board operation and function. Each committee member completes questions to evaluate how well the committees on which he or she serves are functioning and to provide suggestions for improvement. In 2022, the lead independent director and the chairman met with each director, provided results to the evaluation to each individual and discussed and discussed the director’s participation, preparation, and performance.
In 2015, the board of directors undertook a multi-year program aimed at refreshing the board to encourage new ideas, expertise and oversight, while maintaining the institutional experience of the then-current directors. As a result, the board of directors, as of year-end 2022, consisted of nine directors, with eight of those directors having joined since 2015. Each of these directors brings his or her own level of expertise and experience. The board of directors is responsible for determining whether each of the directors is independent. The board has adopted corporate governance guidelines that contain categorical standards of director independence that are consistent with the listing standards of the NYSE. Eight of the nine directors meet this definition of independence.
Average age of directors
Directors of color
More information about our board of directors can be found in our proxy statement. The board composition noted above is as of 12/31/2022.
The primary objective for Essential’s formalized Enterprise Risk Management (ERM) Program is to develop a center of excellence for effective awareness, understanding and management of emerging and existing enterprise-wide uncertainties of every type and every function that can affect the organization, along with the achievement of its strategic business objectives and goals.
Sustainability, when it optimizes costs and resources, drives risk mitigation and decision-making, increases organizational preparedness and affords an ongoing, holistic review of risk across the organization and its individual business functions, is another program objective.
The program’s framework eliminates silos, fosters cross-functional investments into risk understanding and emphasizes the interconnectedness of effective risk management and the organization’s achievement of its strategic business objectives and goals. ERM governance is centrally coordinated and monitored by the Risk Management Department via automated ERM process model facilitation and an electronic risk repository, which yields taxonomies, sophistication and informed decision-making. There is active participation in this process at the highest levels of the organization and across all areas of the business as well.
Essential Utilities is deeply committed to human rights; this care spans across our operations and through all our activities. We recognize the influence and importance our business has on many stakeholders, and we strive to consider and address the impacts our operations have on each of these groups and promote universal human rights in all our practices. Our board of directors is responsible for overseeing human rights risk management and our management team is accountable to the board for ensuring our Human Rights Policy is effectively implemented. All employees are urged to consider promotion of human rights in their roles and are expected to be strong and ethical community partners. Further, our commitment applies to all suppliers and vendors without exception and is independent of what governments may or may not require.
As our policy states, we make the following commitments to minimize risk and adverse effects of our operations:
Make efforts to avoid causing or contributing to human rights violations
Mitigate and/or remediate adverse human rights impacts of our operations where possible
Treat all with equal respect, regardless of their background
Pursue protections of the rights of all people, including women and minorities
Prohibit the use of child labor, forced labor, and human trafficking
Be transparent in our efforts, successes, and challenges
While minimizing and mitigating risk is vitally important, we also believe our operations play a constructive role in both safeguarding and expanding opportunity for human rights development. This is an inherent responsibility of Essential as a supplier of water for our communities and is directly connected to UN Sustainable Development Goal 6, which calls for the “availability and sustainable management of water and sanitation for all.” Our Human Right to Water Policy makes clear our commitment to providing a reliable supply of safe, clean, affordable and accessible water in accordance with regulations at rates established by governing public utility commissions.
We acknowledge our responsibility to customers while also fulfilling our responsibility to sustainable and resilient communities by investing in our nation’s water infrastructure and protecting water sources and local environments. Coordination of all these activities helps safeguard every human’s right to water. We agree with the November 2002 resolution of the United Nations Committee on Economic, Social and Cultural Rights which both calls for a human right to water and acknowledges this as a “prerequisite for the realization of other rights.”
We can never take the human right to water for granted and must continually invest in our water infrastructure for future generations.
The board of directors is briefed on ESG matters in its regularly scheduled meetings and through various channels and reporting paths. The corporate governance committee takes primary responsibility for providing board oversight for the company’s ESG profile, strategy and activities. At least quarterly, senior management presents an update to the corporate governance committee of the board on notable ESG matters related both to the company and to the broader industry or ESG landscape. Each meeting also features a deep-dive discussion based on a set theme as outlined in an annual calendar. Various leaders from across the organization are invited to speak to the meeting’s theme. For example, the company’s Senior Vice President of Human Resources will prepare a special and extensive presentation once per year on the company’s human capital management profile. However, should an urgent or important related matter arise in the interim, the corporate governance committee would not need to wait until the themed meeting to discuss the matter.
Related risks are covered under the enterprise risk management (ERM) review conducted by the risk mitigation and investment policy committee of the board and reported to the full board at each of its regularly scheduled meetings. Our general counsel regularly provides the board a report on the progress of the ERM program. Also, the audit committee, informed about ESG-related risks through the compliance and disclosure committees, provides additional oversight. These committees are comprised of the Essential’s management. Written reports are provided to the full board at each meeting and, for certain ESG matters, presentations are made to the full board.
The CEO is a member of the risk mitigation and investment policy committee and the executive committee. As such, the CEO provides a valuable voice and perspective to board discussions on ESG matters, as he is separately tasked with the responsibility for the overall direction and strategy related to ESG for operations and aligning corporate growth with consideration of these issues. This arrangement serves as a crucial bridge between the board and our company’s management with respect to ESG.
Flowing from governance of ESG by the board of directors, the management of Essential Utilities is responsible for designing, implementing, reporting and executing a strong and comprehensive program. Every member of the executive team is expected to understand the principles and importance of ESG, be aware of latest developments and trends in their area, identify relevant risks and opportunities and continually seek creative means to foster innovation and contribute to the overall development of the Essential ESG profile. Further, this orientation and focus is disseminated through the organization, and we seek to build company culture around an inherent regard for our communities and environment, in line with our corporate mission and purpose.
Our CEO is responsible for the overall direction and strategy related to ESG issues for operations and aligning corporate growth with consideration of such issues. Further, the CEO is the most direct interface with current and future investors in addressing our company’s alignment with ESG goals. As such, the CEO provides a valuable voice and perspective and serves as a crucial bridge between the board and our management to facilitate alignment.
In May 2020, Essential Utilities hired an ESG manager, a new full-time role that reports to the chief of staff and is completely dedicated to further developing and maturing the ESG profile of our company. This reflects a larger effort to re-commit our focus to ESG and accelerate efforts to expand and strengthen our program. The ESG manager oversees the reporting process, works toward increasing our level of disclosure, monitors latest trends and emerging best practices, supports existing projects and helps develop new initiatives so that we can continue to grow as a recognized ESG leader within the utilities industry.
Additional management oversight of ESG is provided by the ESG Oversight Committee, which was formalized in 2020. Members of this group include over a dozen senior leaders from across the organization, each lending a unique and valued perspective. This group meets at least once per quarter to discuss recent progress with ESG initiatives, industry news and trends, strategic short and long-term planning, approval of various initiatives and policies and to recommend matters to be presented to the CEO and the board.
Many leaders and team members across the organization contribute to Essential’s ESG profile and program. We encourage our entire leadership team to remain aware of the sustainability trends and issues within their areas and the industries in which Essential operates. We also expect our leadership to engage employees on these matters and infuse the principles and mission of our company within the daily work and priorities of the team.
Essential incentivizes its leadership team, as well as eligible employees across the organization, through a short-term incentive compensation plan. This is based on a balanced scorecard approach that promotes our team working in the best interests of all of our stakeholders, from investors to customers to employees and other critical groups. This updated incentive program builds on and supports an already strong foundation of management oversight of these issues. Notably, half of the weighting of this compensation plan is based on ESG-related metrics, demonstrating the seriousness and attention with which Essential’s leadership and board view our broad responsibilities as a utility.
While further details and illustrations, as well as performance, are provided in our proxy statement, the 2022 short-term incentive plan elements are listed below at a high level:
As noted in the
Essential’s Code of Ethical Business Conduct reinforces the company’s longstanding tenet for doing business with integrity and in accordance with its core values and ethical standards. The Code emphasizes that maintaining this level of integrity depends upon the conduct of all employees, adherence to our core values and commitment to acting in a safe, legal and ethical manner at all times.
The Code provides specific rules and concrete examples concerning ethical business conduct, but also emphasizes these should be viewed expansively and be broadly applied to business conduct. It encourages employees to discuss potential ethical issues with their supervisors and prohibits any retaliation for raising good faith questions about ethical conduct. Employees may raise ethical issues with the company’s chief compliance officer, any manager or members of the board of directors or the board’s audit committee. A process for making an anonymous report is also provided, with options to file by phone or online through a third-party site. Confidential and anonymous reporting is available 24 hours a day, seven days a week.
While the board of directors has overall responsibility for ensuring ethical business conduct, the chief compliance officer is charged with implementing and enforcing the Code. However, all officers and managers accept responsibility for enforcing and communicating about the Code and are subject to disciplinary action for violations either personally or by employees under their management. Reports are investigated by the chief compliance officer, the audit committee or the full board of directors depending upon the nature of the matter.
Every Essential employee is required to complete annual training about the Code via interactive web programming. Upon completion of the training, each employee must demonstrate a proficiency level by answering a series of questions about the Code’s requirements and their applications to business situations.
The Code specifically addresses the following topics regarding conduct within the company:
We take our role in the public policy process seriously. We have various outlets to participate in public policy at our disposal. Essential engages with government and trade associations in order to educate and address issues impacting our service. It is important to engage in this activity to support future and current candidates who want to maintain our mission by providing a strong water, wastewater and natural gas distribution infrastructure for the next generation, protect the environment and allow our company to remain financially viable. In addition, our management team can participate in the Essential Political Action Committee (PAC). Transparency is critical to building trust in political activities and the activities of the PAC are overseen by a board that meets on a quarterly basis. All PAC and lobbying expenditures are reported in accordance with federal, state and local laws. For further information, please refer to our Political Spending Policy.
An illustrative example of Essential’s leadership and advocacy role for improving the health and safety of its customers was the support and implementation of Act 120 of 2018 (Act 120) by addressing the replacement of lead service lines (LSLs). Lead poisoning is a preventable environmental health hazard and, if not addressed, affects customers regardless of race, ethnicity or socioeconomic status. On October 24, 2018, Governor Wolf signed Act 120 into law, thereby amending the Public Utility Code at 66 Pa. C.S. § 1311(b) to address the accelerated replacement of customer-owned LSLs. Given the health hazards associated with lead, Essential actively supported this legislation and supported similar legislation in New Jersey and is actively replacing LSLs in the state as well.
More recently, Essential has been in close collaboration with industry associations to advocate for both state and federal-level funding for customer assistance in affording water and wastewater services. Essential, and the Pennsylvania chapter of the National Association of Water Companies (NAWC), have urged the Pennsylvania state legislature to continue and expand a support program that was put in place during the COVID-19 pandemic. Pennsylvania’s Low-Income Household Water Assistance Program (LIHWAP) has supported tens of thousands of customers in the state, and we hope that it continues to do so. On a federal level, Essential supported industry efforts to formally study the issue of water affordability and advocate for the creation of a permanent national assistance program.
Essential is committed to the safe, secure and reliable operation of its information technology and operations technology systems. Essential has a robust and longstanding cybersecurity program, which is aligned to the National Institute of Standards and Technology (NIST) Cybersecurity Framework.
As cybersecurity threats continue to evolve and increase in both sophistication as well as complexity, the Essential strategy has been to operate utilizing a risk-based approach and continuous improvement through the following methods:
Governance: The information security and cybersecurity program is overseen by a diverse and cross-functional committee of senior business leaders. This committee meets bimonthly and is charged with ensuring that cyber risk is managed and that the program is aligned to business goals and objectives. Updates are also provided to the board’s risk committee quarterly and the full board once a year.
Risk Management: The information security organization is responsible for ongoing vulnerability assessments and threat analysis to essential assets such as customer and employee data, critical business systems and industrial control environments. Risk assessments are executed quarterly in conjunction with a third party to promote objectivity. Information security and cybersecurity risk management functions are also integrated into the enterprise risk management program. There have been no security breaches in the past year across our enterprise and Essential maintains a cybersecurity insurance policy to promote resiliency and reduce risk.
Controls, Policy & Compliance: Essential has implemented enterprise-wide security policies, standards and controls that incorporate best practices in security engineering, technology architecture and data protection, which support regulatory compliance. The information security controls framework has been developed around the NIST Cybersecurity Framework but also incorporates best practices from ISO 27001 Information Security Management Systems, CIS Critical Security Controls and ISA 99 Industrial Automation and Control Systems Security. An annual review of Essential’s security framework controls is conducted in conjunction with a third party to promote objectivity.
Awareness, Training & Assessment: Essential has created a corporate culture that is conscious of cybersecurity, with a focus on continual assessment, development and improvement. Essential has implemented specialized programs, such as enterprise-wide communications, presentations, phishing simulations and focused training for specific roles. We have developed and implemented a general cybersecurity training program required for all employees.
In 2022, Essential made over $1 billion in controllable spend purchases related to our gas, water, and wastewater businesses. We are proud to say that more than half of this spend was with suppliers from within the states we operate. Being good stewards of community natural resources aligns with being good community partners, because we provide gas, water and wastewater treatment locally. We recognize that, in many cases, our customers are also our suppliers and vendors. We recognize the importance to use suppliers who work and live in a community within the footprint of our infrastructure. These deep, multifaceted connections between Essential and our fellow community members enrich and strengthen neighborhoods, as well as develop a more resilient local economy.
In addition to our efforts to maximize business with vendors local to the communities we serve, Essential is committed to increasing our work with qualified and certified diverse suppliers, which are measured by majority of ownership and control, and include one or more of the following classifications:
To be certified as diverse, the supplier must have a valid and current certification from one of the following:
Essential has established a Supplier Code of Conduct to define the basic requirements for suppliers of goods and services and their responsibilities to the environment and their stakeholders. We are committed to purchasing from suppliers that strive to improve the environmental quality of our water, wastewater, and gas operations, and that use reasonable efforts to minimize pollution and improve environmental protection and sustainability. Our suppliers are also responsible for the health and safety of their employees, which includes controlling exposure to hazards, taking reasonable efforts and precautionary measures against accidents and occupational hazards, providing education and training in health and safety issues and having reasonable health and safety management systems. We also expect suppliers to subscribe to the principles of nondiscrimination, follow high standards of business ethics and professional conduct and adhere to our Human Rights Policy.
Essential believes that supplier diversity is critical for our communities as well as for our business. We want to source from and partner with businesses owned by individuals representative of the diverse communities and neighborhoods where we live, work, and operate each day. This also enriches local economies, increases sourcing options, and fosters collaboration and innovation. As such, we announced a multi-year plan to increase diverse supplier spend to 15% of controllable spend, which excludes spend where there is no opportunity to include diverse suppliers or spend that cannot be sourced from a diverse supplier due to a policy or law (items like power, purchased water and some one-time payments). In 2021, we also added a supplier diversity component (5% weighting) to our short-term incentive plan.
In 2022, Essential spent $156 million with diverse suppliers, representing 15.1% of our controllable spend. This proudly marks the achievement of our commitment in less than two years since its announcement.
We have initiated new partnerships with diverse suppliers, resulting in millions of dollars of spend being directed towards strengthening our communities. Additionally, we have worked with current diverse suppliers as they initiated a path towards formal certification. Moving forward, Essential will continue to build on this achievement and sustain our momentum.
We have taken various steps internally to increase our work with diverse suppliers in the procurement process, including regular review of purchase requisitions to expand the use of diverse vendors, updating our internal purchasing website to encourage greater use of qualified diverse suppliers, working with a leading provider of supplier diversity data and enhancing reporting to better recognize our work with such suppliers.
Externally, we encourage diverse vendors to register and become certified in their state to apply for every applicable opportunity, and we reference a commitment to diversity in our supplier code of conduct. The Essential purchasing department is a member of the National Minority Supplier Development Council, Eastern Minority Supplier Development Council, Women’s Business Enterprise National Council, Women’s Business Enterprise Center East, and Women’s Business Development Center. We regularly participate in networking events and follow-up meetings to learn from companies with mature supplier diversity programs.
Essential has a Tier 2 diverse spend reporting program for its major suppliers. Our Tier 2 supplier diversity program aims to grow and sustain diverse suppliers beyond Tier 1 direct supplier relationships. Our program tracks the certified diverse spend of minority, women, veteran, or LGBT-owned businesses that are the subcontractors to our prime suppliers. We collaborated with key prime suppliers to identify and account for certified diverse subcontractor spend on a quarterly basis.
In 2020, Essential implemented an automated Tier 2 validation process using Supplier IO’s UniTier platform. An Essential-specific website was created for our prime suppliers to enter their Tier 2 supplier spend in support of Essential. These submissions of subcontractor spend are validated by the UniTier platform as certified diverse subcontractors by using the Supplier IO database. Upon completion, Supplier IO generates a report that details verified certified diverse Tier 2 suppliers and unverified diverse suppliers. Only those verified as certified diverse Tier 2 suppliers are used for reporting purposes.