Published on Jul 18, 2023
On August 31, the Deka Group expects its ESG ETFs to drop FirstEnergy (FE) following an index rebalancing by MSCI (MSCI), according to a statement made to The Capitol Forum by a Deka spokesperson.
The Capitol Forum first reported in June that FirstEnergy would be dropped from numerous indexes due to the company’s involvement with coal and other social and governance concerns that tested thresholds for exclusions used by many index providers including MSCI.
Index providers are not typically transparent about why they add or remove companies from their indexes—MSCI did not return requests for comment—but a spokesperson for Deka told The Capitol Forum it is expecting the removal due to updated data MSCI has for FirstEnergy on “carbon emission intensity and thermal coal power generation.”
While it is difficult to assess the full impact of FirstEnergy’s apparent removal from these indexes, this move demonstrates that FirstEnergy remains exposed to divestment from passively managed funds as the indexes those funds track monitor the company’s adherence to environmental, social and governance, or ESG, measures.
Passively managed funds are typically thought to be slower to implement changes because index rebalancing only happens a few times a year, but news of FirstEnergy’s likely removal from these indexes comes after a string of incidences questioning the company’s inclusion in ESG funds.
Due to MSCI’s exclusion policy, the removal of FirstEnergy from Deka’s two ESG ETFs should be automatic.
“Since our ESG ETFs track the underlying indices via full physical replication, the investment terms require that the full index portfolio be reflected in the ETF,” a Deka spokesperson said. “As soon as companies fall out of the index, they will therefore no longer be included in the ETF.”
This is not the first time updated information about FirstEnergy has seemingly made the company ineligible for inclusion in certain ESG-focused indexes and funds. The Capitol Forum reported on Pictet’s divestment of FirstEnergy from one of its ESG funds in the first quarter and in June, The Capitol Forum reported the ESG ratings firm Sustainalytics corrected FirstEnergy’s coal-based revenue number up to 10%, making it ineligible for ESG funds and indexes that screen out companies with coal-based revenues above 10%.
In July, The Capitol Forum reported that Swiss Life Holding’s asset management arm would be divesting investments in FirstEnergy and other companies with ties to the coal industry, not just from their ESG funds, but across their entire portfolio in alignment with the Global Coal Exit List.
Updated data for exclusion. While MSCI did not respond to questions asking what changed for the firm, the two indexes in question, the MSCI World Climate Change ESG Select index and the MSCI USA Climate Change ESG Select index, use a methodology that offers a look at some of the carbon emissions intensity and thermal coal power generation thresholds FirstEnergy might exceed.
Climate Change ESG Select indexes excludes companies with Scope 1+2 Emissions intensity more than 1500 tCO2/$M Sales.
This index category also excludes companies that derive any revenue from the mining of thermal coal, that disclose any evidence of thermal coal production or that derive more than 10% of their revenue from thermal coal based power generation.
As The Capitol Forum has previously reported, FirstEnergy holds a third of the Signal Peak coal mine in Montana through a holding company and has reported at least 10% of its revenue from thermal coal based power generation.
