Published on May 17, 2023
Environmental, social, and governance (ESG) concerns factored into Swiss investment firm Pictet’s internal decision to close a position in FirstEnergy (FE) held by its sustainability-focused fund, according to information obtained by The Capitol Forum.
The Pictet Clean Energy Transition fund’s first quarter exit from electric utility FirstEnergy places pressure on the dozens of other funds marketing similar ESG commitments that also own shares in the power company.
Pictet’s divestment also offers insight into the kinds of corporate conduct that can spur voluntary action by ESG funds.
Pictet explains investment strategy. In a statement provided to The Capitol Forum, Pictet said, “without mentioning specific situations or firms, we do exit positions where we feel engagement will not drive change.” FirstEnergy has legal problems as well as a heavy reliance on fossil fuels, among other issues, and it would appear that Pictet did not believe in FirstEnergy’s willingness to engage in good faith to transition to cleaner fuels.
Pictet’s Clean Energy Transition fund was formerly one of FirstEnergy’s 55 largest investors. Alongside the sustainability fund’s exit, Pictet’s broader asset management arm shed FirstEnergy shares as well, reducing its overall position by 96% from its peak in 2021 (~$210 million in shares) to May 10 (~$8 million in shares), according to a Capitol Forum analysis of Pictet Asset Management’s disclosures.
FirstEnergy declined to comment on “why any investor has made a particular investment decision,” but said that it “understands that ESG considerations are a factor in investment decisions and has integrated EESG (employees, environmental, social and governance) throughout our company strategy,” according to an emailed response the company sent The Capitol Forum.
FirstEnergy as a case study in anti-environmental, anti-social, and bad governance corporate conduct. Akron, Ohio-based FirstEnergy, which generates power primarily from coal and counts six million customers across the Midwest, Mid-Atlantic, and Appalachia, admitted in 2021 to bribing the Speaker of the Ohio House of Representatives millions of dollars in exchange for legislative favors.
The bill at the center of that controversy has been faulted for delaying the state’s transition towards renewable energy while, instead, favoring FirstEnergy’s fossil and nuclear fleet.
For FirstEnergy, the fallout from what’s been dubbed by federal prosecutors as the “largest corruption case” in Ohio history appears hardly over. FirstEnergy signed a deferred prosecution agreement in 2021 after being charged with conspiring to commit bribery via wire fraud and agreeing to pay a $230 million monetary penalty.
The state law at the center of the scandal—House Bill 6—was largely designed to bail out FirstEnergy’s nuclear and coal operations, with benefits for the company estimated at over $1 billion. On March 9, former Ohio Speaker of the House Larry Householder and former Ohio GOP chair Matt Borges were both found guilty of conspiracy to participate in a racketeering enterprise involving bribery and money laundering, with a sentencing hearing scheduled for June 29.
FirstEnergy remains in the crosshairs of Ohio’s attorney general, who sought to restart a related racketeering lawsuit in state court following the guilty verdicts. “Other wrongdoers in this scandal – especially and including the First Energy executives who funded the corrupt Householder Enterprise – cannot be permitted to escape scot-free,” Ohio attorney general Dave Yost said in a March 10 statement. “The discovery process may yield additional information that will reveal an expanded number of defendants who participated in the corrupt Householder Enterprise.”
In addition to the Ohio Attorney General, FirstEnergy cites an ongoing SEC investigation, stockholder and customer lawsuits, and a FERC audit in relation to the company’s dealings around House Bill 6 as possibly having a “material adverse effect on [FirstEnergy’s] reputation, business, financial condition, results of operations, and cash flows,” according to its most first quarter earnings filing.
House Bill 6 was passed in 2019—and though its key nuclear provisions were repealed in 2021, Ohio residents are still feeling its other effects.
House Bill 6 undercut rules requiring Ohio utilities to increase their use of solar and other renewable energy, undermined the ability for renewable energy projects to attract long-term financing, let utilities abandon energy efficiency programs, and added monthly surcharges to FirstEnergy customers’ bills to bail out two coal plants in Ohio and Indiana.
The anti-renewable energy measures in House Bill 6 appear to be at odds with Pictet’s commitments to promote an energy transition to cleaner fuels. Specifically, the Pictet sustainability fund aspires to invest in “power utilities that are on a credible transition path to net zero greenhouse gas emissions and to push these companies to accelerate this transition through active engagement,” according to an email Pictet sent to The Capitol Forum in response to questions surrounding the fund’s FirstEnergy divestiture.
FirstEnergy has plans to reach carbon neutrality by 2050, putting the company on a slower pace towards cutting its greenhouse gas emissions than other utilities in the Pictet Clean Energy Transition fund’s portfolio, which generally report targets for 2040 or earlier.
Further, FirstEnergy currently operates two coal plants in West Virginia, which first went online in 1967 and 1972. It has said it plans to retire those plants in 2035 and 2040 – but the company is considering buying another coal plant in the state, at the direction of state regulators, which could replace one of the coal plants it plans to retire.
Overall, FirstEnergy’s bribery scandal appears to violate all three pillars of ESG—it is anti-environmental since the underlying bill delayed the energy transition to cleaner fuels; it is anti-social in that the company engaged in illegal conduct as well as corrupting public officials (both signs of a bad corporate citizen in the community); and it is bad corporate governance because the firm’s leadership did not have a culture in place to deter illegal and corrupt conduct.
Coal mining interest also conflicts with ESG principles. And though FirstEnergy is primarily an electrical utility, it also owns one third of Signal Peak, a Montanan coal miner that sells primarily to international markets. Signal Peak’s ESG issues may have given additional reason for Pictet to divest its FirstEnergy stake.
Not only is Signal Peak a coal mining company, but it is currently looking to expand its coal operations, which seems to clearly conflict with Pictet’s investment commitments. Pictet says that when it comes to investments in coal, “we categorically exclude companies that generate significant revenue from thermal coal mining from all actively managed strategies,” according to its 2022 Responsible Investment Report.
And beyond coal mining’s environmental considerations, Signal Peak’s social and governance history could impact investors evaluating FirstEnergy’s ESG controls.
Nine former Signal Peak executives were charged or convicted of criminal wrongdoing, and the company itself was hit with a $1 million criminal fine for illegal dumping of a toxic slurry and failing to report worker injuries with the Justice Department. Related to the enforcement action, DOJ described the company’s “utter disregard for environmental and worker health and safety standards” and how “lax oversight fostered a climate of fraud” at Signal Peak.
Pictet divestment of FirstEnergy could spur other ESG funds to follow suit. Roughly 84 percent of FirstEnergy’s 572.8 million outstanding shares are held by institutional investors in Europe and elsewhere.
Fifty other funds with words like “ESG,” “Paris-aligned,” “climate,” or “sustainable” in their names reported holding FirstEnergy in the past 18 months, with holdings ranging from just five shares to over 83,000. Pictet’s Clean Energy Transition fund, for reference, held roughly 757,000 shares as of Sept. 30, 2022, more than those 50 funds combined.
It remains to be seen if other funds may make moves similar to Pictet’s.
Pictet’s Responsible Investment Policy describes how it assesses investments for ESG concerns. Exclusion levels vary depending on each fund’s investment strategy. “The name of excluded issuers can be disclosed to clients upon request, subject to third-party provider agreement on data disclosure,” the policy notes. The policy lists “anti-corruption and anti-bribery” among factors Pictet looks for when excluding investments.
It’s not clear to what extent other actively managed Pictet funds might or might not consider FirstEnergy officially off limits based on an assessment by the Clean Energy Transition fund or otherwise.
Another Pictet sustainable fund, its Global Utilities Equity Fund, held about 1.6 million shares in FirstEnergy, valued at roughly $67 million, as of June 30, 2022, data reported by FirstEnergy shows. That fund includes ESG factors in its investment decisions but does not put sustainability at its core as Clean Energy Transition does under EU rules.
Pictet Clean Energy Transition “reinvested the proceeds” of its FirstEnergy exit into another US utility, NextEra Energy—which itself is highly exposed to fossil fuels, particularly via its Florida Power & Light subsidiary.