A Major New Index Fund Should Unnerve Climate-Skeptical CEOs
Thanks to the publicity created by Gamestop, the widespread perception is that the new generation of investors are small time amateur day traders who will lose their shirts when the Fed turns off the liquidity tap. Whilst that may or may not happen, the reality is that some of the new gen investors are neither small, nor amateurs. This piece highlights the emergence of a new type of hedge fund: “Last month, a tiny hedge fund called Engine No. 1 staged a coup of sorts at ExxonMobil—a shareholders’ revolt that unseated three members of the oil company’s board of directors and replaced them with more climate-concerned candidates.”
Buoyed by its success, Engine No.1 is now spreading its wings and moving beyond HNWs towards mass market investors by launching an ETF which will track the performance of the 500 largest public companies in America. However, this will be an ETF with a difference: “The new Engine No. 1 Transition 500 Fund is, in other words, a low-fee, diversified index fund of the type that now dominates the American stock market. Yet unlike other index-fund providers, which sit out some fights with management, Engine No. 1 has pledged to crusade. When Engine No. 1 campaigns against a company’s leadership, shares held by the Transition 500 ETF will vote for its slate. The ETF will trade on the stock market, appropriately, under the ticker symbol VOTE.”.
What Engine No.1 is capitalising on is that most ETFs don’t vote. Engine No.1 on the other hand does much more than vote: “A company publishes a slate of approved picks for its board of directors; investors rubber-stamp them; everyone goes home. Engine No. 1 is not the first fund to break that pattern—proxy fights have been a significant feature of Wall Street since the 1970s—but it did so, notably, by holding only 0.02 percent of Exxon’s stock. It found success because it convinced investors holding another 49.99 percent of Exxon’s outstanding stock to join its campaign.”
Engine No.1 is benefiting from the fact that the conventional ETFs have not been active in driving innovation in the Boardroom: “The so-called Big Three index investors—Vanguard, BlackRock, and State Street—are the largest shareholders in most major U.S. companies. They have not been known as drivers of innovation in the boardroom. “Out of 4,000 shareholder proposals over the last decade or so, not a single one was put forward by any of the largest asset managers out there,” Michael O’Leary, a managing director at Engine No. 1 and a co-author of the book Accountable: The Rise of Citizen Capitalism, told me.”
Secondly, whilst there are lots of Socially Responsible Investing funds in the market, they tend to be expensive. Engine No.1 isn’t expensive. It charges 0.05%.
Thirdly, Engine No.1 is introducing dimension to the tactical arsenal that investors thought were available to them: “For the past decade, the dominant approach among climate-concerned investors has been to exit: If you’re worried about climate change, activists have exhorted, you should divest from fossil-fuel stocks. But last month, Engine No. 1 voiced its problems with Exxon—and found rapid success. VOTE now lets average investors try voice too.
Really, the two strategies should work in tandem. Divestment should, over time, make raising money more expensive for carbon-intensive oil companies—as it indeed seems to be doing. Engagement should push companies to act in a way that makes divestment less necessary.”