Editor’s note: ImpactAlpha is pleased to partner with Sustainable Research and Analysis LLC to provide timely market snapshots of trends and developments affecting the sustainable investing market.
In late May, a number of the world’s largest investment management firms and asset owners sided with an environmental activist hedge fund and the leading proxy voting firms to elect three dissident candidates to ExxonMobil’s Board of Directors. Of particular note, firms like BlackRock, Vanguard and State Street, which reportedly held nearly 20% of the voting shares, along with the California Public Employees’ Retirement System (CalPERS) and the New York State Common Retirement Fund, voted in favor of some of the directors put forward by Engine No. 1, a small hedge fund with only about a 0.02% share ownership in ExxonMobil.
Engine No. 1 ran a reported $30 million campaign, over a six-month period, aimed at electing four independent director candidates to the ExxonMobil Board of Directors who might help the firm navigate the risks and opportunities facing the oil company, in a rapidly changing industry. The outcome of this vote illustrates that, under certain circumstances, institutional firms, when acting in unison, have the power to influence proxy contests that are not supported by the company.
On the other hand, individual investors, in the form of U.S. households, own 37.6% of the total U.S. equities but cannot exercise voting control over public companies because they typically have indirect ownership of shares via mutual funds and ETFs. This lack of voting control also extends to fund ownership interests in 401(k) plans and other defined contribution qualified retirement plans.
A recent proxy voting policy change by Index Funds S&P 500 Equal Weight Fund allowing underlying individual investors to weigh in may serve as a model for other mutual funds and ETFs looking to take account of investors’ sentiment on various issues and allow them to inform the asset manager’s voting decisions. Short of broader regulatory changes, this approach could be employed to give shareholders a voice in deciding proxy voting issues.
The Index Funds S&P 500 Equal Weight Fund seeks to replicate the total return performance of the S&P 500 Equal Weight Index. This $83.8 million index fund, managed by ONEFUND LLC and operated since May 1, 2015, carries a 25 bps expense ratio net of waivers in effect until July 31, 2021. The fund has recorded an average annual gain of 14.52% for the five years to March 31, 2021 versus 14.74% posted by the S&P 500 Equal Weight Index, a variance that falls within a margin consistent with the fund’s expense ratio.
In April, the fund amended its prospectus to permit its underlying investors to express their views on proxy voting, including environmental, social, and governance, or ESG, issues. That said, the fund is not classified as a sustainable fund as it does not pursue a sustainable investing approach.
ONEFUND LLC seeks to understand the views of fund shareholders, in addition to the views of the management of the underlying companies, to be more fully informed of all factors, according to the fund’s filing. Seeking shareholder views on proxy voting, including ESG issues, may shed light on what indexed companies should be doing to preserve their value, and, indirectly, the value of the overall index, as ESG investing gains prominence. That said, the fund considers various factors, in addition to shareholder views, in assessing how to vote for a given proposal.
Details on the solicitation process, which ONEFUND calls Index Proxy Polling, are not fully clear. Still, this is a unique approach that, short of delegating to underlying investors the right to vote proxies in line with their proportionate fund holdings, could be adopted by fund managers to solicit underlying shareholder input for the purpose of informing their views regarding shareholder sentiment. Along with other relevant considerations consistent with fiduciary obligations, it could form the basis for proxy voting that also reflects the views of underlying shareholders – and perhaps begin to hold fund management firms to a higher standard by taking into consideration the views of all investors, no matter their size or their social and environmental views.
Sustainable Research & Analysis LLC provides a timely monthly snapshot of trends and developments affecting the sustainable investing market segment as seen through the lens of mutual funds and ETFs. The Monitor tracks total net assets, fund flows, fund re-brandings, new fund firms, new fund launches and fund closures. CLICK HERE to request additional information.