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: This is how fund managers work behind the scenes to influence companies’ environmental and social policies

When Engine No. 1 scored a coup by winning a proxy vote and getting three environmentally minded members elected to Exxon Mobil’s board of directors in 2021, it sent shockwaves through the investment industry about the power of shareholder advocacy.

It was framed as a David vs. Goliath story in which the relatively small hedge fund beat the oil giant. In reality, most shareholder advocacy isn’t contentious, which is why those stories aren’t told.

In most instances, shareholder advocacy happens when a portfolio manager reaches out to a company’s investor relations department and speaks with an executive or a specialist in an area the portfolio manager wants to address, says Julie Gorte, senior vice president of sustainable investing at Impax Asset Management.

That’s a common first step for active fund managers, whether they work for a traditional asset manager or a sustainability focused firm, she says. Those conversations are how managers become more familiar with the company and gain entry to making recommendations for change.

“(If) you see something you think would make a company a better investment … it’s in your interest as an investor to at least convey that to them,” Gorte says.

Building relationships

Engagement builds relationships, says Amy Augustine, director of ESG investing at Boston Trust Walden. Candid conversation helps portfolio managers understand where the company is coming from, and it allows asset managers to explain why certain issues are important to them. Sometimes changes happen after one or two conversations, and other times it requires a series of conversations, she adds.

Read: Renewable energy: Strongest ever investment in wind and solar in first half of year even with sting of inflation, supply chains

To engage with a company, portfolio managers need to own shares; otherwise, they can team with another asset manager that owns shares in a target firm.

Two years ago, Impax joined with New York State Common Retirement Fund, which owns S&P 500 index funds, to ask all S&P 500
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companies to disclose the material risk their strategic assets face in case of a natural disaster such as floods, fires and droughts caused by climate change, and where those assets are located. It’s an issue she says is underappreciated by a lot of firms. About 80 companies responded to their inquiry, she says. Ultimately, they filed two shareholder resolutions.

Gorte says some outreach falls on deaf ears so if Impax thinks the issue it raised is serious enough for that company, then the fund manager may file a shareholder resolution.

Before the news about Engine No. 1’s wins, the hedge fund said at the time it was already working with Exxon
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for a year on how to price carbon in a way that includes the harm that the oil giant will cause by releasing more carbon dioxide.

Coming to an agreement

The best result is when a fund manager files a shareholder resolution ahead of a company’s annual general meeting and the manager withdraws the resolution because the two sides come to an agreement, Augustine and Gorte say.

Read: Tesla investors pave way for stock split, vote with company on most proposals

In its second quarter ESG Impact Report, Boston Trust Walden led or participated in 15 shareholder resolutions during the 2022 proxy season, and withdrew more than 70% of those resolutions based on negotiated corporate commitments. In contrast to the shareholder resolution data, Augustine says the firm’s advocacy teams talk with hundreds of companies, often reaching agreements through discussion.

Williams-Sonoma
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is one example of a negotiated corporate commitment spurred by a shareholder resolution, Augustine says. 

In 2020, Boston Trust Walden file a resolution asking the retailer to disclose a comprehensive breakdown of its workforce by race and gender, according to the Equal Employment Opportunity Commission’s defined job categories, and to report on policies and programs to improve diversity. Augustine says while Williams-Sonoma has strong gender diversity and has a female CEO, Laura Alber, the fund manager wanted to get a better understanding of how the retailer managed diversity, equity and inclusion overall.

Augustine says Boston Trust Walden had received hoped-for responses through the usual outreach of letters, emails and phone calls, so they filed the resolution.

“It got our communication into the right hands. Immediately the company responded, and we had a series of dialogues with company leadership,” she says.

The talks resulted in Williams-Sonoma agreeing to disclose the workforce composition data by gender and race, and to report on their broader diversity, equity and inclusion initiative, especially where women and people of color were underrepresented. Augustine says Boston Trust Walden was pleased with how the retailer responded, noting how it not only released workforce composition metrics, but also included industry data for context and detailed its strategies to increase representation of Black and Hispanic employees at manager levels and above, beyond the fund’s request. This year the company also reported data on promotions.

Augustine says the way Williams-Sonoma disclosed the data allows investors to accurately access and value the information, and by releasing this information, hopefully it will help the company with future talent recruitment as a place that proves it values diversity.

Executives’ control limits changes

Insider control can limit how many favorable votes a shareholder resolution receives. Big Tech companies, in particular, are known for concentrating power in a few individuals. Mark Zuckerberg, CEO and co-founder of Facebook parent Meta Platforms, owns 55% of the company’s voting shares.

At Alphabet
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the firm’s co-founder and CEO, Larry Page, co-founder Sergey Brin and former CEO Eric Schmidt own more than 50% of the company between their control of Class A and Class B shares. A shareholder resolution co-filed by Boston Trust Walden asking Alphabet about the Paris Agreement’s goal to limit average global warming to 1.5°C received 19% of all votes cast, which Augustine deemed significant in light of the firm’s insider control.

Resolutions receiving a high favorable proxy vote may spur companies to action since many firms want to please shareholders; however, the majority of resolutions are non-binding, so companies aren’t required to implement requested changes, Gorte says. If companies don’t act, it’s up to shareholders to decide to remain invested.

Gorte says shareholder advocacy on environmental topics has come a long way from when Sisters of Saint Dominic of Caldwell, N.J., and other shareholder activists started asking Exxon more than 20 years ago about what it was it was planning to do about climate change. Now even some traditional mutual funds are asking oil majors how they are limiting the direct carbon emissions they cause.

“During the two decades that the nuns stared engaging with Exxon Mobil, the investment world went from thinking climate change is a bunny-hugger issue to seeing it as a set of material risks both physical and traditional. So there’s been evolution in the market,” Gorte says.

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