By Debbie Carlson
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.
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.
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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 /zigman2/quotes/210599714/realtime SPX -0.38% 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 /zigman2/quotes/204455864/composite XOM +2.24% 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.
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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 /zigman2/quotes/202067350/composite WSM +4.61% is one example of a negotiated corporate commitment spurred by a shareholder resolution, Augustine says.