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For individual investors in the United States, pressuring a company to green up is often impractical or even impossible. Retail investors hold the bulk of their equities in employer plans such as 401(k)s, and often in index funds. They might own hundreds or even thousands of stocks in one fund. “We cannot expect individual shareholders to express an opinion on all ballots of all the companies they own,” write Harvard’s Oliver Hart and Chicago Booth’s Luigi Zingales in recent research they did on the topic.
Moreover, rules for retirement funds instituted in the Employee Retirement Income Security Act of 1974 focus on maximizing financial rather than social value. In this case, Zingales says, “fiduciary duty creates a constraint.”
But could that change? Proxy-ballot advisors employ groups of analysts to provide guidelines for institutional funds on how they should cast votes on corporate ballots. BlackRock, the world’s largest asset manager, is giving its institutional investors the ability to participate in voting decisions on proposals raised at companies they indirectly own in certain funds, and hopes to expand the initiative to individual investors, beginning with a pilot involving a UK-based mutual fund.
There may be other options, too, for individual investors. Hart and Zingales note that Institutional Shareholder Services, one proxy advisor, has six sets of voting guidelines geared toward specific special interest groups—in essence a detailed version of a political platform. Why not let retail investors access such proxy services, choose their own set of guidelines, then request that fund managers vote on their behalf? While this is an imperfect suggestion—for one thing, proxy advisors too often “give one-size-fits-all recommendations,” says London Business School’s Alex Edmans—it would give small investors some voice. Plus, it could spur a market for such services, meaning there may ultimately be more voting choices for investors.
Additionally, mutual funds could solicit investors’ voting preferences and then cast corporate ballots accordingly, Hart and Zingales suggest. They propose that large fund managers might offer green funds that not only promote sustainability but also feature specific voting strategies. For example, Vanguard could run a “light green” S&P 500 fund that would commit to voting for all shareholder resolutions that promote a green economy, as long as their cost of reducing emissions did not exceed $100 per ton. A “dark green” fund could raise that cap to $200 per ton. The fund might charge a fee for each dollar invested to cover the cost of putting forward shareholder ballot proposals.
Vice chair of ValueEdge Advisors Nell Minow notes that facilitating shareholder voice could be a selling point for index funds, which do not have the option of exit. “The best way for index funds to distinguish themselves in the market is to disclose a robust proxy-voting policy,” she says. “Someday mutual funds and index funds will be rated on their voting the way they are on their performance.”
Small investors can work with institutional intermediaries to make their voices heard—something that is already happening. Hedge fund Engine No. 1, for example, partnered with robo-advisor Betterment in July 2021 to offer its Transform 500 ETF (VOTE) to Betterment’s investors. Since adding the fund to its lineup, Betterment has conducted polls asking investors which corporate issues they most want VOTE to tackle, allowing them more voice than simply putting money into the ETF.
In its first survey of investors in its Socially Responsible Investing program after integrating the VOTE ETF into its offerings, Betterment learned that 60 percent of investors wanted Engine No. 1 to push oil and gas companies to transition away from fossil fuels. In a second survey, Betterment asked investors their opinions on other, live shareholder proposals including at Amazon and Exxon. A majority of respondents supported the proposals, and their votes aligned with those cast by VOTE ETF managers.
Giving investors more of a voice could address a common critique of the idea of companies considering shareholder welfare, not just shareholder value. While the latter is measured by share price, welfare isn’t as easily quantified. “It’s difficult for a corporation to determine what shareholder welfare really is,” says Booth’s Lubos Pastor, who is studying how green investing affects financial markets. “How do a few people in the boardroom know what their millions of shareholders really care about? Especially in the situation where half of their shareholders believe in one thing and the other half believe in something different, how do these people in the boardroom decide which have got to get their way?” (For more, read “How do companies measure their CSR impact?”)
While the idea is nascent, aggregating retail investors’ votes could provide useful data that consolidates their voices. “Shareholders are ordinary people who care about money, but also about other things, such as environmental and social issues,” says University of Trento’s Eleonora Broccardo, who conducted research on investor activism with Hart and Zingales. “It is incorrect to think that they only want to maximize their profit, no matter what the impact on others, or on the environment, is. . . . Investors should be given the chance to vote on companies’ investments that are slightly less profitable but allow for better, and desired, social outcomes.”
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