Newly emerged from its climate victory over Big Oil, impact investor group Engine No 1 is preparing to launch its first EFT under the symbol VOTE, which aims to encourage better corporate behavior through shareholder voting rights .
Not content with upsetting a major oil company and sending shockwaves through the market, the # 1 engine seeks to start a mini-revolution in how billions of dollars of passive money engage with Corporate America. .
The impact investing group is preparing to launch its first exchange-traded fund, called Engine No. 1 Transform 500 ETF. The clue as to how he hopes to make a difference? It’s in the ticker: VOTE.
Instead of excluding companies with bad scores in terms of environmental, social and governance indicators, or giving more weight to “good” companies, the fund aims to encourage better behavior by using its rights. shareholder vote. He will follow voting guidelines to get companies to invest in employees, communities, customers and the environment, according to a dossier.
This is a spectacular new approach to combining ESG and index investing. As recently as February, Robeco Quant Research showed that passive managers were among the least likely to vote for social or environmental proposals.
Even in ESG-focused products, the practice is generally to reward good behavior and punish bad behavior at the time of capital allocation, rather than shareholder action.
“A climate fund could limit your carbon emissions in your portfolio, but would not actually change the amount of carbon emitted into the environment,” said Michael O’Leary, Managing Director of Engine No. 1. “With this product, the idea is: What can we do as active owners to actually impact these businesses through the way we vote, through the campaigns we run, through the other investors we bring with us? “
Earlier this month, Engine No. 1 won three seats on the board of directors of Exxon Mobil Corp. after a six-month proxy fight. The bet now is that ETF investors will want to join the cause.
With this in mind, the price of the new fund was set at 0.05%, the lowest. It is also aimed at a mass audience – VOTE will follow the Morningstar US Large Cap Select Index of the 500 largest US companies and, therefore, it will weight them according to market capitalization.
“Most sustainable products on the market exclude or respond to” companies with low ESG scores, said Yasmin Bilger, ETF manager at Engine No. 1. “This idea of a pure game – keeping the market cap exactly , keeping it’s a similar price and added value through active ownership – is truly unique in the market.
Whether it will stay that way remains to be seen. Asset managers of all stripes are increasingly making commitments to ESG standards, including companies such as BlackRock Inc. As the world’s largest fund manager and ETF issuer, it has enormous shareholder power.
In fact, much of Engine No. 1’s success will depend on the membership of three major players by its side: BlackRock, Vanguard Group, and State Street Corp. Now hold 43% of the fund industry’s U.S. equity assets, according to Morningstar Inc. The three could someday own 35% of a typical company’s stock, said John Rekenthaler, vice president of research at the company, in a recent report.
“If all three of these organizations remained loyal to corporate leadership, they could effectively end almost all militant activity,” Rekenthaler wrote.
Robeco’s study showed that larger, more passive managers were less likely to vote in favor of ESG proposals, a phenomenon he said could be linked to the need to keep costs low. However, the research relied on historical data and the authors acknowledged that recent years have shown that votes in favor are “slowly on the rise.”
In addition to its vote, Engine No. 1 will use ETF proceeds to help fund its advocacy work for change in some of America’s largest companies. Although with such a low expense ratio, it will have to attract significant assets to generate significant income.
The new fund is launched with an initial commitment of $ 100 million. He is also receiving a boost from investment advisor Betterment LLC, who will integrate VOTE into all of its socially responsible investment strategies.
“It became clear to us that this would become a major area of focus as investors, including our clients, will understand how capital can drive change,” said Boris Khentov, senior vice president of operations at Betterment. “People will want to be a part of campaigns like the Exxon No.1 Engine campaign.”
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Claire Ballentine in New York at firstname.lastname@example.org