Rina Lakhlani, Sustainability Intern at IEN in this blog explores popular strategies to advance activism within the sustainable investing space. Rina equally celebrates Engine No. 1 recent success in winning three seats on Exxon Board to advance a long-term strategy on climate risk and impact Exxon’s carbon footprint, and calls on investors to rethink their engagement strategies.
When I began my summer internship at the Intentional Endowments Network (IEN), I was most excited about learning popular strategies to advance activism within the sustainable investing space. In my pursuit to discover the most innovative solutions, I’ve learned a few lessons.
The first takeaway is that integrating community voices is central to engagement and strategies that are focus on involving communities are the most innovative and effective. The second is that we need more transparency and accountability on a governance level to understand and launch these tactics at scale.
Unpacking History and Scaling Change
The integration of impact into investment commonly takes the form of either divestment, shareholder engagement, and in some cases, a combination of the two. The divestment movement was popularized during South African apartheid and has continued to be a prominent strategy as evidenced by private prison divestments in the wake of President Donald Trump’s election, tobacco divestments led by the largest state pension funds, and fossil fuel divestments by large endowments or corporations.
Shareholder engagement, on the other hand, has been a rising means of pushing companies to act in socially responsible ways. For example, we have seen indigenous groups successfully using their shares to advance their rights in the face of a Brazilian railway consortium and Catholic money managers challenging one of the largest private prison systems in the United States. Shareholder engagement has even become a popular alternative to divestment for large pension funds, such as Japan’s $1.36 Trillion Government Pension Investment Fund.
While both tactics have proven to be popular means to effect sustainable investments, this experience has taught me that the effectiveness of divestment and shareholder engagement is largely determined by how thoroughly they center community needs and integrate community voices. With Environmental Social and Governance (ESG) issues at the forefront of the investment world, thinking about sustainability must be inclusive and in line with justice principles of a regenerative economy. Above all, we need to acknowledge who is really at the center of the climate crisis: communities of color.
It is no secret that communities of color are the most vulnerable to climate change. To complicate matters, let’s examine who is actually at the investment decision-making table. About 55% of Americans – roughly 182,051,458 people – reported that they either directly owned stocks, stocks in mutual funds, or retirement funds in 2020. But of this pool, how many of these individual investors actually have significant ownership to drive decisions or create a significant impact that benefits communities? The majority of Americans who have financial accounts tied to the market have likely invested their money in or managed by the “Big Three” asset managers — BlackRock, Vanguard, and State Street. The largest 1% of asset managers collectively manage about 82% of the S&P 500’s market capitalization and control 61% of sector assets. It is the institutional investors who cast the majority of the votes in S&P 500 companies, and it is the institutional investors or hedge funds who typically carry the most impact in voting and investment decisions. If we truly want to create climate solutions that account for the disproportionate harm placed on BIPOC communities, institutional investors need to integrate community voices into their investment methodologies while creating inclusive spaces for BIPOC individuals.
Main Street and Wall Street need not be at odds with one another. That is why so many people, including myself, have been so energized by the work being done by Engine No. 1. The relatively new investment firm founded by activist investor Chris James made several high-profile headlines, popularly depicted as the David-and-Goliath of Wall Street, for their successful shareholder engagement fight against Exxon Mobil. While some firms advance impact investing without engaging institutional investors, Engine No. 1 believes that an emphasis on community is aligned with the interests of Wall Street and that a “company’s performance is greatly enhanced by the investments it makes in workers, communities, and the environment.” For Engine No. 1, transformative change is sustainable funds working alongside top shareholders and companies rather than writing them off.
Holding only .02% of Exxon’s shares, the small fund was able to land three seats on the board of Exxon to advance a long-term strategy on climate risk and impact Exxon’s carbon footprint. Their success lied in convincing Wall Street’s biggest asset managers; Engine No. 1’s mission and strategy resonated with other top investors, garnering the attention and support of the Church of England, CalSTRS, the New York State Common Retirement Fund, and even Exxon’s biggest institutional investors like Vanguard, State Street, and BlackRock Inc.
Now Engine No. 1 is taking their activist approach to ESG funds with their new Transform 500 ETF (ticker: VOTE). VOTE is a fund devoted to changing corporate behavior through investing in the biggest 500 U.S. stocks and using their shareholder influence for ESG proposals. Engine No. 1 is a testament to how small shareholders can push high-profile climate wins by engaging both individual investors and institutional investors. This is just the beginning of a new era of activism within boardrooms.
Moving Forward
Engine No. 1 illuminated a pathway to rethinking engagement, but we need to consider how we can achieve this at scale. Transparency and accountability in measuring and reporting ESG frameworks are two aspects of sustainable investing that ought to be essential and tragically have been missing throughout this industry as a larger whole. If we have a universally mandated sustainability framework standardized across the nation, we can democratize knowledge on how companies are sticking to their sustainability commitments. This would allow all stakeholders, especially local communities on the ground, to create informed and effective corporate engagement strategies to accelerate better solutions for our planet.
Over 90% of S&P 500 companies already produce sustainability reports, but how does one compare ESG performance across companies without a standardized system in place? As I have supported the IEN Weekly Roundup, noticing the lack of sustainability accounting metrics or standardized tools mandated by our U.S. Government has never been more alarming. How can we expect greater involvement in sustainable finance from both institutional and individual investors when we can’t fundamentally understand the nuts and bolts?
Without transparency or accountability, it is all the easier to align with climate solutions in name, but not in practice. Take for example the Sustainable Finance Disclosure Regulations (SFDR) that were mandated in March of this year across the European Union; after the anti-greenwashing regulations were instituted, the European ESG assets shrank by two trillion dollars from 2018 to 2020.
As institutional and individual investors begin to embrace sustainability in their investment portfolios, we need to demand for more transparency and accountability from the largest shareholders and corporations. While it is definitely amazing that the SEC has pushed towards nonbinding ESG recommendations for climate-related disclosures, there is still much to be done. Climate-related disclosures need to be binding to force transparency and accountability in sustainability commitments. More reported information will lead to better-informed and viable engagement strategies.
That is the beauty of the peer-learning structure of the Intentional Endowments Network; it creates a space where we can collaborate and learn together from one another. We can only discover the most successful strategies, whether it be divestment, shareholder engagement, or something entirely different when we truly commit to democratizing education and access to the world of sustainable finance. I am excited to continue learning and growing with you all.
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I’ve been blessed with the opportunity this summer to learn what I love. I am eternally grateful to the Yawkey Foundation and the Yale Center for International and Professional Experience for making my internship at the Intentional Endowments Network (IEN) a possibility for me. I am especially grateful to the entire IEN team for welcoming me into the family and showing me how collaboration and kindness can accelerate positive outcomes for our planet. Thank you for reading my thoughts and I welcome any further connections on this topic or beyond at [email protected] or via LinkedIn.