Fennel

<div class="is it iu iv iw"> Modern capitalism has ushered in the greatest era of innovation, globalization, and sheer economic output in human history. However, the incentive structure, which rewards short-term gains over long-term sustainability, has come at the expense of fair labor and fair trade practices, human rights, and our planet’s delicate ecosystems. Social scientists have long recognized these shortfalls inherent to our system, but all external efforts — government intervention, a thriving philanthropic sector, protest movements, etc. — have not done enough to curb the destruction of this capitalist machine. Even <a class="au lj" href="https://money.cnn.com/2013/09/17/news/economy/occupy-wall-street-fizzled/" target="_blank" rel="noopener ugc nofollow">Occupy Wall Street</a>, the largest anti-capitalist protest movement in modern history, failed because our corporations are ultimately beholden to no other stakeholder than their own shareholders. So if corporations are doing this on the behalf of their shareholders, maybe it’s up to the shareholders to help put an end to this. Shareholder activism is a channel to create impact by influencing company policy from within. It can be a method for socially- and environmentally-conscious advocates to voice their concerns from the perspective of shareholders who want to increase the value of their ownership by promoting sustainability. As the conservationist David Brower liked to say, “There is no business to be done on a dead planet.” Shareholder activists are bullish on <a class="au lj" href="https://www.sustain.ucla.edu/what-is-sustainability/" target="_blank" rel="noopener ugc nofollow">sustainability</a> because they realize the massive upside potential of infusing compassion into business practices: positive press, fewer boycotts, fewer fines, fewer lawsuits, fewer labor strikes, more productive employees, more consumer demand, and the benefits of increasingly-progressive legislation. Even Founder of BlackRock Larry Fink — a pro-market authority — praised shareholder activism in his <a class="au lj" href="https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter" target="_blank" rel="noopener ugc nofollow">2022 Letter to CEOs</a>. This letter, written from the perspective of the shareholders of Corporate America, did not attack capitalism but instead implored executives to reframe and repurpose capitalism to achieve a wider array of society’s ambitious goals. “Capitalism has the power to shape society and act as a powerful catalyst for change,” Fink wrote. Over the past few decades, there have been a handful of organizations that have formed in order to support sustainable action through the current capitalist system. Organizations like <a class="au lj" href="https://www.asyousow.org/" target="_blank" rel="noopener ugc nofollow">As You Sow</a>, <a class="au lj" href="https://www.greencentury.com/" target="_blank" rel="noopener ugc nofollow">Green Century Funds</a>, and <a class="au lj" href="https://impaxam.com/" target="_blank" rel="noopener ugc nofollow">Impax Asset Management</a> have used shareholder activism to put forward shareholder proposals that aim to push companies in the direction of environmental sustainability or social good. Why push for change through shareholder proposals? If you own stock in a company, you are entitled to vote your shares at annual shareholder meetings. Typically, shareholders vote on anything that might affect the stock price, such as the makeup of the Board of Directors, mergers & acquisitions, stock splits, and executive compensation. But many investors are also proposing measures that support ESG (Environmental, Social and Corporate Governance) initiatives, asserting <a class="au lj" href="https://online.hbs.edu/blog/post/what-is-the-triple-bottom-line#:~:text=The%20triple%20bottom%20line%20is,%3A%20profit%2C%20people%2C%20and%20the" target="_blank" rel="noopener ugc nofollow">triple bottom line</a> benefits to people, the planet, and profit. Institutional investors and activist hedge funds have leveraged shareholder activism to make great impact, such as <a class="au lj" href="https://engine1.com/" target="_blank" rel="noopener ugc nofollow">Engine №1</a> who were able to <a class="au lj" href="https://www.thedeal.com/activism/activist-investor-rankings-for-2021/" target="_blank" rel="noopener ugc nofollow">vote three environmental activists</a> onto the Board of Directors of Exxon Mobil in 2021. Retail investors, too, can be a part of this movement. If you own stock in a publicly-traded company, you can participate in the shareholder voting process by looking up that company’s Definitive Proxy Statement, which is filed to the Securities Exchange Commission in the Schedule 14A. You may search for upcoming shareholder proposals and the proxy voting materials of your stocks through the SEC’s <a class="au lj" href="https://www.sec.gov/edgar/search/" target="_blank" rel="noopener ugc nofollow">EDGAR database</a>, which is free and open to the public. Disruptive technology such as investing apps have democratized access to the stock market, increasing stock trading by retail investors from diverse socioeconomic backgrounds. Thus, it is exceedingly important for retail investors not to leave their power on the table but to exercise their rights as shareholders and vote at these meetings. <a class="au lj" href="https://www.proxymonitor.org/Default.aspx" target="_blank" rel="noopener ugc nofollow">ProxyMonitor.Org</a> has a watchlist of the upcoming votes of Fortune 250 companies and allows users to sort by social impact. It is famously theorized that capitalism has within it “the seeds of its own destruction.” Under a capitalist system, social classes are defined in their relation to their control over the means of production. But in the context of shareholder activism, democratized stock ownership and proxy voting allow for a more inclusive control over the means of production. Shareholder activism will allow more people to negotiate the value of corporate sustainability — a perspective that has been stifled in the past. This movement can bring about a new notion of what capitalism is and who it serves. Every vote in favor of ESG goals is another seed planted in the unemotional, hyper-rational capitalist paradigm, so that future generations can reap the benefits of a protected natural ecosystem and a compassionate corporate culture.   </div> <div class="o dy lk ll ie lm" style="padding-left: 440px;" role="separator">∙ ∙ ∙</div> <div class="is it iu iv iw"> The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a class="au lj" href="https://www.finra.org/" target="_blank" rel="noopener ugc nofollow">FINRA</a> <a class="au lj" href="https://www.sipc.org/" target="_blank" rel="noopener ugc nofollow">SIPC</a>. </div>

Shareholder Activism

What's the State of Shareholder Activism?

Shareholder activism is a channel to create impact by influencing company policy from within.

Sultan White

08 Aug, 2022

4 min read

<a href="https://www.history.com/topics/19th-century/labor#:~:text=Origins%20of%20The%20Labor%20Movement,-The%20origins%20of&text=The%20earliest%20recorded%20strike%20occurred,union%20organization%20among%20American%20workers.">Labor unions</a> have existed in the United States since the nation’s founding, with the concept first brought to America by the European immigrants who settled in the New World. Labor Unions are groups of workers who come together to collectively advocate for safer working conditions, higher compensation, better hours, and reasonable benefits. <a href="https://www.encyclopedia.com/law/law-magazines/philadelphia-cordwainers-trial-1806">The Federal Society of Journeymen Cordwainers</a> is regarded as the first labor union born in the US, officially forming in 1794. The formation of this union was the shot heard around the country, sparking unions across different industries and cities. As companies gained power throughout the 1800s, consolidating multiple types of tradespeople in single factories, unions began forming alliances amongst each other — unions of unions. These groups of workers fighting for their rights would become the working class’ greatest hedge against exploitation.  As union membership grew into a significant voting bloc, union members began pushing for legislation to protect their labor rights. The creation of the U.S. Department of Labor and federal civil rights legislation is partly due to the advocacy efforts of labor unions. Of these “unions of unions,” the AFL-CIO is by far the largest and one of the most influential. The organization traces its roots back to the formation of the AFL in 1886, and it’s still heavily engaged in <a href="https://www.influencewatch.org/labor-union/afl-cio/#:~:text=In%20the%20AFL%2DCIO's%202016,the%20union's%20political%20action%20committee).">political spending and lobbying</a> today. Recently, the AFL-CIO has deployed yet another means of achieving large-scale progressive change: <a href="https://fennel.com/blog/whats-the-state-of-shareholder-activism" target="_blank" rel="noopener">shareholder activism</a>. Labor unions use many techniques to advance their goals. One of the most well known techniques is striking, in which union members refuse to work until their demands are met. When employers treat workers like they’re disposable, strikes try to prove to them that they are not.  What makes labor strikes so effective is a process called “collective bargaining” — which involves union members banding together in order to put more weight into their demands. Ultimately, collective bargaining plays a part in all union negotiations, which means it can also be used to accomplish things through shareholder activism. In 2021, <a href="https://www.corporatesecretary.com/articles/shareholders/32544/sec-says-rooney-rule-proposals-are-micromanagement">AFL-CIO submitted shareholder resolutions</a> to several major companies — including Amazon, Activision Blizzard, and Electronic Arts — aiming to reform hiring practices in order to increase diversity in the workforce. These resolutions came fresh off the heels of the <a href="https://www.aljazeera.com/features/2020/12/31/2020-the-year-black-lives-matter-shook-the-world">2020 racial justice movement</a>, while many institutions were reckoning with criticisms of racial discrimination, including the AFL-CIO. The AFL-CIO’s proposal is similar to <a href="https://operations.nfl.com/inside-football-ops/diversity-inclusion/the-rooney-rule/">the “Rooney Rule”</a> adopted by the NFL, which requires hiring managers to interview at least one non-white and non-male candidate for open positions. Unfortunately,  these resolutions were rejected on the grounds that they constituted “micromanagement.” While the AFL-CIO was not able to pass the reform they were hoping for, they still made incremental progress by directly negotiating for other diversity policies after the shareholder proposals were dropped. This signaled that shareholder activism could be an effective tool for labor unions to use in conjunction with their existing collective bargaining methods.  In 2022, the AFL-CIO went after Amazon again, this time with a shareholder proposal aimed to address the <a href="https://operations.nfl.com/inside-football-ops/diversity-inclusion/the-rooney-rule/">unfair and unsafe conditions</a> that factory workers must endure. <a href="https://www.iccr.org/sites/default/files/page_attachments/afl-cio_-_employee_turnover_-_final.pdf">In the statement</a>, the AFL-CIO calls for a report on Amazon’s exceedingly high turnover rate, citing not only negative effects on the company’s worker acquisition costs, but also the fact that their “human capital management practices” are misaligned with Jeff Bezos’ goal to be the <a href="https://www.aboutamazon.com/news/operations/update-on-our-vision-to-be-earths-best-employer-and-earths-safest-place-to-work">“Earth’s Best Employer.”</a> This second attempt at shareholder activism errs on the side of caution — pushing the business case rather than just the social justice case.  As shareholder activism matures, we are likely to see more economic framings of social issues. Of course, labor unions exist to look after the best interests of their workers,  but it’s important to keep in mind that the success of the employer is critical to a well-paid and well-benefited employee. While treating employees well is the right thing to do from a humanitarian standpoint, it’s the costs associated with a high turnover rate and the potential gains of happier, more loyal, and more productive employees that get the message across to the companies. As the old saying goes, money talks. ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member FINRA SIPC.

Shareholder Activism

Labor Unions Are Using Shareholder Advocacy to Push for Workers’ Rights

Shareholder activism is one of the tools in a union's arsenal.

Sultan White

13 Oct, 2022

3 min read

<div class="ir is it iu iv"> The <a class="au li" href="https://www.investopedia.com/terms/i/industrial-revolution.asp" target="_blank" rel="noopener ugc nofollow">Industrial Revolution</a> led to an unprecedented rise in economic activity as businesses leveraged new technologies and manufacturing processes. The U.S. GDP, the average standard of living, and even the population size grew rapidly between 1760 and 1840. But this era saw one other innovation that would forever alter the business-society relationship: the large-scale adoption of incorporation. The word “corporation” has etymological roots with the Latin word corpus, meaning body, thus the term itself gives businesses a human form. Incorporation — the legal act of forming a corporate entity — established businesses as persons with their own legal rights. Businesses in the Industrial revolution grew quickly, but they needed capital to fuel that rapid expansion. Incorporation created a new company structure that allowed businesses to attract investors as company shareholders, giving companies access to outside capital. But adding shareholders into the mix meant businesses were now bound to the wants of their investors. So many companies began limiting the liability of shareholders. By doing so, business managers were free to take risks that encouraged innovation and entrepreneurship, but in some cases, it also meant they could conduct destructive business practices with little worry of reprehension. Incorporation narrowed the scope of business from then on; the great economist <a class="au li" href="https://www.theguardian.com/news/2006/nov/17/guardianobituaries.politics" target="_blank" rel="noopener ugc nofollow">Milton Friedman</a> held that since business managers legally are agents of the shareholders, to do anything other than to maximize profits would essentially be stealing from them. There is even a case law, <a class="au li" href="https://h2o.law.harvard.edu/cases/3472" target="_blank" rel="noopener ugc nofollow">eBay v. Newmark</a>, in which shareholders sued managers for not maximizing profits. Shareholders can also vote to terminate managers who do not uphold their fiduciary duties. Considering these systemic conditions, a strictly-monetary incentive structure can lead to the destruction of our natural environment, a record-high wage gap, and other consequences that benefit the interests of the corporation in the short term at the expense of others. Greed is rewarded while goodness can be punishable. The entire concept of “corporate personhood” ushered in decades of accumulating wealth and power used to influence Justices and members of Congress. Corporations today are granted “rights” that embolden them to impede upon the rights of ordinary citizens. For example, in <a class="au li" href="https://publicintegrity.org/politics/the-citizens-united-decision-and-why-it-matters/" target="_blank" rel="noopener ugc nofollow">Citizens United v. FEC</a>, the Supreme Court ruled that corporate dollars used to persuade politicians are protected as “free speech,” which corporations exploited in order to flood our legislative branch and regulatory agencies with lobbyists peddling the interests of their businesses. American citizens fed up with this corporatocracy are presented with two different paths of systemic change — the path of revolution or the path of renaissance. On one hand, revolution is represented by extrinsic forces of change toppling one institution to prop up another. Conflict is inherent. On the other hand, renaissance is an intrinsic and internal force of change, in which these “corporate persons” adopt more sustainable business practices of their own volition and by the will of the shareholders. Shareholder activism is an intrinsic force of change. It can mold corporations to serve the interests of all stakeholders, including our Earth’s ecosystems. In the past couple of years, many shareholder activists have advocated for the adoption of <a class="au li" href="https://www.law.cornell.edu/wex/public_benefit_corporation#:~:text=A%20public%20benefit%20corporation%20is,a%20responsible%20and%20sustainable%20manner." target="_blank" rel="noopener ugc nofollow">public benefit corporations</a> (PBCs), a new type of corporate entity that requires the board of directors to create value for the planet and the greater community, in addition to seeking profits. In 2020, Delaware — by far the most popular state to incorporate businesses — made it easier for an existing corporation to become a <a class="au li" href="https://corpgov.law.harvard.edu/2022/02/18/converting-to-a-delaware-public-benefit-corporation-lessons-from-experience/" target="_blank" rel="noopener ugc nofollow">PBC</a> by lowering the required shareholder vote from a two-thirds to a simple majority. Shortly after, <a class="au li" href="https://www.businesswire.com/news/home/20210113005967/en/Veeva-Becomes-First-Public-Company-to-Convert-to-a-Public-Benefit-Corporation" target="_blank" rel="noopener ugc nofollow">Veeva Systems</a> and <a class="au li" href="https://ir.unither.com/news/press-releases/press-release-details/2021/United-Therapeutics-Converts-to-a-Public-Benefit-Corporation-Following-Shareholder-Approval/default.aspx" target="_blank" rel="noopener ugc nofollow">United Therapeutics</a> became the first two public companies to convert from C-Corps into public benefit corporations. By making these changes, Veeva Systems and United Therapeutics, codified into their corporate governing documents a steadfast commitment to social and environmental responsibility. Now, <a class="au li" href="https://www.kiplinger.com/investing/esg/603598/what-are-public-benefit-corporations-pbcs" target="_blank" rel="noopener ugc nofollow">their decisions are made</a> in the context of <a class="au li" href="https://online.hbs.edu/blog/post/what-is-the-triple-bottom-line" target="_blank" rel="noopener ugc nofollow">the triple bottom line</a>, forever imbuing these “corporate persons” with a stronger ethical and moral code. Shareholder activists’ co-opting of the public benefit corporation legal structure is a relatively new tactic, and we have yet to see the full extent of its effectiveness, but it is one strategy in which changing a corporation’s identity could change its motivations for the better. Holding similar goals, the shareholder activism and PBC movements can combine forces to achieve greater awareness and impact — a coalition of intrinsic forces of change, reimagining the purpose of doing business, and turning corporations into good people.   </div> <div class="o dx lj lk id ll" style="padding-left: 400px;" role="separator">∙ ∙ ∙</div> <div class="o dx lj lk id ll" style="padding-left: 440px;" role="separator"> </div> <div class="ir is it iu iv"> The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a class="au li" href="http://finra.org" target="_blank" rel="noopener ugc nofollow">FINRA</a> <a class="au li" href="https://www.sipc.org/" target="_blank" rel="noopener ugc nofollow">SIPC</a>. </div>

Shareholder Activism

How Shareholder Activists Are Turning Corporations Into Better People

Companies are reprioritizing their values by becoming public benefit corporations.

Sultan White

09 Nov, 2022

4 min read

There are several different ways to incorporate <a href="https://fennel.com/fennel101/esg">ESG</a> into your portfolio, because ESG investing isn’t a one-size-fits-all approach. ESG investing involves using a company’s environmental, social, and governance data to guide investing decisions. But a lot of information falls into those three buckets, and which data points to focus on and how to use that data may vary from investor to investor. On top of that, different investors may have different reasons they’re using ESG. Maybe they hope to <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">use ESG as a form of risk management</a>, by looking for long-term business viability and avoiding businesses that may face regulatory liabilities. Or maybe they want to use ESG to invest in companies that align with their personal values. One of the popular ways investors incorporate ESG data into their portfolios is through <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">ESG screening</a>, which involves including or excluding companies based on their ESG performance. However, this approach differs from a technique many impact investment funds do — active ownership. Let’s examine these two different ESG investing approaches to better understand the pros and cons of each. <h4>The Positives and Negatives of Screening</h4> ESG screening comes in two different forms — positive screening and negative screening. Both approaches are relatively straightforward. Positive screening involves investing in companies based on certain ESG factors, while negative screening involves excluding companies from your portfolio or divesting. Positive and negative screening are really just two sides of the same coin, and can be done in tandem. In order to incorporate screening into your portfolio, all you need is relevant ESG data and a personal strategy of what you want to invest in or avoid. For example, if you want to construct a portfolio of women-led businesses, you need access to the gender breakdown of a company’s board of directors or leadership team. That way you can positively screen women-led companies into your portfolio. If you see that some of the companies already in your portfolio have no women in leadership positions, then you may want to negatively screen them out. Provided that you have the proper ESG data, it’s relatively easy to incorporate ESG into your portfolio this way. Screening can help investors who are using ESG from a risk management perspective. If they believe the global transition to renewable energy will benefit green energy companies and hurt traditional fossil fuel companies, they can use ESG screening to make sure their portfolio aligns with that hypothesis. Screening can also help investors who want to make sure their investments are aligned with their personal values. This sort of investing happens all the time, whether it’s <a href="https://fennel.com/blog/why-are-students-pushing-universities-to-divest">universities divesting from oil companies</a> after student pressure, protesters <a href="https://michiganintheworld.history.lsa.umich.edu/antivietnamwar/exhibits/show/exhibit/military_and_the_university/dow_chemical">divesting from napalm manufacturers</a> during the Vietnam War, or <a href="https://www.robeco.com/en/key-strengths/sustainable-investing/glossary/sin-stocks.html">religious investors divesting from “sinful” industries</a> like gambling or drug use. Screening is popular in <a href="https://financebuzz.com/values-based-investing">values-based investing</a> and <a href="https://www.nerdwallet.com/article/investing/ethical-investing">ethical investing</a>, which have both been around for a long time. But what if you’re an impact investor who wants to use their investment to promote some sort of change? Sure, positive screening may help promote the companies you do invest in, but negative screening can leave you out of the conversation for the companies you may want to change, which could create an echo chamber effect. That’s why some impact investors are turning to a more hands-on approach known as active ownership (or active engagement). <h4>What Is Active Ownership?</h4> Active ownership involves using one’s position as a shareholder to push a company towards positive change. This can be done through things like <a href="https://fennel.com/fennel101/shareholder-voting">shareholder voting</a>, attending annual shareholder meetings, putting forward shareholder proposals, and so on. A famous example of active ownership at work is Engine No. 1’s <a href="https://www.reuters.com/business/little-engine-no-1-beat-exxon-with-just-125-mln-sources-2021-06-29/">board takeover of ExxonMobil</a>. In 2020, Engine No. 1, a relatively unknown activist hedge fund, acquired a small stake in the oil giant ExxonMobil. Although Engine No. 1’s shares only represented about 0.02% of the company, the hedge fund was able to use its shareholder status to put forward a handful of shareholder proposals and nominate new members to Exxon’s board of directors. After getting support from large asset managers like BlackRock, Vanguard, and State Street, Engine No. 1 was able to win <a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/">three of Exxon’s board seats</a>. Why did Engine No. 1 care about winning board seats? The hedge fund had three main goals: to bring independent directors with energy experience to Exxon’s board, to promote better long-term capital allocation, and to implement a strategic plan for Exxon’s business in a world that is rapidly moving towards sustainability and decarbonization. Since Engine No. 1’s board takeover, Exxon has <a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/">made several commitments</a> to lowering its greenhouse gas emissions and invested billions of dollars into low carbon solutions.   <h4>Implementing Active Ownership Into Your Portfolio</h4> Okay, so all you have to do to implement active ownership into your portfolio is target a multinational company, wage a months-long shareholder campaign, and get some of the largest asset managers in the world to support your cause? Well, not exactly. Screening may seem easy to incorporate into your portfolio because it just involves including or excluding companies based on ESG data. Active ownership may take a little bit more work, but it could be as simple as using your shares to vote. "If you're a shareholder of a company, you should be active. Active ownership is really important,” Yusuf George, Managing Director of Engine No. 1, said at <a href="https://medium.com/fennelapp/a-recap-of-socap-2022-875a0cc53fb">a recent SOCAP event</a>. “Part of the reason [Engine No. 1] talks so much about the energy sector, the transportation sector, and agriculture is because they account for about 75% of greenhouse gas emissions. We want to go where the problems are, because if we don't, nothing will change. And so we believe that it's really important to use any tool you have — it can be voting your shares, showing up at an annual general meeting, whatever tool you have to be an active owner is really important." As Yusuf George points out, leaning into the problem is important because it could help lead to change. While exclusionary screening may work for a risk management approach, active ownership may lead to a greater impact on the company. If your goal as an investor is to have an impact, then it could be worth it to use ESG data to identify opportunities for impact within a company. Then you could use your position as a shareholder to push for change with whatever tools you have — whether that’s voting, putting forward proposals, or just spreading awareness of issues.   Risk Disclosure: Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well. ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

Shareholder Activism

Screening vs Active Ownership: Different Ways To Incorporate ESG Into Your Portfolio

Active ownership could help ESG investors push for more impactful change.

Fennel

28 Nov, 2022

4 min read

‘Tis the season — the season where some of the largest public companies have their annual general meeting (AGM) and shareholders get to vote on important business decisions. <a href="https://www.finra.org/investors/insights/welcome-proxy-season-primer-proxy-statements-and-shareholder-meetings">AGM/proxy season</a> refers to the couple of months when the highest number of companies have their annual general meetings (sometimes called annual shareholder meetings). Companies tend to have these AGMs in the first half of their fiscal year, and since many companies end their fiscal years on December 31, a lot of AGMs happen between early April and late June, with a high concentration of AGMs occurring in May. Of course, there are plenty of early birds and plenty of stragglers, so it’s good to get mentally prepared for proxy season ahead of time and know what to expect. AGMs give companies the chance to report business progress or plans to shareholders and ask for their input on certain decisions <a href="https://fennel.com/fennel101/shareholder-voting">in the form of shareholder voting</a>. Companies often let shareholders attend these meetings in-person, over the phone, or online. But even if shareholders don’t attend the meetings, they’re allowed to vote “by proxy” by sending in their votes ahead of time. Publicly traded companies are required to send out their proxy statements ahead of their AGM. This proxy statement includes useful information like when the shareholder meeting is taking place, who’s running for the board of directors, information about executive compensation packages, the board’s pick for an auditing firm, company performance, and what shareholder proposals will be voted on. If you own a company’s stock and are eligible to vote, you should receive notice that the shareholder meeting is coming up and be given instructions for how to vote. Depending on your situation, you may receive these materials from the company hosting the meeting, a voting transfer agent, or the bank/broker you invest with. These materials are either delivered electronically, through email, or by mail.   Why should I vote? We get it, these proxy materials are dense documents written in legalese, and therefore, are easy to ignore. But it may still be in your best interest to read through them and vote on ballot measures. It is your shareholder right, after all! If you’re planning on investing in a company over the long term, these annual meetings can provide a temperature check of what that company is planning over the next year. It also gives you an avenue to communicate with the company on what you think the best path forward for the business is. On top of board appointments, executive compensation, and so on, sometimes shareholders are asked to vote on things like dividends, the issuing of new shares, or stock splits. These things can potentially influence a company’s share price, which means you may want to pay attention as an investor. In addition, companies also vote on shareholder proposals that deal with how a company impacts the world. For example, in 2022 Jack in the Box shareholders voted that the company should <a href="https://www.greencentury.com/majority-of-jack-in-the-box-shareholders-support-green-century-packaging-proposal/">speed up its sustainable packaging efforts</a>. Meanwhile, Lowe’s shareholders voted that the company should <a href="https://www.sec.gov/Archives/edgar/data/60667/000119312522105006/d301898ddef14a.htm#toc301898_128">report its racial and gender pay gaps</a>. There’s a moral argument for why these things are important. Sustainable packaging is good for the planet and closing racial and gender pay gaps is good for social equity. But, there is also a business argument that shareholders bring up in these proposals. For the sustainable packaging vote, shareholders brought up that other fast food companies had made commitments to sustainable packaging, which could make Jack in the Box look bad <a href="https://unctad.org/news/un-agencies-cop27-urge-action-tackle-impact-plastic-climate">during a time of record plastic pollution</a>. For the pay gap vote, shareholders <a href="https://www.sec.gov/Archives/edgar/data/60667/000119312522105006/d301898ddef14a.htm#toc301898_128">stated</a> that “actively managing pay equity is associated with improved representation and diversity is linked to superior stock performance and return on equity.” More votes like these will happen in 2023. For example, Disney shareholders will vote on <a href="https://www.sec.gov/Archives/edgar/data/1744489/000119312523033959/d354565ddefr14a.htm">disclosing political contributions</a> on April 3, Kellogg Company shareholders will <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/55067/000162828023006053/k-20230302.htm#ica54dcf0e22344dda059d9950a115ea0_549755814733">vote on pay equity</a> on April 28, and Eli Lilly shareholders will vote on whether the company should <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/59478/000005947823000101/lly-20230224.htm#i9aaa0f0598e640239f3876129ce4be9b_1099511632187">disclose the effectiveness of its diversity, equity, and inclusion (DEI) efforts</a> on May 1. If you care about issues that affect the environment or your community, you may want to voice your opinions on these issues and participate in shareholder votes. But even if you don’t care about these issues so much, shareholder votes have the potential to impact the share price or overall business performance of a company you are invested in. So be an engaged shareholder this proxy season. You’ll get to voice your opinions, and may help push the companies in your portfolio to be even better. ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

Shareholder Activism

Proxy Season 2023 Is Coming Up, Here's What You Need To Know

‘Tis the season — the season where some of the largest public companies have their annual general meeting (AGM) and shareholders get to vote on important business decisions.

Fennel

14 Mar, 2023

2 min read

<a href="https://fennel.com/blog/proxy-season-2023-is-coming-up-heres-what-you-need-to-know" target="_blank" rel="noopener">Proxy season 2023</a> is coming up, which means investors are getting ready to exercise their rights as shareholders and vote on important business decisions. But before the annual general meetings of 2023 really kick off, let’s take a look back at last year and pick out some of the trends we saw in proxy season 2022. That way, we might have a better idea of what to expect in 2023. Here are some of the highlights from last year’s proxy season:   There was a record number of shareholder proposals in 2022 If your favorite part of proxy season is voting on shareholder proposals, 2022 was your year. Last year broke records in not only the number of shareholder proposals that were submitted to public companies, but also the number of proposals that made it to the ballot and were voted on. According to <a href="https://corpgov.law.harvard.edu/2022/10/27/boardroom-recap-the-2022-proxy-season/">a PricewaterhouseCoopers study</a>, there were 555 shareholder proposals among Russell 3000 companies that were voted on — a 25% increase compared to the previous year. The study says that this is the result of two factors. One, a 17% increase in the number of shareholder proposals that were submitted to these companies. And two, a 40% decrease in no-action requests granted by the SEC (these requests allow companies to drop certain shareholder proposals from their proxy statements). With this record number of proposals being voted on, a record number of proposals also received the majority of votes.   Lots of these proposals centered around ESG issues In this record year of shareholder proposals, there were plenty that were related to ESG. Proxy Preview Project <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/record-number-of-shareholder-esg-proposals-in-2022-defies-gop-political-backlash-71181308">found</a> 607 instances of shareholder resolutions related to ESG topics in the first half of 2022, which it said was a 22% increase from the year before. This uptick came despite the fact that a 2020 SEC rule made it relatively harder to file and refile shareholder proposals. "The attempt to silence shareholder voices has, instead, prompted them to get louder," Andrew Behar, CEO of As You Sow, wrote in <a href="https://www.proxypreview.org/2022/report-blog">the Proxy Preview report</a>. "This uprising is occurring while investors and fiduciaries increasingly understand that systemic risk affects all players in the capital markets, inspiring leading companies onto the path of serving all stakeholders."   Some of the top ESG issues were: DEI, climate change, and political spending While governance issues remained a popular topic for shareholder proposals, there number of shareholder proposals surrounding environmental and social issues almost doubled among Russell 3000 companies, according to the PwC study mentioned before. However, the study points out that only 41 of the 288 E and S related proposals received the majority of votes. This is a slight uptick from the 36 proposals that got the majority of votes in 2021, but still represents a decline in the percentage of proposals reaching the majority benchmark. The study found that the number of environment-related proposals doubled compared to the year before. These proposals included topics like measuring direct emissions, climate risk management, measuring indirect emissions, and implementing sustainable packaging. Proposals that dealt with direct emissions like greenhouse gas emissions and net-zero targets were more likely to pass (7 out of 14 did) than proposals that dealt with indirect emissions The study also found that shareholder proposals asking for racial equity audits were surprisingly popular, with average support going from 33% in 2021 to 45% in 2022. 8 out of 22 of these proposals passed with the majority of votes. These environmental and social trends build off of what we’ve seen in the past few years. US SIF <a href="https://www.ussif.org//Files/Trends/2022/Trends%25202022%2520Executive%2520Summary.pdf">analyzed</a> shareholder proposals spanning 2020 to 2022 and found that the issues that prompted the most proposals were: labor and equal employment opportunity (with 311 proposals), corporate political activity (with 288 proposals), and climate change (with 265 proposals).   Notable vote: Jack in the Box’s sustainable packaging Speaking of breaking records, one especially notable vote came from the shareholders of Jack in the Box. Investor Green Century Funds put together a shareholder proposal asking Jack in the Box to speed up its sustainable packaging efforts, arguing that the company had fallen behind the sustainable packaging initiatives of other fast food companies. What makes this vote notable is that it passed with 95% of the vote despite Jack in the Box recommending that shareholders vote against it. This is <a href="https://www.greencentury.com/majority-of-jack-in-the-box-shareholders-support-green-century-packaging-proposal/">the largest margin</a> that an environmental- or social-related proposal has passed with a company opposing it — showing that certain investors really care about environmental impact, and are willing to push companies that drag their feet on these issues.   Investors paying close attention to governance Environmental and social issues were in the spotlight, but so was governance. According to <a href="https://www.ey.com/en_us/board-matters/four-key-takeaways-from-the-2022-proxy-season#accordion-content-1941053843-0">EY</a>, shareholders asked for more board oversight and disclosures when it came to ESG issues, and some companies responded by citing ESG in director qualifications. EY also notes that despite the signals that activist investors would challenge more company-picked board nominations, the opposition only went up by a small percentage. The average vote against S&P 500 directors was 4.2% in 2022, which was only up a little bit compared to the 3.9% average in 2021.   Say on pay decline One particularly interesting trend in governance is the decrease in support for company “say on pay” votes. If you look at previous proxy years, you’ll notice that in general, say on pay votes received overwhelming support. But that may be starting to chip away. According to PwC, “Average support at companies in the S&P 500 and Russell 3000 hit record lows since the vote was introduced 11 years ago, at 87% and 90% respectively. In the S&P 500, 21 companies failed their say-on-pay vote, with 207 companies receiving below 70% support. The number of failed votes at Russell 3000 companies hit 71.” While 70% may still seem like a high percentage of the vote, this represents a stark contrast when compared to before. This trend is exemplified by the controversy surrounding Apple’s 2022 say on pay vote for its CEO Tim Cook. Last year, Institutional Shareholder Services (ISS), one of the largest proxy advisory firms, <a href="https://www.reuters.com/technology/apple-shareholder-iss-urges-vote-against-ceo-cooks-bonus-2022-02-16/">asked Apple investors to vote against</a> Tim Cook’s compensation, saying there were issues with how his equity was awarded. Apple’s say on pay vote still received a majority with 64% approval, but this was down from 95% in 2021. In response, Cook <a href="https://www.cnbc.com/2023/01/12/apple-ceo-tim-cook-receives-a-40percent-pay-cut-after-shareholder-vote.html">voluntarily cut his own salary by 40%</a> at the start of 2023. This is potentially a big deal, because if Tim Cook isn’t safe from say on pay opposition — the same Tim Cook that leads the largest US company by market cap, that grew his company’s share price by around 1,000% since becoming CEO in 2011 — this could have big implications for the compensation of other CEOs if their shareholders believe they are being unfairly paid. It could be interesting to see how support for say on pay changes in 2023, or if it changes at all. But all of these trends from 2022 could be worth keeping an eye on in 2023. These trends could just be symptoms of what investors are thinking about during a specific year, or they could be hinting at a larger movement.   • • • The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member<a href="http://finra.org/"> FINRA</a><a href="https://www.sipc.org/"> SIPC</a>.

Shareholder Activism

ESG

Investing

Highlights From Proxy Season 2022

Let's take a look back at some of the things that happened during last year's AGM season.

Fennel

21 Mar, 2023

5 min read

How many times have we followed a trend just to fit in with the “cool kids” even if meant being untrue to ourselves? The reality is, many of us have fallen prey to peer pressure at some point. But individuals aren’t the only ones who conform to a trend to stay relevant. Businesses do too, and because ESG (Environmental, Social, and Governance) and sustainability are the hot topics of today, many companies partake in something called “greenwashing.”    <h4>Why greenwash?</h4> <a href="https://earth.org/what-is-greenwashing/">Greenwashing</a> is defined as the process of making misleading statements, in order to market a company or its products as being environmentally sustainable. <a href="https://corporatefinanceinstitute.com/resources/knowledge/other/greenwashing/">Some examples of greenwashing are</a>:  <ul> <li aria-level="1">Making vague or false environmental claims that are not backed up by hard evidence or third-party certifications </li> <li aria-level="1">Placing emphasis on irrelevant issues (for example, saying a phone is “CFC-free” when CFCs are already banned by law) </li> <li aria-level="1">Hiding “trade-offs” — essentially, highlighting small environmental victories in order to mask a larger, potentially more concerning issue (for example, banks advertising their issuing of sustainable bonds while financing companies that harm the environment) </li> </ul> Greenwashing is <a href="https://www.nasdaq.com/articles/are-companies-as-green-as-theyd-have-you-believe-2021-06-21">on the rise</a> as companies that boast of high ESG scores and sustainable practices are gaining traction in both financial and non-financial aspects. We’ve seen the S&P 500 ESG Index beat the S&P 500 Index <a href="https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview">since the first market slump in early 2020</a>, <a href="https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/">record issuance</a> of sustainable bonds in the year 2021, <a href="https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx">studies</a> that show ESG factors drive consumer preference, and customers <a href="https://www.forbes.com/sites/gregpetro/2022/03/11/consumers-demand-sustainable-products-and-shopping-formats/">willing to pay a premium to go green</a>. As a result, many companies may try to emulate this success by exaggerating how environmentally sustainable they really are. Some companies resort to greenwashing as they come under pressure to comply with environmental industry standards or regulatory requirements. One such example is when <a href="https://www.bbc.com/news/business-34324772">Volkswagen admitted to cheating</a> government-required emissions tests by fitting various vehicles with “defeat devices.”   <h4>The rewards of being truly sustainable are sustainable</h4> What companies sometimes forget is that greenwashing is not sustainable (pun unintended). Those who greenwash risk getting exposed by an informed consumer or a gatekeeping group, which can backfire on the company’s reputation. A recent example would be when <a href="https://www.dezeen.com/2019/08/02/hm-norway-greenwashing-conscious-fashion-collection-news/">H&M launched its “green” clothing line called Conscious</a>. In this instance, the retailer claimed to use organic cotton and recycled polyester, but didn’t provide enough evidence to back up its marketing. The company then faced criticism for misleading claims In the case that the truth behind an organization’s greenwashing claims goes uncovered, it is still at a loss as it only enjoys the superficial benefits of being a “responsible” business. It doesn’t reap the added value that actual sustainable business can receive — like <a href="https://www.bain.com/insights/sustainability-your-brands-next-cost-saving-weapon/">lower operational costs</a>, <a href="https://www.globenewswire.com/news-release/2019/01/10/1686144/0/en/CGS-Survey-Reveals-Sustainability-Is-Driving-Demand-and-Customer-Loyalty.html">loyal customers</a>, or <a href="https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf">positive shareholder returns</a>.   <h4>Greenwashing faces legal implications in the future</h4> Most importantly, responsible ESG practices minimize regulatory and legal interventions, which in turn means less negative publicity and fines. This is exemplified in Volkswagen’s case, wherein the car manufacturer was fined $125 million for its emissions scandal, and saw further losses as a result of having to recall close to 12 million of its cars worldwide. The spiral translated into <a href="https://fortune.com/2020/10/06/volkswagen-vw-emissions-scandal-damages/">business losses</a> and <a href="https://fortune.com/2015/09/23/volkswagen-stock-drop/">negative shareholder returns</a>. The greenwashing crackdown will continue with new environmental laws being written. The <a href="https://research.hktdc.com/en/article/MTAzNDU1OTc0Nw">EU has decided to amend its new consumer rules</a> to address greenwashing concerns, requiring producers to provide greater transparency on product information to avoid misleading claims. The UK is also targeting greenwashing with the Competition and Markets Authority’s <a href="https://www.whitecase.com/publications/alert/uk-clampdown-greenwashing">Green Claims Code</a>. Organizations are driven towards greenwashing because of peer, consumer, or legal pressures. However, by doing so these businesses miss out on the true benefits of being sustainable.They also might expose themselves to the threat of legal action as more legislation is being drafted against greenwashing. As a result, these companies risk reputational damage, financial losses, and negative returns for stakeholders. Until regulators catch up to all the companies engaging in greenwashing, it’s up to us to be on the lookout for common greenwashing tactics, and stay fully informed about the purchases and investments we make.   ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="https://www.finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

Environmental

What Is Greenwashing?

Greenwashing is a superficial and sometimes misleading way companies claim sustainability.

Shivani Hemnani

15 Aug, 2022

3 min read

With financial markets around the world still reeling from muddled efforts to curb a global pandemic, one financial notion seems to be gaining fresh support: ESG. However, much about ESG remains unexplored. Are ESG and risk management practices related? How can ESG be used to benefit organizations and investors from a risk standpoint? Does one of the three ESG pillars play a bigger role in terms of generating financial returns, utility, and risk management?   Some investors have a hypothesis that ESG investments generate stronger, more sustainable returns over the long term, and this has been exemplified in the past couple of years. ESG investments, indices, and companies that keep considerations of the three factors at the forefront of their culture have bounced back higher than unbothered counterparts; for example, the S&P 500 ESG Index has beat the S&P 500 Index <a href="https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview">since the first market slump in early 2020</a>, sustainable bonds have seen <a href="https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/">record issuance in the year 2021</a>, and organizations with good ESG ratings <a href="https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf">have displayed strong financial resilience</a> since the economic downturn. How can this phenomenon be explained? The answer lies in the fact that <a href="https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html">ESG can work as a risk management strategy</a>; not just in financial terms, but also in view of management conditions and meeting regulatory requirements. A <a href="https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx">report published by McKinsey</a> tells us that good ESG practices could potentially lead to positive cash flows, as well as hedge financial and reputational risks due to the following reasons: <ul> <li>ESG drives consumer preference as some customers are <a href="https://www.forbes.com/sites/gregpetro/2022/03/11/consumers-demand-sustainable-products-and-shopping-formats/">willing to pay a premium to go green</a>. McKinsey also found that companies that use sustainable practices in their supply chain are able to cut costs.</li> <li>Responsible reporting minimizes regulatory and legal interventions, which generates less negative publicity for an organization.</li> <li>Having generous social policies in place helps motivate and retain staff, as well as increase employee productivity, which has been found to <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000869">positively correlate with shareholder returns.</a></li> <li>ESG practices help optimize investments and capital expenditures. One way to get ahead of the curve is to consider making investments into assets that take advantage of sustainability tailwinds. For example, China’s efforts to curb air pollution is estimated to create <a href="http://www.chinadaily.com.cn/a/201804/18/WS5ad69dc6a3105cdcf6518f2c.html">over $3 trillion in investment opportunities across various industries</a> through 2030.</li> </ul>   <h4>Integrating ESG in business practices doubles as good risk management, which goes on to generate brand equity for companies and attract investors.</h4> Research has <a href="https://www.mdpi.com/2071-1050/12/1/254">found a positive relationship</a> between ESG scores and brand equity value of S&P 500 companies. Good ESG incorporation mitigates reputational risks for an organization, and that is where investor confidence is built. In turn, investors manage financial risks by keeping exposures to ESG investments in their portfolios, which also helps them derive utility as they are inclined to feel that their investment decisions are part of a bigger movement to do better for the world.   <h4>It's the Social and Governance factors that actually push away the risks.</h4> We constantly hear a lot of buzz surrounding the Environmental aspect which dominates sustainable investment allocations, but the value of the Social and Governance aspects which have a determining impact on sustainable practices, and as a result, risk management within an organization, are rarely ever given recognition. Taking a deep-dive into how the “S” and “G” areas are equally at play as the “E” in contributing to sound risk management within a company and yielding positive returns for investors, we delve into some research on how the three factors impact financial performance on an absolute basis. A <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwi9kr_i48b3AhWTQc0KHfB2DUAQFnoECAYQAQ&url=https%3A%2F%2Fjournals.vgtu.lt%2Findex.php%2FJBEM%2Farticle%2Fdownload%2F12725%2F9980&usg=AOvVaw1dAd8rRWX31GFeB0IY3x9v">recent study</a> examined the overall and individual influences of corporate E, S, and G conduct on economic performance of S&P 500 firms. A breakdown of the scores for each aspect across companies from different industries and their correlation with the respective companies’ economic performances were looked at. The results may be surprising at first look: Corporate “E” conduct does not have any significant effect on firm economic performance, while conduct for “S” and “G” significantly influences firm economic performance. The Social and Governance components are key to the general practices of risk management; aiming to do justice to these elements in the day-to-day course of running a business ensures responsible and skilled management structures, risk ownership, and compliance with regulatory requirements. Here we covered reasons to explain these occurrences in the market — that ESG is an exceptional risk management tool for organizations internally, and also for investors in financial terms. More importantly, we saw that “S” and “G” are crucial to building optimal risk practices within a firm, which when combined with “E”, enhance the attractiveness of businesses and generate solid returns over the long term for investors.   References Ajour, E. et al. (2020). The Role of Sustainability in Brand Equity Value in the Financial Sector. MDPI. Retrieved April 29, 2022, from <a href="https://www.mdpi.com/2071-1050/12/1/254">https://www.mdpi.com/2071-1050/12/1/254</a> BNP Paribas SA Group (2021). BNP Paribas recognized by EcoVadis and FTSE4Good extra-financial ratings. BNP Paribas. Retrieved May 06, 2022, from https://group.bnpparibas/en/news/bnp-paribas-recognized-by-ecovadis-and-ftse4good-extra-financial-ratings Cek, K. & Eyupoglu, S. (2020). Does environmental, social and governance performance influence economic performance? Scopus. Retrieved April 29, 2022, from <a href="https://www.scopus.com/record/display.uri?eid=2-s2.0-85087457813&origin=inward&txGid=4864f78cdc725470874f18fec147c309&featureToggles=FEATURE_NEW_DOC_DETAILS_EXPORT:1">https://www.scopus.com/record/display.uri?eid=2-s2.0-85087457813&origin=inward&txGid=4864f78cdc725470874f18fec147c309&featureToggles=FEATURE_NEW_DOC_DETAILS_EXPORT:1</a> Cheasty, G. (2019). Asset Management: Integrating ESG Risk into a Risk Management Framework. Deloitte. Retrieved April 22, 2022, from <a href="https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html">https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html</a> Dorobantu, S., Henisz, W. & Nartey, L. (2022). Spinning gold: The financial returns to stakeholder engagement. Wiley Online Library. Retrieved May 09, 2022, from <a href="https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2180">https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2180</a> Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. ScienceDirect. Retrieved May 09, 2022, from <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000869">https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000869</a> Henisz, W., Koller, T., and Nuttall, R. (2019). Five ways that ESG creates value. McKinsey Quarterly. Retrieved May 09, 2022, from https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx Lawrence, E., & Zlatkova, S. (2020). Managing risk with ESG investing - CFA society chicago. Northern Trust Asset Management. Retrieved April 26, 2022, from <a href="https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf">https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf</a> Murugaboopathy, P., & Dogra, G. (2021). Global sustainable bonds see record issuance in Jan-Sept 2021. Reuters. Retrieved April 26, 2022, from <a href="https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/">https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/</a> S&P Global. (2022). S&P 500 ESG Index. S&P Dow Jones Indices. Retrieved April 22, 2022, from <a href="https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview">https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview</a>   ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="https://www.finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

Investing

How Does ESG Relate to Risk Management?

Some investors have a hypothesis that ESG investments generate stronger, more sustainable returns over the long term.

Shivani Hemnani

25 Aug, 2022

4 min read

Are you an investor who cares not only about the performance of your portfolio, but also how your investments affect the environment, society, or humanity as a whole? If you do, you’re not alone. There are many investors who invest based on their own morals, what they think is ethical, or to achieve a certain social goal. In fact, this type of investing is so popular that there are a handful of different terms that refer to the practice of aligning your investments with your values. You may have heard of impact investing, sustainable investing, socially-responsible investing, or ESG, but what do all these terms actually mean? And how do they differ?   Let’s define some of the commonly used terms:   ESG — Stands for <a href="https://fennel.com/fennel101/esg">Environmental, Social, and Governance</a>. A framework for assessing companies beyond solely financial data, by looking at that company’s impact on the environment, its impact on society, and how that company is organized. ESG is about better understanding a company by taking into account this information.   ESG investing — Involves incorporating ESG data in order to make investment decisions. Traditionally, ESG investing is <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">viewed as a form of risk management</a>, where ESG is used to identify companies that are managed sustainably and avoid those that could face regulatory scrutiny. However, ESG investing is often grouped together with socially responsible investing or sustainable investing — even though technically those refer to different strategies.   Ethical investing — Using your personal code of ethics to determine what to invest in. This differs from investor to investor. One person may think ethical investing involves divesting from companies that test on animals, while another person may not care about animal testing and instead focus on avoiding companies that benefit from child labor.   Impact investing — According to the <a href="https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing">Global Impact Investing Network</a>, impact investing refers to making investments “with the intention to generate positive, measurable social and environmental impact alongside a financial return.” Impact investing is a broad term, but in order to qualify as impact investing the investor should have the desire to create a positive, the ability to measure that impact, the evidence to inform that investment decision, and the goal of also generating returns in the end.   Socially responsible investing (SRI) — Involves investing in something based on how that investment impacts the environment, society, or the greater good. The concept of SRI has been around for decades (at least) and is sometimes used interchangeably with ethical investing and sustainable investing.   Sustainable investing — According to <a href="https://online.hbs.edu/blog/post/sustainable-investing">Harvard Business School</a>, sustainable investing refers to “a range of practices in which investors aim to achieve financial returns while promoting long-term environmental or social value” — emphasis on long-term. Sustainable investing often is associated with investing in green energy or environmentally-friendly practices because the word “sustainable” is often used in that setting   Values-based investing — Similar to ethical investing, values-based investing involves making investment decisions based on a person’s own set of values. Sometimes those values reflect a person’s morals or religion, and other times they reflect a more generalized set of beliefs. Regardless of what those beliefs are, a values-based approach depends on the individual investor.    <h4>Which approach is best for you?</h4> After going through all of these terms, you may have noticed that there are a lot of similarities. Sometimes the differences between these approaches depend on the intention or end goal, other times it just comes down to semantics. Hopefully, next time you hear one of these terms get tossed around you’ll have a better understanding of what it means. This understanding may help you make your own investing decisions going forward.   * * * The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

Investing

ESG vs SRI: What Do All the Terms Mean?

There are a lot of terms used in the world of impact investing, what do they all mean?

Fennel

01 Nov, 2022

2 min read

There are several different ways to incorporate <a href="https://fennel.com/fennel101/esg">ESG</a> into your portfolio, because ESG investing isn’t a one-size-fits-all approach. ESG investing involves using a company’s environmental, social, and governance data to guide investing decisions. But a lot of information falls into those three buckets, and which data points to focus on and how to use that data may vary from investor to investor. On top of that, different investors may have different reasons they’re using ESG. Maybe they hope to <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">use ESG as a form of risk management</a>, by looking for long-term business viability and avoiding businesses that may face regulatory liabilities. Or maybe they want to use ESG to invest in companies that align with their personal values. One of the popular ways investors incorporate ESG data into their portfolios is through <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">ESG screening</a>, which involves including or excluding companies based on their ESG performance. However, this approach differs from a technique many impact investment funds do — active ownership. Let’s examine these two different ESG investing approaches to better understand the pros and cons of each. <h4>The Positives and Negatives of Screening</h4> ESG screening comes in two different forms — positive screening and negative screening. Both approaches are relatively straightforward. Positive screening involves investing in companies based on certain ESG factors, while negative screening involves excluding companies from your portfolio or divesting. Positive and negative screening are really just two sides of the same coin, and can be done in tandem. In order to incorporate screening into your portfolio, all you need is relevant ESG data and a personal strategy of what you want to invest in or avoid. For example, if you want to construct a portfolio of women-led businesses, you need access to the gender breakdown of a company’s board of directors or leadership team. That way you can positively screen women-led companies into your portfolio. If you see that some of the companies already in your portfolio have no women in leadership positions, then you may want to negatively screen them out. Provided that you have the proper ESG data, it’s relatively easy to incorporate ESG into your portfolio this way. Screening can help investors who are using ESG from a risk management perspective. If they believe the global transition to renewable energy will benefit green energy companies and hurt traditional fossil fuel companies, they can use ESG screening to make sure their portfolio aligns with that hypothesis. Screening can also help investors who want to make sure their investments are aligned with their personal values. This sort of investing happens all the time, whether it’s <a href="https://fennel.com/blog/why-are-students-pushing-universities-to-divest">universities divesting from oil companies</a> after student pressure, protesters <a href="https://michiganintheworld.history.lsa.umich.edu/antivietnamwar/exhibits/show/exhibit/military_and_the_university/dow_chemical">divesting from napalm manufacturers</a> during the Vietnam War, or <a href="https://www.robeco.com/en/key-strengths/sustainable-investing/glossary/sin-stocks.html">religious investors divesting from “sinful” industries</a> like gambling or drug use. Screening is popular in <a href="https://financebuzz.com/values-based-investing">values-based investing</a> and <a href="https://www.nerdwallet.com/article/investing/ethical-investing">ethical investing</a>, which have both been around for a long time. But what if you’re an impact investor who wants to use their investment to promote some sort of change? Sure, positive screening may help promote the companies you do invest in, but negative screening can leave you out of the conversation for the companies you may want to change, which could create an echo chamber effect. That’s why some impact investors are turning to a more hands-on approach known as active ownership (or active engagement). <h4>What Is Active Ownership?</h4> Active ownership involves using one’s position as a shareholder to push a company towards positive change. This can be done through things like <a href="https://fennel.com/fennel101/shareholder-voting">shareholder voting</a>, attending annual shareholder meetings, putting forward shareholder proposals, and so on. A famous example of active ownership at work is Engine No. 1’s <a href="https://www.reuters.com/business/little-engine-no-1-beat-exxon-with-just-125-mln-sources-2021-06-29/">board takeover of ExxonMobil</a>. In 2020, Engine No. 1, a relatively unknown activist hedge fund, acquired a small stake in the oil giant ExxonMobil. Although Engine No. 1’s shares only represented about 0.02% of the company, the hedge fund was able to use its shareholder status to put forward a handful of shareholder proposals and nominate new members to Exxon’s board of directors. After getting support from large asset managers like BlackRock, Vanguard, and State Street, Engine No. 1 was able to win <a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/">three of Exxon’s board seats</a>. Why did Engine No. 1 care about winning board seats? The hedge fund had three main goals: to bring independent directors with energy experience to Exxon’s board, to promote better long-term capital allocation, and to implement a strategic plan for Exxon’s business in a world that is rapidly moving towards sustainability and decarbonization. Since Engine No. 1’s board takeover, Exxon has <a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/">made several commitments</a> to lowering its greenhouse gas emissions and invested billions of dollars into low carbon solutions.   <h4>Implementing Active Ownership Into Your Portfolio</h4> Okay, so all you have to do to implement active ownership into your portfolio is target a multinational company, wage a months-long shareholder campaign, and get some of the largest asset managers in the world to support your cause? Well, not exactly. Screening may seem easy to incorporate into your portfolio because it just involves including or excluding companies based on ESG data. Active ownership may take a little bit more work, but it could be as simple as using your shares to vote. "If you're a shareholder of a company, you should be active. Active ownership is really important,” Yusuf George, Managing Director of Engine No. 1, said at <a href="https://medium.com/fennelapp/a-recap-of-socap-2022-875a0cc53fb">a recent SOCAP event</a>. “Part of the reason [Engine No. 1] talks so much about the energy sector, the transportation sector, and agriculture is because they account for about 75% of greenhouse gas emissions. We want to go where the problems are, because if we don't, nothing will change. And so we believe that it's really important to use any tool you have — it can be voting your shares, showing up at an annual general meeting, whatever tool you have to be an active owner is really important." As Yusuf George points out, leaning into the problem is important because it could help lead to change. While exclusionary screening may work for a risk management approach, active ownership may lead to a greater impact on the company. If your goal as an investor is to have an impact, then it could be worth it to use ESG data to identify opportunities for impact within a company. Then you could use your position as a shareholder to push for change with whatever tools you have — whether that’s voting, putting forward proposals, or just spreading awareness of issues.   Risk Disclosure: Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well. ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

Shareholder Activism

Screening vs Active Ownership: Different Ways To Incorporate ESG Into Your Portfolio

Active ownership could help ESG investors push for more impactful change.

Fennel

28 Nov, 2022

4 min read

5 Impact Investing Examples: How Investors Push for Change

Example #1: Impact investing in diverse founders

Example #2: Impact investing in the oil industry

Example #3: Impact investing in response to apartheid

Example #4: Impact investing in Chicago

Example #5: Impact investing in agricultural development

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