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

There is a growing number of investors who aren’t satisfied with just financial returns, they want to know that their investments are creating a better world. This desire to make change is at the core of impact investing. <a href="https://fennel.com/blog/esg-vs-sri-what-do-all-the-terms-mean">Impact investing</a> refers to when investments are made with the intention of generating positive and measurable social or environmental impacts. Typically, an investor will have an idea of what impact they want to have, and then seek out investments to create that impact. This could mean investing in renewable energy companies to promote decarbonization, investing in minority-led companies to promote the work of underrepresented groups, and so on. But what does this look like in practice? Here are a handful of impact investing examples for interested investors   <h4>Example #1: Impact investing in diverse founders</h4> So many startups rely on venture capital funding in order to get up and running. But where that VC cash flows isn’t always equitable. One study found that <a href="https://www.forbes.com/sites/forbesbusinesscouncil/2022/05/26/diversity-the-holy-grail-of-venture-capital/?sh=5b51cec34178">77% of VC dollars</a> go to startups led by white founders. In 2021, a record year for VC funding, <a href="https://news.crunchbase.com/diversity/vc-funding-black-founded-startups/">only 1.3%</a> of all U.S. venture and growth equity financing went to companies led by Black founders. Harlem Capital hopes to close that funding gap. Harlem Capital started in 2015 as a syndicate of angel investors, and evolved over the years into a fully-fledged VC firm. The company debuted with <a href="https://techcrunch.com/2019/12/02/diversity-focused-vc-fund-harlem-capital-debuts-with-40m/">its inaugural $40 million fund</a> in 2019 and plans to invest in 1,000 diverse founders over the course of 20 years. After using that $40M fund to invest in 23 companies, Harlem Capital raised <a href="https://harlem.capital/harlem-capital-134-million-fund/">a $134 million fund</a> to invest in even more diverse founders. These diverse founders are building an array of diverse solutions, from <a href="https://harlem.capital/portfolio/curu">credit platforms that provide wider access to loans</a>, to a <a href="https://harlem.capital/portfolio/agape">relationship wellness app for couples</a>, <a href="https://harlem.capital/portfolio/jobble">gig marketplace for independent workers</a>, and more.  “We fundamentally believe we are a venture fund with impact, not an impact fund. The way we generate impact is to give women and minority entrepreneurs ownership,” Harlem Capital managing partner Henri Pierre-Jacques told TechCrunch.   <h4>Example #2: Impact investing in the oil industry</h4> In late 2020, a small activist hedge fund called Engine No. 1 <a href="https://hbr.org/2021/01/can-a-tiny-hedge-fund-push-exxonmobile-towards-sustainability">acquired a $40 million stake</a> in oil giant ExxonMobil, worth about 0.02% of the company’s shares. The hedge fund then wrote <a href="https://reenergizexom.com/materials/letter-to-the-board-of-directors/">an open letter</a> to Exxon’s board of directors to explain why. In that letter, Engine No. 1 pointed out the ways that Exxon had been struggling and failed to deliver shareholder returns. It also pointed out a four-part strategy for fixing this: 1) refresh the board of directors with people who has experience in the energy industry 2) become more disciplined in managing long-term capital allocation 3) implement a plan for the business to thrive in a world pushing away from fossil fuels, and 4) realign management incentives with creating shareholder value. Engine No. 1 then nominated four new directors for Exxon’s board, and campaigned for them during proxy season. After gaining the support of some of Exxon’s largest shareholders, three out of four of those directors won seats on the board. After that, Exxon started <a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/">making measurable advancements</a> towards its new goals. For example, the company committed $15B towards investing in low-carbon solutions over a six year span, announced new scope 1 and scope 2 greenhouse gas targets for 2030, added a low-carbon solutions business unit and got the former head of General Motors’ Cruise to lead it.   <h4>Example #3: Impact investing in response to apartheid </h4> Word about the injustices committed in apartheid-era South Africa spread across the world. While many South African groups fought for their rights, international organizations also joined in to show support in their own way.  By the 1970s and 80s, students at American universities <a href="https://www.universityofcalifornia.edu/news/how-students-helped-end-apartheid">were protesting in solidarity</a> with South African students. Although these American students were thousands of miles away, they thought they could help by pressuring their universities <a href="https://nvdatabase.swarthmore.edu/content/columbia-university-students-win-divestment-apartheid-south-africa-united-states-1985">to divest</a> from companies that supported the apartheid regime. By 1988, <a href="https://www.investopedia.com/articles/economics/08/protest-divestment-south-africa.asp">155 colleges</a> across the US and Canada had divested from South Africa. And soon this movement spread beyond universities. By the end of 1989, 26 states, 22 counties, and over 90 cities <a href="http://richardknight.homestead.com/files/uscorporations.htm">had also created policies</a> against companies doing business in South Africa. This pressure caused many US businesses to pull out of South Africa. From 1985 to 1990, over 200 US companies collectively pulled out of South Africa, resulting in <a href="https://www.investopedia.com/articles/economics/08/protest-divestment-south-africa.asp">a loss of $1 billion</a> in direct investment dollars. Other countries put pressure on their companies to pull out of South Africa too, and by the early 1990s, the South African economy was <a href="http://richardknight.homestead.com/files/uscorporations.htm">feeling the effects of capital flight</a>.   <h4>Example #4: Impact investing in Chicago</h4> Sometimes impact investing is most felt at the local level. The Chicago Community Trust is a foundation that connects philanthropic donors, local organizations, and generous individuals who want to use their money to create a positive impact within the Chicago community. In 2020, the foundation <a href="https://www.cct.org/press-releases/the-chicago-community-trust-launches-impact-investing-platform/">launched</a> an impact investing platform to help facilitate impact-driven investments. The platform also helps investors measure the impact of their contributions by showing if they help low-income neighborhoods, go to businesses run by minority or women owners, help provide affordable housing, or if they provide capital to sustainable energy initiatives.   <h4>Example #5: Impact investing in agricultural development</h4> Lots of people talk about ending world hunger, what are some ways to actually do that? According to Root Capital, by investing in agricultural enterprises in the developing world. Since 1999, Root Capital has been investing in agriculture businesses in Latin America, sub-Saharan Africa, and Southeast Asia. Not only does the organization supply capital, it also provides training to help these companies grow. In addition to creating more steady sources of food, Root Capital also aims to use its investments to help alleviate local poverty, protect the planet, and advance gender inclusion. To date, the organization has <a href="https://rootcapital.org/about-us/">distributed</a> $1.6 billion to over 750 clients, representing 2.3 million farmers and $4.6 billion in economic activity. Risks: Employing ESG strategies may not result in favorable investment performance. The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware, diversity equity and inclusion (DEI), impact investing, or faith-based investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. ∙ ∙ ∙ 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>.

5 Impact Investing Examples: How Investors Push for Change

What does impact investing look like in practice?

Fennel

21 Dec, 2022

5 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

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

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