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Shareholder Activism - What you need to know

As ESG investing gains more popularity, shareholder activism is a critical concept to understand that can effect how to most effectively drive that change. 

Today we're going to talk about:

  • What is Shareholder Activism?

  • Types of shareholder activism 

  • Why should investors care about shareholder activism? 

  • Institutional investors vs. everyday investors

  • What impact does shareholder activism have? 

What is Shareholder Activism?

Shareholder activism could be encouraging change within a company because you don't believe they are maximizing a certain business potential. 

It could be encouraging change to improve currently poor environmental, social or governance issue.

Or it could be any list of other issues to drive change within a company. 

Ultimately, activism is about driving change. 

Specific to stock shareholders, shareholder activism is trying to bring about change within a company without necessarily influencing a change in control. 

Types of shareholder activism

We'll first give a brief overview of the main types of shareholder activism, then talk about how and when these types could be the most effective. 

Divesting / Exiting
Voting
Behind the Scenes Engagement
Public Disagreeance
Shareholder Resolutions
Initiate a Takeover

Divesting / Exiting

Divesting is one of the easiest ways for an individual investor to engage in shareholder activism. However, one could argue that this doesn't provide much measurable change (as individual investors). 

Let’s look at this practically (if a bit nerdily)

 

You have a $100,000 investment portfolio. You’re young so you’re in a 80/20 portfolio and using the Vanguard Total Stock market index fund for the 80% that is in stocks.

 

As of 11/30/18,  5.2% of this fund was invested into oil & gas companies. This means of your $100k, roughly $4,160 of your portfolio is invested into oil and gas companies. ($100k x 80% x 5.2%). 

 

As of 12/31/18, this fund invested in 3,545 companies according to Morningstar. That means roughly 184 potential oil and gas companies in this 5.2%.

 

If you chose a similar sustainable investment that excluded oil and gas companies, each of these 184 companies would only lose out on a $22 investment because of your choice to invest responsibly.

Voting 

When you own a stock, you are a partial owner in that company. As an owner, you have the right to vote on:

  • Board of Directors

  • Proposed operational alterations

  • Stock splits

  • Mergers & acquisitions 

  • Executive compensation

  • and more...

Voting is primarily done at the corporation's annual general meeting or by proxy. 

Since mutual fund managers are fiduciaries, there is generally a high level of voting among fund managers. 

However, if you really want to affect change, smaller and more concentrated investment funds are more likely to have an independent voting mandate.1

This is another reason why I believe that for the greatest impact, you may need to consider an actively managed ESG investment fund instead of an index fund.  To read more, check out this article

Behind the Scenes Engagement 

Engaging a company behind the scenes is a good way to offer influence without engaging in a public campaign such as a shareholder resolution.

 

As an individual investor however, this is likely to be much more difficult. You will likely encounter barriers with getting in touch with executives and having them listen to you. 

According to research by Amundi Asset Management, a majority of institutional investors have engaged in discussions with management of companies in their portfolio within recent years.1

Primarily institutional mangers tend to engage in matters that are in the best interest of shareholders. Common topics include:

  • Board independence

  • Unequal Voting Rights

  • Executive Compensation

Public Disagreeance

Normally this will come in the form of physical protesting, or more likely... those lovely Social Media shaming posts... 

This is not a form of shareholder activism that institutional investors tend to take. This primarily comes from the individual investor and with fairly limited success...

Shareholder Resolutions

Shareholders who hold either $2,000 worth company stock or 1% of company shares can submit a shareholder resolution. 

A shareholder resolution is a proposal that can be voted on at a company's annual meeting. 

These proposals are frequently about:

  • Board Refreshment

  • Board Diversity

  • ESG proposals (Environmental, Social or Governance)

Shareholder resolutions are rarely filed by institutional investors and are mainly filed by shareholder activism organizations or smaller boutique asset managers.  

For an idea of what this looks like from an asset manager that focuses on this, check out Green Century

For an idea of what this looks like from a shareholder activism organization, check out As You Sow.

Initiate a Takeover

Admittidly, this is not an extremly common strategy. Expecially for individual in

What do ESG bonds finance? 

Source: Visual Capitalist 

How do ESG bonds perform compared to a traditional investment? 

Before we dig into performance of ESG bonds, let's first point out two caveats:  

1) Most performance research of ESG investments has focused on stock investments. 

2) Unlike stocks, bonds are typically not investments meant to generate large investment gains. 

  • Bonds are typically purchased for their yield and because they are non correlating asset class for stocks. (they tend to zig when stocks zag)

According to a study by Amundi Asset Management, the "benefit" of using ESG data with bond investing seemingly depends on what type of bonds you purchase. 2

Mainly, European vs. American. 

Source: Amundi Asset Management 

This is broken down into European (EUR) & US Dollar (USD) based investment grade (IG) bonds. 

A few things were discovered in their research:  

1) European based ESG bonds had a slightly higher overall average return (37 basis points = 0.37%)

2) US Dollar based ESG bonds had slightly lower overall average return (-32 basis points = -0.32%)

3) The greatest benefit of ESG data was found in European ESG bonds focused on Social (S) factors. 

4) In general, ESG bonds underperformed traditional bonds during 2010 - 2013 & generally outperformed traditional bonds from 2014 - 2019.  

What does the future look like for ESG bonds? 

ESG investing has seen record amounts of investments in recent years. Most of this has been into stocks so far, but I think the trend is clear.  

To learn more about this trend, check out this article

The ESG bond market is currently pretty small. But ESG bonds are being issued more frequently.

Demand for ESG bonds has been growing, but there has not been enough supply.

 

As more companies start to integrate sustainability into their business practices, I believe the supply will grow to meet the demand. 

What this all means for you:

Bonds can at times be overlooked in a portfolio because they are the are "less sexy" than stocks. 

Stocks provide the performance, bonds provide the shock absorption of a portfolio. 

But, ESG bonds provide a unique opportunity for impact. 

While stocks are traded more frequently, bondholders tend to be along for the long term. This means that fund managers may have a higher chance to affect change through shareholder activism. 

For the sustainable ESG investor, ESG bonds could be a primary tool to effect the positive impact we're hoping to see... 

If you don't know where to get started, I would encourage you to check out our Ultimate Guide to ESG Investments.  

If you're on the fence about ESG investing, check out Five Reasons Why you should consider Sustainable Investing. 

If you want tools so you can do your own investment research, check out these tools.  

If you prefer to delegate, feel free to schedule a phone call.  We're happy to help...

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1) Shareholder Activism: Why should investors care? - Amundi Asset Management 2018

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Advisory services offered through Resources Investment Advisors, LLC. ("RIA"), an SEC-registered investment adviser.