While this year’s proxy season may be over, Engine No. 1’s work to transform shareholder activism is just getting started. A little over a month ago, the hedge fund declared victory in a proxy battle with ExxonMobil aimed at changing the company’s approach to the clean energy transition through its board leadership. With just a 0.02% stake in the company, Engine No. 1 won the support of institutional investors including BlackRock, CalSTRS, State Street, and Vanguard to elect three of its four new proposed directors to the board.
Now, the firm is now bringing this activist engagement strategy to the public. Engine No. 1 recently launched its first exchange-traded fund: the Transform 500 ETF. The ETF is a market cap-weighted fund of the 500 largest companies in the United States. The Transform 500 ETF doesn’t exclude or re-weight companies by performance against certain environmental, social, or governance (ESG) metrics. Rather, it delivers impact through how it engages with the companies it’s invested in and votes its shares.
And while Engine No. 1 may have introduced the ETF on the back of its win over Exxon, for founder Chris James, this was the plan from the outset. When first leaving his job in 2019 to start Engine No. 1, James intended to launch it with an ETF. Two years and one significant success in shareholder activism later, Engine No. 1’s brought James’ vision to the market under the ticker, VOTE. The firm’s also making the ETF easily accessible to a large chunk of retail investors in partnership with Betterment.
Betterment launched in 2010 as the first automated, online investment platform – and now manages $30 billion on behalf of 650,000 clients. The company offers three ESG portfolios, all of which will include the Transform 500 ETF. Betterment developed its first ESG portfolio in 2017 and, in the years since, interest has soared. Morningstar data shows asset flows into U.S. sustainable open-end and exchange traded funds reached a record $51.1 billion in 2020, up by more than double 2019’s total and nearly 10 times higher than 2018 flows. ESG asset flows are booming, but the wider corporate and economic change they target hasn’t kept up.
With the Transform 500 ETF, Engine No. 1 is looking to change that. “What’s really happening or different by shifting exposures as opposed to really changing companies?,” Yasmin Dahya Bilger, Engine No. 1 Managing Director and Head of ETFs said on the pitfalls of traditional ESG investing in a recent LinkedIn Live conversation with JUST CEO Martin Whittaker. Engine No. 1 Managing Director, Michael O’Leary, and Betterment SVP of Operations, Boris Khentov, joined Dahya Bilger to discuss how the new ETF’s approach could transform retail ESG investing and make shareholder activism a mainstream mechanism for change.
You can watch the full conversation here and read on for our key takeaways.
Engine No. 1 sees the Transform 500 ETF as a way to invite the everyday investor to “take your seat at the table.” The ETF is not only leading with a different strategy, it’s making a complex process only major shareholders tend to be well-versed in, proxy voting, the business of retail investors. That decision, Dahya Bilger and O’Leary noted, was one the firm made to address the need for a more tangible way for individual investors to see impact with their dollars.
“I think people don’t even know that their money has a voice,” Dahya Bilger said. “They don’t even realize that they are in charge, they are the shareholder, they have decision-making capacity that hasn’t been harnessed.” The Transform 500 ETF, as its VOTE ticker makes clear, is designed to democratize shareholder engagement. And that’s part of what made a partnership with Engine No. 1 an appealing decision for Betterment.
Khentov brought up the fact that for an individual investor, this is an opportunity to be part of a broader movement. “We all just want to be part of something that’s bigger than ourselves, ultimately. With our money, it’s no exception,” he said. He raised the recent “meme stock” trend among retail investors as an example of the power of collective action. It’s not just data, he thinks, that will get retail investors on board with an ESG approach. It’s narrative.
“There’s a way for us to pool our dollars and be heard, and have an impact,” Khentov said. “And who doesn’t want to be a part of something like that? When we saw this Exxon proxy battle…we knew that our customers and investors generally would want to be part of that. It’s such a transformational thing to be able to say, ‘My portfolio in my 401k was part of that.’”
He also sees the product potential in an ETF like the Transform 500. Values-driven investing, he said, is just the latest mandate from Betterment clients. He sees Engine No. 1’s ETF strategy as the drive behind a new category of product. In the same way Betterment helped make retail investing more accessible and approachable ten years ago, the Transform 500 ETF could have a similar effect on proxy voting and shareholder activism.
Right now, O’Leary said, it can be hard for individuals to know how the shares that make up their retirement plans, or other accounts are being voted in these proxy battles. And, more often than not, mandated reporting shows that they’re not voting in favor of ESG proposals. With the Transform 500 ETF, Engine No. 1 is aiming to set a new standard for transparency and accountability among investors on proxy voting, O’Leary said.
It’s why the firm’s pushing forward campaigns like Reenergize Exxon and exploring others on issues like fair wages and racial equity that JUST polling shows are top of mind for Americans. It’s also why the ETF’s campaigns will focus not on engaging all 500 companies it’s invested in, O’Leary noted, but the ones where it sees the most potential for impact with these campaigns.
Both Dahya Bilger and O’Leary made the point that this is just the start for Engine No. 1’s ETF strategy. Dahya Bilger emphasized that the firm built its ETF business for the long term and for scale. “We’re not playing for a niche part of the market. We’re actually going for what is effectively in most portfolios, people’s core,” she said. What will be key to its success, however, is building broad support among other investors.
“When you are an investor in a public company, you are only ever as strong as your coalition,” O’Leary said. If support for Engine No. 1 in the battle against Exxon is any indication, corporate America should prepare to face a new fuel to the proxy fight: retail investors.
If you want to stay in the loop for more discussions with foremost experts in the ESG investing space as soon as they go live, be sure to follow Martin Whittaker on LinkedIn.