The Bottom Line: Engine No. 1 launched an exchange traded fund focused on proxy voting strategies but passively managed securities will not be ESG qualified.
Engine No.1 set to launch VOTE ETF to reproduce Exxon Mobil proxy strategies
Capitalizing on its newfound notoriety, Engine No. 1 launched on June 23rd an exchange traded fund with a reported $100 million in assets that seeks to encourage transformational change at the public companies within its portfolio through the application of proxy voting guidelines and dialogue with management of the portfolio companies, thus attempting to replicate the strategy that the firm used to elect three dissident candidates to Exxon Mobil Corp.’s Board of Directors. This time, Engine No. 1 proposes to do so via an ETF that invests its assets passively in an index consisting of the 500 largest U.S. stocks by market capitalization as determined by Morningstar. According to press accounts, the ETF is intended to appeal to Main Street investors who want portfolios to back environmental, social and governance proposals. While this may be the intention, it remains to be seen whether Engine No. 1 succeeds in its efforts without also bringing together the coalition of institutional investors that empowered Engine No. 1’s successful proxy fight against Exxon Mobil. In the meantime, investors interested in pursuing sustainable investment strategies will be exposed to sectors and portfolio securities that would not otherwise typically qualify for investment in funds that integrate ESG into investment decision making while would be investors in VOTE would be anticipating proxy victories that might not actually come to fruition. Investors seeking to achieve a sustainable investing strategy through impact, however, will have to consider these tradeoffs before making a decision to invest in the fund.
It remains to be seen whether VOTE will be able to replicate its Exxon Mobil proxy voting strategy to achieve positive outcomes.
Engine No. 1 is basking in the glow of victory achieved in late May when a number of the world’s largest investment management firms and asset owners sided in this particular case with an environmental activist hedge fund and the leading proxy voting firms to elect three dissident candidates to Exxon Mobil Corp.’s Board of Directors. This is based on updated preliminary results for the election of directors at Exxon Mobil’s annual meeting of shareholders held on May 26, 2021 that were announced on June 2nd. In particular, firms like BlackRock, Vanguard and State Street, which together reportedly held nearly 20% of the voting shares, along with the California Public Employees’ Retirement System (CalPERS) and the New York State Common Retirement Fund, to mention just a few, voted in favor of some of the directors put forward by Engine No. 1—a small hedge fund with about a 0.02% share ownership in Exxon Mobil Corp. The hedge fund ran a reported $30 million campaign over six months aimed at electing its proposed four independent director candidates to the Exxon Mobil Board of Directors so that they might help the firm navigate the risks and opportunities facing the oil company in a rapidly changing industry. The outcome illustrated that under certain circumstances, institutional firms, when acting in unison, have the power to influence proxy contests that are not supported by the company. That said, the same institutional investors may not join forces with Engine No. 1 in the future and this may challenge VOTE to achieve positive outcomes. On its own, the largest current holding in the index, Apple, Inc., makes up 6.73% while the fifth largest, Alphabet Inc. Class A makes up 2.35% and lower still thereafter. These holdings alone fall short of the levels required to achieve successful outcomes. Nor is it clear how Engine No. 1 will finance such efforts given the reported $30 million spent on the Exxon Mobil campaign. Priced at an attractive 0.05%, the fund will have to reach $60 billion in assets to generate an equivalent revenue stream that would potentially support only one Exxon Mobil like proxy fight. Otherwise, Engine No.1 will have to directly finance future proxy fights.
Fund will invest in the 500 largest U.S stocks that may not otherwise qualify for investment in an ESG-weighted portfolios that integrate ESG
According to the fund’s June 21, 2021 prospectus filing, the passively managed fund will invest in the 500 largest U.S. stocks by market capitalization. Because they are not otherwise qualified, these stocks will include companies with poor ESG records and/or companies that have attempted to address and remediate ESG risks or companies with declining ESG scores. These stocks are likely to straddle industries such as Energy, Materials and Industrials that may not otherwise qualify for investment in an ESG-weighted portfolios that integrate ESG.
VOTE’s proxy voting guidelines, according to the fund’s prospectus filing, are based on a commitment to protecting and enhancing the value of its clients’ assets and to aligning shareholder and stakeholder interests through favoring actions that encourage companies to invest in their employees, communities, customers and the environment. In applying the proxy voting guidelines and in seeking to engage in opportunities for dialogue with companies within the fund’s portfolio, Engine No. 1 intends to measure and assess the investment made by companies in their employees, communities, customers and the environment with financial, operational, and environmental, social and governance metrics that are obtained from multiple sources. The prospectus goes on to note that Engine No. 1 will generally follow the recommendations of an independent third party proxy voting service to implement the proxy voting guidelines when determining how to vote on any specific matter.