New Engine No. 1 ETF builds momentum for climate-aligned proxy voting

Climate-aligned finance requires more than just investing in companies in low-emissions sectors; it involves wielding shareholder power to push high-emitting sectors to decarbonize.

Too often, however, climate-friendly investment products focus on only the first half of this equation, directing capital to sectors with small carbon footprints and avoiding carbon-intensive sectors. While excluding heavy emitters from climate-focused funds can send a powerful signal, it’s also critical that investors use their leverage to improve climate risk management at the very firms in need of new environmental leadership.

Fortunately, the universe of climate-aligned financial products is changing. Last week, hedge fund Engine No. 1 followed in the footsteps of socially responsible investment firms by launching the Transform 500 ETF, a fund that, unlike comparable index funds, plans to use shareholder voting and corporate dialogue to steer the 500 largest US public companies towards improved environmental, social, and governance (ESG) standards.

This ETF sends an important message to other asset managers and consumers that the climate integrity of a financial product depends on not only what stocks it invests in but how fund managers engage portfolio companies.

The importance of proxy voting

One of the most powerful tools investors have to fight climate change is their influence. Corporate management teams value investor opinions and have cited investor pressure as a growing motivator for net zero ambition and planning.

Investors can make their concerns known by voting at companies’ annual meetings. Every year, shareholders have an opportunity to elect corporate board members and vote for proposals on ESG issues. These votes can compel corporate executives to take meaningful steps towards emissions reduction.

In response to 2020 shareholder votes, for example, Chevron published an annual report on its climate lobbying, while J.B. Hunt released its first-ever climate action plan. More notably, this May, investors elected three new candidates to ExxonMobil’s board. These developments highlight the impact of shareholder voting on corporate climate risk management.

Voting is particularly crucial for index funds like the Transform 500 ETF. These products track stock indexes like the S&P 500 and thus have limited flexibility in selecting portfolio companies ― their influence stems almost entirely from how they engage corporate executives and vote at annual meetings. Index funds, which hold over $4 trillion in assets, can drive effective climate management at the world’s largest public companies by devoting heightened attention to voting and corporate engagement.

Raising consumer awareness on proxy voting

Additionally, products like the Transform 500 ETF can help make shareholder voting more central to how individuals make investment decisions.

For years, consumers have focused almost entirely on three factors when selecting ETFs and mutual funds: financial performance, the price of the fund, and the companies that the fund includes.

The irony is that most ETFs and mutual funds found in millions of Americans’ retirement portfolios have nearly identical fees and compositions. Voting is a key differentiating factor ― a factor often overlooked and misunderstood.

Products like the Transform 500 ETF can help raise consumer awareness on shareholder voting and ultimately make investment stewardship core to the marketing of ETFs and mutual funds. Consumers should know how their money is being used to influence management decisions at high-emitting companies.

How other funds can follow

The voting strategy championed by the Transform 500 ETF and socially responsible investment firms like Domini and Green Century should not remain a niche tool; it can also be adopted by the world’s largest asset managers to promote responsible climate planning at companies across the economy.

Fund managers can take three steps to build on recent momentum:

• Disclose: By transparently and accurately disclosing how they vote their shares, fund managers can provide consumers with the necessary information to compare the climate impact of financial products.
• Coordinate: Lasting corporate climate progress depends on coordinated dialogue between multiple investors and company management. Fund managers can safeguard their clients from climate risk by working together to set clear, unified expectations for carbon-intensive companies.
• Vote: How fund managers vote is key to the credibility of their climate aligned investment.

These three steps also apply to Engine No. 1 as it translates its announcement into action.

Asset managers have stepped up this proxy season with strong votes on climate-critical resolutions. But more can be done. Offering financial products that bring consumers’ climate concerns to the board room represents a crucial next step in sustainable finance.