Capitalizing on its newfound notoriety, Engine No. 1 recently launched an exchange traded fund that seeks to encourage transformational change at the public companies held in its portfolio. This new fund, VOTE ETF, was launched on June 23rd with a reported $100 million in assets and is attempting to replicate the successful strategy that the firm used to elect three dissident candidates to Exxon Mobil Corp.’s Board of Directors.
Engine No. 1 proposes to encourage transformational change through the application of proxy voting guidelines and dialogue with management of the underlying portfolio companies 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 can succeed in its efforts.
To evaluate the viability of the VOTE ETF, it is important for investors to review some of the key reasons why Engine No. 1 succeeded with its proxy fight against Exxon Mobil Corp.
- In the particular case of Exxon Mobil, Engine No. 1 was able to bring together a coalition of the world’s largest investment management firms (e.g. BlackRock, Vanguard, State Street, etc.) and asset owners (e.g. California Public Employees’ Retirement System (CalPERS), New York State Common Retirement Fund, etc.) who sided with the environmental issues of this hedge fund.
- The investment firms and asset owners that sided with Engine No. 1 held nearly 20% of the voting shares of Exxon Mobil Corp.
- The hedge fund ran a reported $30 million campaign over six months aimed at electing its proposed four independent director candidates.
It is also important for sustainable investors to take into consideration the following tradeoffs in such an investment strategy.
- Investors that integrate ESG into their investment decision process will be exposed to sectors (e.g. Energy, Materials and Industrials, etc.) and portfolio securities that may not otherwise qualify for investment in an ESG-weighted portfolio.
- Investors will be anticipating proxy victories that might not actually come to fruition.
Some of the obstacles the VOTE ETF will need to overcome in achieving its strategic goals are:
- The same institutional investors may not join forces with Engine No. 1 in the future and this may challenge VOTE ETF’s ability to achieve positive outcomes.
- The largest current holding in the VOTE ETF index is Apple, Inc., at 6.73%, while the fifth largest holding, Alphabet Inc. Class A makes up only 2.35% of the index. These holdings alone fall short of the levels required to achieve successful outcomes.
- Priced at an attractive 0.05%, the VOTE ETF 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.
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 reviewing the key reasons for Engine No. 1’s past success, investor tradeoffs and obstacles in achieving their strategic goals, we believe that their ability to achieve multiple Exxon Mobil type victories, within the VOTE ETF portfolio, will be very difficult to achieve.