By Shelburne, Vermont Financial Advisor Josh Kruk
June 4, 2021
By now, some of you have probably read about the recent ExxonMobil (XOM) proxy vote in which Engine No. 1, an upstart activist hedge fund, stunned the investing community by successfully placing at least two new directors1 on XOM’s board in spite of the company’s vocal opposition. Although it owns only 0.02% of XOM’s outstanding stock, Engine No. 1 marshalled voter support by hammering away at XOM’s slow-footed business response to climate threats.
Of particular interest to us is that BlackRock and Vanguard were among the large investors backing at least some of Engine No. 1’s proposed board candidates. As our investors know, we are big proponents of low-cost index fund strategies. BlackRock and Vanguard set the standard in this area, and both have significant representation in our portfolios (environmental and traditional strategies alike).
An area of focus and concern for many has been how these firms, and other large peers like State Street, would leverage their huge index fund holdings in proxy votes, particularly relative to votes dealing with climate risk. Index funds are designed to passively hold the stocks of all of the underlying companies in the index. While we think this generally makes investing sense, it doesn’t really provide a huge incentive to lean on companies to act a certain way2.
As we have mentioned in previous posts, BlackRock’s CEO, Larry Fink, has been especially vocal about the need for corporate boards and management teams to address climate risk. Yet, BlackRock has also drawn activist fire for not being aggressive enough in climate-related proxy votes, preferring instead to use behind-the-scenes pressure to try to influence company management.
It’s possible that the XOM vote will be more of a one-off event than most people believe. Let’s face it…even when compared to other traditional energy companies, XOM’s response to climate risk so far has been the equivalent of bringing a tricycle to the Tour de France. They’re a pretty easy target.
But this result and the amount of attention it received will probably embolden more Engine No.1 style raids. That in turn will keep the focus on how the big index investors respond. If the XOM vote is in fact a preview of what is to come and Vanguard and BlackRock really start throwing their weight around, every corporate management team should pay attention.
“A refusal to accept that fossil fuel demand may decline in decades to come has led to a failure to take even initial steps towards evolution, and to obfuscating rather than addressing long-term business risk.” – Excerpt from a recent Engine No. 1 presentation regarding XOM.
“When we meet with the company, the executive management team does most of the talking. They were unwilling to listen to shareholder concerns.” – Aeisha Mastagni of the California State Teachers’ Retirement System, which backed Engine No. 1's proposal.
“It is highly unlikely that the temperature in the middle of the next century will be significantly affected whether policies are enacted now or 20 years from now.” – Former XOM CEO Lee Raymond in a 1997 address to the World Petroleum Congress. This one did not age particularly well.
Notes
1. As of now, the outcome for a potential third board seat is still being resolved. 2. For our environmental strategies, we choose indexes that are constructed with much lower exposure to the areas we want to avoid, such as fossil fuels.