State Street: Shareholder Activism Works

Do the managers running ESG funds really massage the moral fibers of their peace-and-love shareholders? Absolutely they do, says Rahki Kumar, head of ESG Investments and Asset Stewardship for State Street Global Advisors. “Because we are invested in thousands of companies through our index strategies, we have developed a scalable framework for deciding the issues and companies to focus on in order to maximize our impact,” she says. “We prioritize across a number of factors: the size of our holdings; poor long-term financial performance within a sector; lagging market or industry standards; and issues tied to emerging environmental, social or governance risks,“ she says about their stock picking strategies within ESG. And what do they do to hold these companies accountable to clean air, clean water, and women in the workplace? She gives an example of two companies, one was a U.S. energy sector company was exploring how to navigate the challenges of falling crude oil prices, geopolitical risks and domestic environmental rules. Another company was a Taiwanese food packaging firm where food safety was an issue. “After a multi-year engagement… on environmental standards, we saw significant improvements in the quality and transparency of reporting around hydraulic fracturing processes as well as water and waste management practices,” she says as an example. State Street Advisors working on ESG funds meet with board directors from companies they invest in. Each year, they issue detailed guidance around specific ESG issues and publish quarterly reports on their engagement and proxy voting. If the shareholders disagree with an action, State Street Global Advisors brings that to the board. If there are no changes and the company fails to meet their ESG criteria, then the fund can sell out of the asset. In theory, ESG investors can be third-party consultants helping companies save electricity, or devise solutions for workplace safety. For newcomers, ESG stands for environmental, social and governance. Basically an ESG fund is geared towards attracting investors who are concerned with economic sustainability and fair practices by its corporate managers. They don’t want sweat shop labor. They don’t want trees being cut down in the Amazon to make cardboard boxes used to hold their morning cereal. Some may not want genetically modified organisms. Each fund is different and has their own set of factors for choosing a company. ESG products were initially made to appeal to big institutional investors, such as college endowments, who faced pressure from student activist groups to divest in certain entities, particularly defense contractors. Today, ESG is witnessing increased interest among retail investors. Morningstar now has a sustainability rating system for mutual funds. They partnered with the research firm Sustainalytics to help rate ESG funds versus their Morningstar category peers. So now RIAs can compare both fund performance and its manager’s ESG street cred on a large number of funds before committing to one. This might help ESG savvy investment advisors build their own portfolio for their clients. A lot of the success of ESG activism will depend on the company itself. Not only that, the success of an activist shareholder will depend on the importance that shareholder has within the holdings of an individual company. A fund with a mere 1% holding in Shake Shack (SHAK 104,28 +1,90 +1,86%) probably won’t hold much sway for investors looking to pressure companies into providing health benefits for part time workers. “Engagement is a two-way street,” says Kumar. “We are committed to providing maximum transparency to our portfolio companies around our views, expectations and voting decisions. We also work with other asset managers and asset owners to create principles aimed at promoting good governance and protecting the shareholder interests of long-term investors,” she says. Last month, the RIA Channel hosted an online seminar called Invest4Impact where fund managers gave their ideas on how to put client money in ESG funds. A replay of the show can be seen here.