We now consider the many companies that neither directly produce fuel for greenhouse gases, nor work actively to improve the environment. Just as individuals have a tendency to put greenhouse gases into the air through our daily activities, so do these companies, some on a large scale. To transform the economy, we must encourage these companies to reduce, and eventually eliminate, the practices that are harmful to the environment. Influencing a company is very difficult for an individual investor. However, like-minded individual investors can band together by investing in a mutual fund that acts in a transformative way.
Individual investors can band together in a transformative way.
A transformative mutual fund is a shareholder-advocacy fund. It starts by owning stock shares of many nominally “clean” companies. The companies do not directly produce greenhouse gases, but they do not work directly to improve the environment either. The fund is a partial owner of each of these companies. A transformative fund takes this partial ownership seriously, as an active shareholder. It employs advocates who study how the nominally clean companies’ environmental practices could be improved, such as by reducing their use of electricity produced by fossil fuels, or reducing plastic packaging, or ending agricultural practices that disturb natural carbon-storing acreage. The fund’s advocates then engage, or negotiate, with the managers of these companies to encourage them to adopt more sustainable practices.
An Actual Example
This is a condensed description of a true set of events from a few years ago. The names of the companies in this example are not important. However, the events themselves are important, because they illustrate one way that shareholder advocacy can work in practice.
In 2018 a shareholder-advocacy mutual fund owned some shares of Verizon. The fund managers looked through the company’s books, and saw that only 4% of the electricity that Verizon used came from clean sources — wind and solar. The rest came from burning fossil fuels. So the fund requested a meeting with representatives of Verizon.
The minutes have not been published, but the meeting presumably opened with the usual cordialities. It became clear, however, that Verizon was not willing to change their sources of electricity. So the mutual fund representatives thanked the Verizon representatives for meeting with them, and informed them that they would prepare a shareholder resolution. They would present it at the next annual meeting and put it to a vote of all the shareholders.
It happened in this case that there was also a second mutual fund which had the same sort of approach. It asked to co-sponsor the shareholder resolution, and they prepared a joint resolution. Then at some time someone must have said, “Maybe we should all talk again.” So Verizon and people from the two mutual funds got together and worked out a deal that was financially and technologically feasible. It had a timetable of steps, so that Verizon would get 50% of its electricity from clean sources by 2025. This was acceptable to everyone, and the mutual funds withdrew their proposal.
Individuals' investments can combine to help transform the environment.
In this example, a small portion of each investor's money went towards paying for the team that negotiated to make something happen that wouldn’t have happened otherwise! The investor could legitimately say, “My investment helped bend the climate trend, reducing the rate of climate change.” This is transformative investing!
Shareholder advocacy can make a stock fund transformative.