I had a couple other thoughts but they weren’t that relevant and my comment was getting too long.
1. Shareholder advocacy often combats displacement effects because the campaigns often target entire industries (see Farm Animal Investment Risk and Return or Boston Common Asset Management’s Banks and Climate Change work as examples).
2. It makes sense for index investors to advocate for corporate policies that benefit their entire portfolio. They have incentives to encourage companies to minimize negative externalities (funny enough, some academics worry that index investors will discourage competition, and want to make them illegal). I’m not making any particular argument here, because if big investors explicitly acted on this line of reasoning it probably would become illegal, but I do find the thought interesting so I wanted to raise the point.
3. More people should be exploiting the clever hack! That’s actually how I got into this space :)
Responding here to John’s and Hauke’s comments above. I hugely appreciate these comments. Especially the highlighting of the marginal impact of the individual, that’s exactly the framework of analysis needed.
I want to focus specifically on the added value of being a shareholder for advocacy.
Nonprofits are able to be more radical, and have the edge in reaching the attention of the mainstream public—which is likely most important in advocacy campaigns focused on consumer-facing brands.
As I see it, both shareholder and nonprofit advocates have the ability to build larger coalitions, influence policy, and generate media attention.
But shareholder advocates are likely to be more effective for some campaigns. Shareholders are more primary stakeholders, can more easily meet with corporate decision-makers, have more credibility in interactions, can promote and frame issues in a business sense (this, by the way, is one of the most effective factors in shareholder engagement).
Shareholders can take established issues and push them over a critical threshold. They can be more effective when dealing with issues that are less obvious to the general public but still present long-term risks to corporations, as well as working with companies that aren’t consumer facing.
It is also likely that shareholders hold a particular advantage over advocacy nonprofits in authoritarian countries that are becoming increasingly antagonistic to nonprofits, while welcoming foreign investment.
I would love to more thoroughly map out what scenarios are most effective for shareholders vs. nonprofits, could be a great guide for effective advocacy.
On marginal impact and what an individual can do:
For most individual investors, the decision is which mutual fund to invest in. By investing in a fund that does shareholder advocacy on one’s behalf, the individual increases the mutual fund’s earnings, which helps it expand advocacy operations. Now if the fund didn’t do advocacy, those fees could have gone to a nonprofit so it could expand its operations and conduct more advocacy. But as I explained above I think there are a sufficient number of scenarios where that tradeoff would be worth it (I don’t think that shareholder advocacy should replace nonprofit advocacy, but I do think that it is much more neglected, and there are a lot of easy opportunities for shareholder advocacy impact).
The potential of SRI at scale is to have more shareholder advocacy staff to run more and bigger campaigns. Not just to have more assets behind a request.
Kit, thanks for making that distinction.
All I (personally, can’t speak for Max) tried to convey was that there is substantial evidence that impact investing has not led to underperformance (can’t say anything about the future because as every financial disclaimer says: past performance is not indicative of future results).
Of course, studies showing historical outperformance from ESG are useful to make Kit’s latter point that SRI has not undermined the bottom line
I don’t know if this is necessarily true, because often times outperforming firms get inflows of assets. Then they wouldn’t have to raise their fees because they make more money by taking the same (or lower) fees off of a larger pool of assets.
There may be research out there that completely disproves my hypothesis, it is just a hypothesis, but I don’t think one can necessarily make that logical jump.
Thanks for the comment! I don’t fully understand the point you’re making in the second paragraph, do you mind expanding a bit?
On your first p0int, you would be correct assuming efficient markets and that all information is priced in. A lot of ESG research has been making the claim that ESG factors are material, and often ignored by mainstream managers (not priced in). This could lead to the result you describe.
I could understand that you may be skeptical of ESG being material and not priced in. I will say that discussion of ESG factors is showing up in more and more mainstream investment managers reports in the context of “just good business”, indicating that investment managers are starting to look more at ESG factors as material.
I’m glad you’re excited about this idea. Making the business case to companies to take AI safety seriously, from an investor perspective, could be an important angle to getting more companies to take it seriously.
Not much difference between 1 and 100 shares. Influence certainly depends on number of shares, but it’s more dependent on credibility. There are a number of great examples of smaller investors with issue area expertise substantially affecting corporate operations. And other small investors have raised new issues from new angles to company management. More still have built coalitions, and garnered significant press. All pathways to impact.
James Gifford has done the best work on this, and the executive summary is especially worth a read: https://www.slideshare.net/slideshow/embed_code/key/E28F5ODb5Rk2tu (sorry it’s in a terrible format, that’s the only version I could find that’s not behind a pay wall).
You posed some fantastic questions, jjharris!
By using your shares to support an advocacy campaign with an individual stock, I think you will marginally increase the success probability of the campaign. I can’t say that you will generate abnormal returns. I did link to a couple studies that correlate successful advocacy campaigns with outperformance, but it’s in no way guaranteed.
Separately (or additionally), investing in a mutual fund/ETF run by an impact-focused investment manager gives it more assets, which gives it more operational capacity to pursue more social good, as well as a more powerful voice in all its advocacy campaigns.
How does impact scale with a greater holding: James Gifford has the seminal work on this topic (https://www.slideshare.net/slideshow/embed_code/key/E28F5ODb5Rk2tu). Gifford finds some correlation between assets and effective engagement. But he makes the critical point that successful shareholder advocacy operates primarily on persuasion, not coercion. Having more assets does increase a shareholder advocate’s credibility, but it’s really about ability to convince management.
Also, Gifford details how smaller investors have been able to raise issues to companies from the shareholder perspective, and build coalitions/generate press coverage to leverage their small stake and still drive impact.
Your question of whether it’s the best investment of your time is another good one, and very difficult to answer. There is not sufficient academic research comparing the effectiveness of advocacy from the shareholder angle to advocacy from traditional nonprofit angles. I think this would be a very worthwhile pursuit, and would love to see this happen. I will say that some nonprofits (animal welfare ones especially) have seen the value of the shareholder angle, and have partnered with investors, or used their own endowments as leverage in the past.
The reason why I wanted to write this piece (my perspective, can’t speak for Max) was to make the point that shareholder advocacy has been historically successful, and that it is not obvious that one that pursues a shareholder advocacy investment strategy (themselves or investing in a shareholder advocacy fund) will lead to financial underperformance. Therefore, shareholder advocacy should not be written off, and is worthy of consideration of serious EA individuals and organizations.
Edited to reflect this comment, thank you.