As investors, we vote with our dollars, whether we realize it or not. Where we invest and what companies we support has an impact on society as a whole, and funds can help investors use their money to make a positive impact.
Actively managed mutual funds have many ways to make a difference, including: • divesting from companies they find objectionable; • investing in companies with strong environmental, social and governance (ESG) practices; • using their power as large shareholders to file and vote on resolutions that encourage companies to address important ESG issues and risks; and • engaging directly with a company’s management team.
Many funds have used all or some of these tools for decades and made significant progress. In the other realm are index funds, which are designed to passively track a particular market index. Therefore, investors are not able to take action by divesting from companies that may get into trouble. For example, because Wells Fargo is in the S&P 500 index, passive funds tracking the S&P 500 had no recourse when the bank admitted to illegally opening millions of fraudulent accounts and was fined $1 billion. Actively managed funds, on the other hand, could choose to sell Wells Fargo and move on to other bank stocks.
Index funds often are among a company’s largest investors, so the best way they can effect change is to vote on shareholder resolutions. But major index fund companies, like Vanguard or BlackRock (iShares), have rarely voted on these proposals. And when they have voted, they usually supported the status quo and voted with management rather than pushing companies to do better.
Things are changing There are signs that index funds are starting to get more involved. This year, BlackRock CEO Laurence D. Fink told S&P 500 companies that they needed to conduct business more responsibly.
Index fund providers also are beginning to vote for change. Last year, BlackRock, Vanguard, and State Street made the news when, for the first time, they voted in favor of a resolution that required Exxon to report on the financial impact that climate change could have on the company.
Vanguard also voted in favor of 47% of shareholder proposals regarding a company’s board of directors in 2017, compared to supporting just 17% of such proposals in 2016.