Using ETFs In ESG Activism

Yasmin Bilger is a managing director and head of ETFs for Engine No. 1, an investment firm that sent tremors through corporate boardrooms last month after winning three seats on ExxonMobil’s board despite owning just 0.02% of the oil giant’s shares. It won those seats by convincing the company’s largest shareholders that the company needs to pivot quickly to renewables, over the fierce opposition of Exxon’s management.

Earlier this week, Engine No. 1 launched its first ETF, the Engine No. 1 Transform 500 ETF (VOTE), as a way to bring its shareholder activism to an index of companies substantially similar to the S&P 500.

The following transcript has been edited for clarity.

ETF.com: Why does the ETF make sense for your firm to achieve the activist objective via an investment vehicle versus how Engine No. 1 did it with Exxon?

Bilger: The firm really introduced itself to market, I would say, with the campaign with Exxon and our activist work. But Engine No. 1 is a broad impact investment firm. And from a philosophical standpoint, what we believe is that positive impact can drive long-term shareholder value.

The ETF business has been one we've been working on for quite some time. It actually plays several key strategic roles for us as a broad platform. First, it’s the one place where any investor—big or small—can join us in what we’re doing, and really take a seat at the table for the work we’re doing to transform companies.

Secondly, it’s a place of scale for us. In particular, with VOTE, we’re giving access to an index product—a market cap index product—that exists in virtually every investor’s portfolio. And we think that addressable market is really valuable and important.

ETF.com: What's the inspiration around specifically getting VOTE as a ticker? It seems like the democratization aspect of pushing ESG is pretty big in this new fund.

Bilger: We’re very excited about VOTE as a ticker, because we think it really reflects the spirit of what we’re trying to do. VOTE provides exposure in an index-based format to the largest 500 companies.

What's really unique about it is—as opposed to changing the investment exposure that many people have when they own core market cap, and the price point that many people have when they own core market cap—we’re trying to drive change as active owners through the votes we cast, the campaigns we run and the investors we bring along with us.

It’s really designed, in our minds, to help align many investors’ values on the environmental and social side, while still providing that simple market cap exposure. So we think it resonates around the idea of taking a seat at a table, and really joining us for our mission.

ETF.com: Is there any change in the strategy of how Engine No. 1 will engage with company management using the ETF vehicle compared to what we saw a few weeks ago with the campaign to get board seats at Exxon?

Bilger: I think our actual kit is really wide when we think about what we can do as active owners. Exxon is one example of how we can engage with companies, but there's a very broad spectrum, all the way to the votes we cast.

In the middle, it’s just our engagement with companies, which we plan on running in a more thematic and focused fashion. You can really expect—through us as a firm generally, but also the ETF—for us to be taking advantage of that full spectrum of the tool kit, which could also happen, and will likely include less high-profile and more collaborative campaigns that we can engage with companies.

But there’s something with the Exxon campaign I think is really important to note. It was a good example of how we owned 2 basis points of that company, and the success was driven off of the investors we brought along with us, the coalitions that we formed. That sentiment will absolutely flow through to the ETF and our strategy around how we’re sort of working toward the transformation we talk about.

ETF.com: When you're talking to potential buyers for VOTE, what else are you telling them, other than the ESG mission? Why should they invest in this fund specifically, versus the other very large ETFs right now that track the S&P 500?

Bilger: The goal of VOTE is to really minimize friction on the investment side. I think that’s one of the challenges that many investors feel with this space altogether—that there’s this trade-off between financial performance and impact; and second, that there’s a trade-off they have to make on costs.

I think the way we've designed this fund really solves both of those challenges. The Morningstar Index that the fund tracks gives exposure to the largest 500 companies in the U.S., and has very low tracking error to other standard benchmarks.

So we think we've achieved the goal of keeping the exposure very similar on the investment side. With our pricing strategy at 5 basis points, we’re well within the range of where market cap price is really.

Also, as an index provider, Morningstar has been a great partner. I see them as a very like-minded provider along with us, really driving disruption in the industry that they operate in.

ETF.com: We saw Exxon fiercely oppose Engine No. 1 during the run-up to the shareholder meeting. If the point of this ETF is to push that kind of change, and your firm has equity in some of the biggest companies in the U.S., does that change the strategy of who you're going to look at to try and apply pressure to?

Bilger: I think one of the most interesting things about this product is, with the launch of this product, we’ll be nearly permanent owners of the largest 500 companies in the U.S. based on the index that we track. That provides a wealth of opportunities for us to drive through the work we do on the engagement side, some of the changes that we believe will drive long-term shareholder value.

We talked a bit about the tool kit on the active ownership side. When it comes to engagement, what you tend to find at some of the larger, more traditional asset managers, is that they treat that exercise more about quantity than impact, measuring the number of companies they met with, and tracking year-over-year growth.

We’re going to take a much more focused, targeted and thematic approach to the work we do on the engagement side, really focus on where we think we have the biggest opportunity to drive change, and come with specific solutions backed by rigorous data and analysis that we tie to value.

ETF.com: How exactly will Engine No. 1 measure changes from these companies in those positive social good changes? And how will it give that information to its investors?

Bilger: A lot of other asset managers are focusing on quantity of engagements rather than impact of engagements. And there's a variety of reasons we think that larger asset managers are sort of constrained to that world.

We’re going to take a much more thematic and focused approach to how we engage with companies. When it comes to the theme side, really focusing on two to four environmental and social themes per year, based on where we see the largest opportunities to drive change, really grounding our arguments, not just in ideological space, but in economic space.

And while we’re going to engineer a much more targeted and thematic approach, I think the second point, around the investor side, is critical.

One of the other gaps I see in the market right now is that, for many investors—particularly in the sustainable ETF space—the change isn't real to them. It’s not tangible to them. And I think they struggle with the “so what” of what their money is really fighting for.

I think that this more impact-focused approach to engagement is going to be a really important way to engage with our investor base, and bring that to life.

ETF.com: What themes will Engine No. 1 be looking to push in the near term?

Bilger: Without being able to comment specifically on our next set of campaigns and engagements, we see the whole spectrum of environmental and social issues as really what we’re going to be playing in.

That includes continuing on the climate side, as well as more social issues like wages, diversity and inclusion. While I think people know us right now in the market for what we've done with Exxon, we really see ourselves as operating across both environmental and social issues.

ETF.com: Engine No. 1 has filed for effectiveness for the Engine No. 1 Transform Climate ETF. Can you comment about that, and the future timeline scope of other ETF launches?

Bilger: We’re building an ETF business for the long term, and for scale and as a platform. We’re now approved for an additional ETF in the climate space. It’s too early for us to talk about that, though.

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