Should Facebook disclose how much money it makes from political ads?
Should oil companies set targets on climate change action? Should they be more transparent on their lobbying?
About 16% of Facebook’s shareholders, some of who are also employees, supported a shareholder proposal raising concerns around its political advertising. At oil and gas giant Santos, shareholders are divided. In April, a little less than half its shareholders supported calls for strengthening Santos’ emissions targets, and review its membership of fossil fuel lobby groups. Many eyes focused on how the largest index managers voted. Blackrock rejected the proposal to set emission targets but explained that it would continue to monitor the company.
The result is thorny headlines that the “Biggest US index funds oppose most climate proposals in shareholder votes”; and “coming under intense pressure over the role they play in climate change”; or that funds are blindly siding with companies’ managements.
This is the context for The Fund Checker, a project that captures index funds’ voting patterns in the past years.
Why does it matter what index funds vote?
Millions of people invest through index funds: pooled investments that track the companies in a financial market index, like the S&P 500. In the U.S., there is about $26 trillion under management in index funds, representing about 100 million people. And these numbers are rising. Why? Owning some index funds in your portfolio makes sense if you want to avoid significant risk, bet on a wide variety of companies, but don’t want to spend too much time and money picking them. Index funds give investors the broad market exposure of an entire index, ready to buy as a prefab package: it is diversification at low management costs. You will likely make less money with index funds than with that one genius stock pick, but index funds are affordable and often less risky.
Index funds became so large that they fundamentally changed shareholder dynamics. Today, about a third of publicly traded shares, is in the hands of index funds. The management of index funds is a low-margin business, where scale is key. That led to the emergence of a few mega asset managers. In the concentrated market of asset management, State Street, BlackRock, and Vanguard have combined almost $16 trillion in assets under management. They have about 80% of all indexed money in the US.
Index funds — or in practice, the asset managers that operate these funds — are required to vote at shareholder meetings for companies in their fund portfolios. That means that they vote on thousands and thousands of proxy items every year on behalf of millions of investors in mutual funds and ETFs. Because of their size, these large asset managers often influence the outcome of the votes: together, BlackRock, State Street, and Vanguard are voting 25% of the shares at large public companies. Furthermore, an index (such as the S&P 500) rarely changes the companies in its composition, making fund managers “eternal” shareholders: a fund won’t drop a company from its portfolio unless the underlying index changed. The result is that index fund managers have significant influence over the voting outcomes at most public companies’ shareholder meetings.
What is at stake?
Shareholders have a say on matters that are important to their company. Most votes are on routine issues, like approving a non-controversial board director or the audit firm. But shareholders vote on many topics that are actually interesting; for the company and society at large. Those can be environmental issues such as the company’s climate change impact, corporate sustainability efforts, or renewable energy commitments. Or social issues like employee safety, internal pay disparity, and customer privacy. And corporate governance issues, such as the racial diversity and compensation of board members, and minority shareholders’ rights.
The massive voting block represented by the largest index funds, representing millions of people, can tip the outcome of votes on issues we care about — such as climate change action or racial equity within a company.
Index funds are a passive way of investing: the point of indexing is to copy an index instead of creative stock picking with savvy investment strategies. Researching the right vote for thousands of companies held by funds is tedious and expensive.
Their passive investment approach, combined with the fact that they have to vote for thousands of companies, made index fund managers not only passive investors but also passive stewards to the companies in their funds’ portfolios.
The critique has been that the largest asset managers tend to agree with the company’s management. That is why they are increasingly taking their shareholder voting and influence seriously. They are growing their investment steward teams. And the world’s largest asset manager BlackRock notably pledged to make climate change a priority. Also, because the world — including investors — increasingly care about environmental, social, and governance (“ESG”) issues in the context of companies’ behavior: ESG investing is mainstream.
Yet, despite the increased efforts of the largest asset managers, the data is inaccessible. It is hard to get a good overview of how your fund voted. And shareholder voting is a nuanced topic. Not every shareholder proposal is constructive, despite the well-intended ideas behind it. As the Santos case shows, index fund managers — as eternal shareholders — may want to give management some time and space to address pressing issues.
The point is that index funds’ voting matters; it affects companies and our society. Beyond the headlines, we don’t have a clear view of how our money is represented in funds’ shareholder votes. How are our funds voting?
We built a tool to explore how index funds of the three largest asset managers voted on shareholder proposals related to enviromental, social, and governance topics.