Shareholder Engagement Update: 4Q18

Creating a sustainable investment portfolio is a multi-dimensional process, akin to baking a layer cake.

There are a lot of trends in sustainable investing—from fossil fuel free investing to gender lens investing, both of which we specialize in, and one of which I highlight below. Often trends are chased through ETFs and mutual funds that offer to either avoid companies with the biggest oil reserves, invest in clean water, or invest in companies with female leadership (spoiler alert: there aren’t enough women in leadership). These are all laudable efforts, but such strategies are often limited to a single focus (mostly for marketing reasons), ignoring other potentially negative and offsetting factors at work within the portfolio. At Arjuna, we take an integrated approach with your money, combining several strategies to create well-diversified impact portfolios.

Baking the Cake

Creating a sustainable investment portfolio is a multi-dimensional process, akin to baking a layer cake. At the base level, we avoid companies whose products and services are inherently harmful to people and the environment. Think tobacco and weapons, or divesting of fossil fuels for that matter. Next, we layer on an ESG, or Environmental, Social, and Governance, lens. This exercise refines the portfolio to invest in companies who are managing ESG risks and opportunities well relative to their peers. For the third layer, we invest in companies whose products and services offer solutions to some of our greatest sustainability challenges. Think renewable energy and sustainable agriculture. And for the top layer, we engage with the companies in the portfolio, asking them to improve their practices in service to environmental, social, and investment returns. This work can reap the greatest change, not only inside the portfolio by reducing risk and increasing opportunity, but by leveraging our client’s influence to change company practices, industry standards, as well as the political and public landscape.

Highlight on Gender Lens Investing

Gender lens investing recognizes the value that women contribute to our society and economy. Investors can tap into the innovation and tenacity that women bring to the global markets through investing in women-owned businesses, women-led corporations, or women-run investment strategies. Investors also have a role in pressing companies to improve their gender diversity and equity.

Shareholder engagement has been successful in working to close the gender pay gap and place more women on boards. Arjuna Capital has pressed nearly 2 dozen companies in our client’s portfolios from Silicon Valley to Wall Street to commit to publish and close their gender pay gaps. And the broader investor community has supported our shareholder proposals because they recognize the business case—companies that pay women fairly are at a competitive advantage in attracting and retaining top talent and removing the structural barriers that keep women from advancing into leadership.

Investors that ignore the leadership power of women are at a competitive disadvantage. Companies with more gender diverse leadership teams are shown to out-innovate and outperform across a host of metrics. MSCI finds gender diverse boards led to a 36% improvement in return on equity. Similarly, McKinsey & Company identifies gender-diverse executive teams as a driver of higher-than-average profit margins and stock price performance.

The biggest challenge to gender lens investing is the dearth of female leadership. In the public markets, too few women hold executive and board positions, making it near impossible to invest in a well-diversified portfolio of women-led companies, when the guidelines are so narrowly defined. Investors with a gender lens shouldn’t limit their mandate to investing in women-led companies. They need to shape the opportunity by pressing companies to move more women into leadership.

Through our Highwater Global Fund, we invest across 10 sustainability themes, including gender equity. Here, we look not only for women in leadership, but for companies whose products and services are delivering solutions for women, such as Bright Horizons Family Solutions, which runs childcare centers. And, State Street, an asset management company that recognizes the business case for women in leadership and has committed to voting its proxies against boards without female directors. Because of their Fearless Girl campaign, more than 300 companies have already added a female director, while another 28 have committed to doing so before the end of 2018.

In the private markets, women entrepreneurs and venture capitalists are underfunded and therefore discouraged. Here, investors have an opportunity to channel more capital to women-run businesses and investment strategies. For example, our Income and Impact Fund, which invests in over 20 private fixed-income investments, invests in loan funds with a focus on women borrowers, like micro-loan fund MCE Social Capital.

Next quarter we will highlight our approach to fossil–fuel free investing. And while gender-lens and fossil-fuel free investing may seem wholly unrelated, they both intersect with dysfunction in the greater system. Climate change is a symptom of a world with an out-of-balance power structure. Bringing greater equality to our power structures will reshape the way we make decisions as a collective, as businesses, as investors, as politicians, and as citizens. By adopting a more gender-balanced philosophy, we can create an economy that works for people and planet, addressing the existential threat from climate change in a meaningful way.

Natasha Lamb, Director of Equity Research & Shareholder Engagement

The opinions expressed herein are those of Arjuna Capital, LLC (“Arjuna Capital”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. Arjuna Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.  This is not a recommendation to buy or sell a particular security. Arjuna Capital is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Arjuna Capital including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.  AJC-18-30