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Hi! I'm an NYU prof. working on AI-related topics, and recent joiner of Giving What We Can. Nervously posting a first question:

When investing money that's needed for a non-EA purpose, is it reasonable to use mutual funds that try to use shareholder activism to accomplish prosocial impacts as the default building blocks for a portfolio?

[Edite to clarify that I'm asking about funds that try to accomplish social/non-financial impact through shareholder activism.]


  • I'm primarily interested in finding the best way to allocate personal savings investments that I expect to need in the future, but for which I can afford to take some risk. I expect to divert at least 10% of any returns to charity, possibly more, but I don't see this primarily as investing for future giving. Secondarily, if a clear consensus emerges around a worthwhile socially responsible investing strategy, I'd be interested in making the case for professional organizations that I deal with to try such a strategy.
  • I've seen fairly convincing arguments that index funds with ESG (roughly: social impact) filters—seemingly the most prominent form of socially responsible investing—don't actually succeed in advancing ESG goals, but it sounds at least plausible that prosocial shareholder activism/proxy voting can have an impact on corporate behavior. (This is informed, in part, by discussion on the forum here.)
  • Right now, it doesn't seem like there's much of a cost to participating in this kind of activism. I'm not an expert at evaluating securities, but it looks like most of the activist mutual funds from Calvert outperform their benchmarks, even after fees (example), and tend to do well on socially-agnostic rankings like Morningstar's. Other firms, like Domini and Impax/Pax, seem to be aiming at something broadly similar, and doing a reasonably good job as well. Given that, it seems like a no-brainer to build a portfolio centered around these funds. Am I missing something?
  • Of course, I'm suspicious that it's a fluke that all of these funds are beating their benchmarks after fees, especially since the fees are relatively large (at least 0.5% higher than comparable index funds). I wouldn't be surprised to come back in a few years and find that there's a much clearer cost to choosing these activist funds over cheap index funds in the same category. In this case, I'd want to somehow quantify the social value that comes from the activism that managers like Calvert do, and use that to choose whether to continue investing with them. Has anyone tried to quantify this, or to compile research that would make that doable?




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This paper is relevant to your question.

Abstract: This article asks how sustainable investing (SI) contributes to societal goals, conducting a literature review on investor impact—that is, the change investors trigger in companies’ environmental and social impact. We distinguish three impact mechanisms: shareholder engagement, capital allocation, and indirect impacts, concluding that the impact of shareholder engagement is well supported in the literature, the impact of capital allocation only partially, and indirect impacts lack empirical support. Our results suggest that investors who seek impact should pursue shareholder engagement throughout their portfolio, allocate capital to sustainable companies whose growth is limited by external financing conditions, and screen out companies based on the absence of specific ESG practices that can be adopted at reasonable costs. For rating agencies, we outline steps to develop investor impact metrics. For policymakers, we highlight that SI helps to diffuse good business practices, but is unlikely to drive a deeper transformation without additional policy measures.

Thanks, Wayne!

This looks like a good starting point for further research, but it's hard to take much that's actionable from this without more background in finance. Is there anything you'd take away as advice to a smallish-scale individual investor?

Good question! I haven't seriously thought about this issue, but this is my first impression:

  • Shareholder activism seems more likely to be effective than divestment.
  • There probably aren't any shareholder activism mutual funds/ETFs that focus on causes that EAs tend to prefer.
  • If you're wealthy enough to conduct shareholder activism on your own, then doing so might be a better idea than investing in index funds. It seems likely that you can persuade a company to do $1 of good by giving up less than $1 in risk-adjusted return. I suspect this is true mainly because companies are generally willing to make very large dollar-value changes on the basis of relatively small activist efforts.

I used to do some work in this space and may get around to writing a more in-depth response soon, but I'm pretty busy right now, so in case I don't, two things:

1) Even if you think shareholder activist strategies have outperformed the market historically, the activism space has become substantially more competitive in the last 3-4 years or so, and it has begun to face growing regulatory pressures, so I generally expect that any activism-related arbitrage opportunity that may still exist will shrink over time until it is no larger than the cost of mounting an activism campaign.

2) See here for some pertinent background on the corporate governance ecosystem.

Hrm, this is useful context, but I think you may be getting at a different issue. For the mutual funds that I'm looking at, they seem to be viewing shareholder activism as a potential avenue to have prosocial (ESG) impact on the companies that they invest in, such that their activism strategy likely increases fees a bit without impacting returns either way.

Ah, sorry, I must have misread your original question. Here are my top-level takes on the question you did, in fact, ask: 1) I see some of these Calvert funds have done well over the past few years, but I'm sufficiently convinced by some form of the efficient markets hypothesis to be skeptical that their above-market returns will continue to exceed their fees over the medium-to-long-term. 2) While I do think that shareholder activism through the proxy process can occasionally yield important, positive changes in the corporate world, the levers of corporate governance are limited enough that I very seriously doubt that the money you're spending on Calvert's fees is doing more good maintaining your investments in those funds than it would do if it were donated to, say, Malaria Consortium's SMC program. 3) It's important to remember the actual comparative here. It's not Calvert vs. an evil money manager; it's probably Calvert vs. BlackRock, which has been loudly pushing its portfolio companies to be more conscientious about their impact on the climate. Of course, on account of its scale, BlackRock's mutual fund and ETF offerings will be much, much cheaper than comparable funds offered by Calvert, and also on account of its scale, BlackRock controls a far larger number of shareholder votes than Calvert does. Ultimately, you have to ask yourself: How often do BlackRock and Calvert vote in different directions on issues that I think are genuinely high-impact (assuming Calvert always casts a socially optimal vote, which I also doubt)? And: How often are Calvert's votes likely to decide those shareholder elections (when BlackRock is voting the other way)? And: How often are my Calvert fund shares likely to make the difference in whether Calvert decides those shareholder elections favorably? If you were to try to model that, I suspect you'd find that investing through Calvert isn't much at all better for the world than investing through BlackRock, and to the extent that i
Thanks! This is helpful, and nudging me away from this approach. Do you know of any good primers to get a better sense of how/when these levers get used on socially relevant issues?
The levers of corporate governance are pretty limited. The corporate form is designed to limit the extent to which minority owners of common stock can intervene in corporate operations. As a result, most proxy proposals of social concern pertain to public disclosures (e.g. of environmental impact, of lobbying expenditures, of pay equity data, etc.) or to the appointment of sympathetic board members/removal of unsympathetic board members. These are nowhere near a majority of total proxy proposals, but they're a sizable percentage of total shareholder proposals (most of which do not pass). For more detail on this, see this comment.
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Update: It seems like the new VOTE ETF could be significantly cheaper and significantly higher-impact than the alternatives I'd mentioned, though still not overtly EA-oriented. Any thoughts?

My quick notes, in tweet form: https://twitter.com/sleepinyourhat/status/1438571062967611405

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