Where Investors Go From Here: Strategies to Align Portfolios

So, what’s an investor to do given the limited social data about companies as they relate to certain aspects of the XX Factor framework? First, it’s important to debunk the idea that investors will need to sacrifice financial returns to align their portfolios for greater social impact. In our interviews, foundations and high-net worth investors expressed confusion about this idea.

There are, in fact, a range of ways to balance mission with financial objectives. For instance, Bridges Fund Management, with its Bridges Spectrum of Capital, maps out a broad range of risk/return strategies for impact investing. This spectrum is widely referenced by the social impact investment industry because it shows different strategies investors can adopt based on their desired risk, return, and impact profile. It ranges from financial-only (where traditional investment management resides) to impact-only (where traditional philanthropy resides) and describes the balance that is possible in between.

Based on dozens of conversations with asset owners and investment advisors, we identified three types of investors who seek social data on companies. We then created the table below (“A Typology of Investors”) to show how each of these three investors would apply a specific social impact lens to financial investing. Each type of investor has a different goal for considering a company’s social data. That particular goal drives investment policies and practices, much as a foundation’s philanthropic goals drive grantmaking.

While various regulators require advisors and investment managers to develop an Investment Policy Statement (IPS) for client portfolios, it typically focuses only on the financial aspects of investment goals. A mission-aligned investment strategy should be reflected in your IPS. We spoke with advisors and investment managers who are expanding their clients’ IPS beyond traditional financial concerns. Such expanded investment policy statements can include a mission statement, social criteria for the companies you seek to own (as well those you want to avoid owning), and guidance on casting shareholder ballots (called proxy voting) to align with social impact goals. (For sample language, see box.)

Sample Language for Expanding Investment Policy Statements

Financial advisors and investment managers are required by various regulators to develop an Investment Policy Statement (IPS) for client portfolios. Language regarding an investor’s mission, social criteria for selecting companies to own, and guidance for casting shareholder ballots represents ways that policy statements can incorporate social factors. To align the public equity portion of your portfolio with the findings of the XX Factor framework, your IPS may include criteria such as:

  • Where feasible, seek out investments in companies with policies demonstrating a commitment to:
    • Providing a living wage
    • Providing maternity leave
  • Where feasible, avoid investments in companies that misalign with my mission including companies that:
    • Have a higher gender wage gap than their industry peers
    • Have patterns of sexual harassment and lack policies and practices designed to prevent sexual harassment in the workplace
  • My proxies should be voted as follows:
    • Vote for all policies that request disclosure on the gender pay gap, paid family leave policies, and how the company is ensuring equal access to employment for women

A Typology of Investors Using an Impact Investment Lens

Below are examples of three types of investors who seek social data on companies—those who want to mitigate Environmental, Social, and Governance (ESG) risks; those who want to pursue ESG opportunities; or those who want to create positive, social impact. Communication and implementation of an investor’s portfolio is different for each type of investor. For example, those focused on creating positive social impact have a very different social investment thesis and policy statement versus those focused primarily on financial returns and mitigating ESG risks. Those pursuing ESG opportunities or focusing on social impact are much more likely to be engaged as a shareholder of the companies they own.

WHY USE A SOCIAL
IMPACT LENS?

INVESTMENT LENS

Social Investment Thesis

TO MITIGATE
ESG RISKS

FINANCIAL

Investing in financially attractive companies that rate higher than their peers on social measures will generate higher and more consistent financial returns over time

TO PURSUE ESG
OPPORTUNITIES

VALUES

Screening out bad actors and investing in companies that have higher alignment with my values will keep my investments from doing harm while at the same time performing well financially

TO CREATE
SOCIAL IMPACT

CHANGE

Investing in companies that demonstrate a commitment to specific social practices will help solve important societal problems; may seek competitive or below market returns; may include a “laggards” portfolio for activist corporate engagement

Investment Policy Statement

Documents criteria for financial goals

Documents criteria for implementing my values and financial goals and the balance between them, as well as proxy voting guidelines

Documents criteria for implementing financial and social goals, and the balance between them as well as proxy voting guidelines

Shareholder Engagement

Might not be addressed

Ensure that my proxies are voted in alignment with my values; may outsource other forms of shareholder engagement

Vote my proxies and/or ensure they are voted in alignment with social goals; actively seek opportunities to engage in corporate dialogue, and submit shareholder resolutions

Given all this, investors have two clear choices when aligning for social impact: choose stocks based on the information the companies provide about their Environmental, Social and Governance (ESG) goals and engage as a shareholder to influence the companies you own.

Choosing Stocks Based on Available Data

The XX Factor can guide you to social criteria for selecting companies with policies, practices, products, and public activities that align with your philanthropic goals. For example, if you care about economic empowerment for women, the XX Factor identifies equitable work-related policies and practices as one of the key determinants, and equal pay for equal work as a measure of that determinant. To align your public equities with the goal of economic empowerment for women, you could therefore seek investments in companies that provide equal pay for equal work.

In order to have a diversified portfolio and meet certain financial risk and reward goals, you will likely own shares of companies whose policies and practices may not fully align with your philanthropic goals. This is where the second strategy, shareholder engagement, can be a useful approach.

Engaging as a Shareholder

Shareholder engagement is a term used to describe the activities that enable shareholders to communicate with the management of companies they own. As an owner of a publicly-traded company, you have the right, and many would say the responsibility, to communicate your social goals with a company’s management and board to shape its policies, practices, and public activities.

You can communicate with management and encourage a company to align with your social mission in three ways:

Voting proxies
Proxies are shareholder ballots. Each year, prior to a company’s annual meeting, the company’s management sends qualified shareholders[3] a proxy statement, materials that lay out the agenda for the annual meeting, and the issues on which management is required to seek approval from shareholders. For example, requests for disclosure of the gender pay gap have been an item on proxy ballots for a number of U.S. companies recently. The gender pay gap is related to the XX Factor indicator equal pay for equal work in the economic empowerment dimension.

Engaging in direct corporate dialogue
Typically, direct corporate dialogue is a collaborative effort among institutional investors and nonprofits to persuade a company’s management to change its policies, practices, operating methods, and/or public activities on a specific issue.

If you are interested in committing time and effort to engaging in direct dialogue with companies, you can either join an existing effort or start one of your own. For example, the Educational Foundation of America (EFA), a family foundation, joined with Trillium Asset Management and 33 other institutional investors to write letters to the 50 largest publicly-traded employers in the U.S., pressing the companies to continue offering comprehensive sexual and reproductive healthcare benefits despite recent rules that expand exemptions from the Affordable Care Act that mandates employers provide contraceptive coverage to employees.[4] Access to contraceptives is one determinant in the XX Factor health dimension.

Some of the individual and foundation investors we spoke with described “own to influence strategies” where they invest in companies that they consider to be bad actors for the express purpose of urging company management to change specific policies and practices.

Submitting shareholder proposals
Whether or not you are engaging in direct corporate dialogue, you may want to press companies to help advance women by joining with a like-minded group that is submitting a shareholder proposal to companies that you own shares in.[5] Shareholder proposals are a way to formally request that a company take an action such as disclosing information or reporting on the impact of its operations. Shareholder proposals can be used to initiate dialogue or to raise the bar when discourse with a company is unproductive.

In 2017, Pax World Funds filed shareholder proposals at seven technology and financial companies requesting disclosure of the percentage pay gap between male and female employees. Of the seven companies, Oracle was the only one that did not reach out to Impax after the filing. As a result, the proposal went to a vote and received support from 38.7% of shareholders at Oracle’s 2017 Annual General Meeting,[6] sending a strong signal to management that more than one-third of its shareholders want more information about the company’s gender pay gap.

Key Strategies to Align a Public Equity Portfolio

Below are examples of strategies that investors can use to align their public equity portfolios with our XX Factor framework.

HIGH-LEVEL STRATEGY

Select companies
for your portfolio

GENERAL APPROACHES

Set criteria that describe attributes of companies that you want to avoid investing in because they don’t align with your mission.

SPECIFIC EXAMPLES

Eliminate from consideration any company that has exhibited patterns of sexual harassment including prior litigation with no policies and practices to prevent future occurrences, which is related to attitudes towards women in a society, a determinant in the XX Factor’s personal safety dimension.

Set criteria that describe attributes of companies that you actively seek to invest in because they do align with your social goals.

Invest in companies that provide maternal and mental health benefits (if not provided by the public sector), criteria directly related to the XX Factor health dimension and determinants: the presence of a skilled attendant at birth, and mental illness rates.

Activate your portfolio through shareholder engagement

Vote your proxies, the annual ballot questions that a company’s management is required to provide to shareholders.

Vote yes on policies that request disclosure on paid family leave policies, a criterion that is related to paid maternity leave—a measure related to the equitable work-related policies and practices determinant in the XX Factor economic empowerment dimension.

Engage in dialogue with corporate management by joining a network of like-minded investors who collaborate to influence company policies and practices.

Send letters to management requesting that they provide employees with comprehensive reproductive health coverage (if not provided by the public sector), which is related to both access to contraceptives and the presence of a skilled attendant at birth. Both are determinants within the XX Factor’s health dimension.

Collaborate with like-minded investors to submit shareholder proposals to request disclosures of or changes to corporate practices and policies.

Submit a shareholder proposal requesting that the company calculate and disclose the firm’s gender pay gap, which is related to the equal pay for equal work measure associated with the equitable work-related policies and practices determinant in the XX Factor’s economic empowerment dimension.

* November 7, 2018 — An earlier version of this file stated the following on page 21: “In 2017, Equileap began to publish 12 data points measuring the gender balance and equality in over 3,000 companies and eight additional data points on 1,000 of those companies.” The correct figure is 19 data points measuring the gender balance and equality.

Endnotes

[3] You are eligible to vote proxies as long as you purchased the shares prior to the company’s record date. The U.S. Securities and Exchange Commission defines the record date as, “a date announced by the company as the official date you must be an owner on the company’s records in order to participate in the annual meeting and corporate election.” Source: U.S. Securities and Exchange Commission, n.d. “Spotlight on Proxy Matters – The Mechanics of Voting.” Last modified May 23, 2012. https://www.sec.gov/spotlight/proxymatters/voting_mechanics.shtml.

[4] Trillium Asset Management. 2017. “Shareholder Advocacy Highlights.” www.trilliuminvest.com/wp-content/uploads/2018/01/q3-q42017-Shareholder-Advocacy-Highlights.pdf.

[5] Each country has specific requirements for shareholders to submit proposals. In the US, you must, among other things, own a minimum of $2,000 worth of company stock and have held it for one year prior to the annual filing deadline. The process for filing shareholder proposals is regulated by the Securities and Exchange Commission in the US and by similar government bodies in other countries. Source: U.S. Securities and Exchange Commission, n.d. “Shareholder Proposals: Staff Legal Bulletin No. 14G (CF).” Last modified October 16, 2012. https://www.sec.gov/interps/legal/cfslb14g.htm.

[6] Smith, Heather. 2018. “Advancing Gender Equality by Closing the Pay Gap.” PAX World Management. https://paxworld.com/advancing-gender-equality-closing-pay-gap/.