## The Opportunity A marketplace matching ESG voting proposals + research with institutional investors looking to reduce their regulatory risk, improve public perception, and compete in a crowded marketplace. %% ### Scraps Despite the demand for values-driven investing, few individual shareholders participate in corporate decisions through proxy voting. growing push to increase shareholder engagement from companies like BlackRock, Robinhood and others. Individual investors as a group owned 29% of shares in 2020, compared to 71% with institutional investors, [according to ProxyPulse](https://www.broadridge.com/_assets/pdf/broadridge-proxypulse-2020-review.pdf), which tracks shareholder engagement. Interestingly, institutional investors’ voting increased to 92% of the shares they held (vs. 90% for the 2019 proxy season), while retail investor voting held steady at 28% of the shares they own.“The information gap is one of the biggest challenges to retail participation in proxy voting,” (is it also a time issue? institutionals hire teams of people to do this) People don’t really have a sense of what their vote will do (voting recommendation engine, and stats on outcomes). Moreover, many investors aren’t familiar with a company’s board of directors or understand shareholder resolutions (investor education), However, there’s a growing push to boost shareholder engagement, including changes from funds that typically cast proxy votes on behalf of investors.(recommend asset managers who fit their values? marketing for AM in a competitive environment) Global investment manager BlackRock recently announced institutional customers invested in index strategies may participate in proxy voting starting in 2022. The change may affect roughly 40% of the company’s $4.8 trillion managed index assets, [according to a statement](https://www.blackrock.com/corporate/about-us/investment-stewardship/proxy-voting-choice), and BlackRock may expand access to more investors in the future. “BlackRock is committed to exploring all options to expand proxy voting choice to even more investors, including those invested in exchange-traded funds, index mutual funds and other products,” the company wrote. And in August, Robinhood acquired [Say Technologies](https://blog.robinhood.com/news/2021/8/10/say-technologies-is-joining-robinhood), a shareholder engagement platform offering easy access to proxy votes and direct communication between investors. About disintermediation and transparency. Push information out to nodes. Information arbitrage tends to concentrate power, and will continue to do so, unless you systematically design for it [[The iron law of oligarchy]]. %% ## History In the 1970s, Milton Friedman popularized the notion of shareholder primacy, the idea that a corporate is only responsible for increasing shareholder value. These writings shaped [corporate governance](https://www.investopedia.com/terms/c/corporategovernance.asp) laws in the U.S. and in 1997, the association Business Roundtable began endorsing principles of shareholder primacy. However, after a few decades of the shareholder primacy experiment, the pendulum is swinging back toward stakeholder capitalism. [80% of investors](https://www.statista.com/statistics/1269441/individual-investors-wanting-investments-matching-their-personal-values-wealth-worldwide/) seek to practice values-aligned investing. Global ESG fund assets have increased to $2.74 trillion in December 2021, up from $1.28 trillion at the end of 2019. The Department of Labor is easing the path for ERISA fiduciaries to consider ESG factors. And at Microsoft, a [landmark sexual harassment proposal](https://www.microsoft.com/en-us/investor/corporate-governance/votingresults.aspx) was passed via proxy vote. Global investors are clamoring to optimize for more than just financial returns. So what does this mean for institutional investors? %% ### Scraps: AND Why now? ERISA fiduciaries are increasingly able to consider ESG factors when making investment decisions. the tide is now shifting back toward stakeholder capitalism. Many are unhappy with where the experiment has ended up and the way externalities have been outsourced. However, the pendulum is now swinging back toward stakeholder capitalism. 1973, the world began an experiment (fiduciary respons, to unbundle externalities, milton friedman, globalization didn't help). This resulted in (externalities). Pressure is mounting as the pendulum swings back. (populist demands, more engagement, retail ESG millennial growth rates, microsoft case, phony ESG). law: retirement & endowments & pensions are now legally allowed to optimize for ESG in addition to their traditional fiduciary responsibly. What next / what does this mean? Friedman's proposal broke down because voting power concentrated in the hands of the few, with most shareholders not expressing their right to vote. [Stakeholder Capitalism](https://www.investopedia.com/stakeholder-capitalism-4774323) Shareholder primacy, or the idea that a corporation is only responsible for increasing [shareholder value](https://www.investopedia.com/terms/s/shareholder-value.asp), was made popular by Nobel prize-winning economist [Milton Friedman](https://www.investopedia.com/terms/m/milton-friedman.asp) in the 1970s. His writings on the theory were so influential they helped shape [corporate governance](https://www.investopedia.com/terms/c/corporategovernance.asp) laws in the U.S. In 1997, the association Business Roundtable began endorsing principles of shareholder primacy. The tide is shifting, however, ERISA fiduciaries could consider ESG factors when making investment decisions impacting ERISA retirement plans. Increasing engagement Microsoft sexual harassment proposal precedent: [Microsoft Investor Relations - 2021 Proxy Voting Results](https://www.microsoft.com/en-us/investor/corporate-governance/votingresults.aspx) One is like state of the industry and why now is right. That's like one piece where nothing about what I'm building? What about like this transition of Blackrock giving power back and why that happens. And why this is like the right moment to build in this space. unsure how to straddle fiduciary vs esg Why now? Blackrock is actively chosen to cede power to avoid being disrupted by regulation. The top five funds control 40% of capital markets in stage three BlackRock, Vanguard, fidelity, etc. They control way too much power and don't know how to wield it - since they're beholden to everyone (institutions, companies, the public discourse). Need to reduce their power and take then out of the limelight. And avoid being like busted by someone for concentration like you were starting to see like papers in academia, talking about our constitution a lot more like you just look at mentions of Blackrock apart restoration. In the last five, seven years, the papers about it have gone up by like 50 to 50 to 70 a year versus like 10 a year. So that's like a signal of where like the momentum is going. So if you follow the momentum, you're like, oh, now's a good time for me to just get out of this game. That's why they're doing this. Now like in two years Blackrock will control 1% of the voting. Wow. Like, as of last year, they were controlling like, you know, 11% Larry Fink indicated in his January letter that the asset manager intends to [give voting rights](https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter) to the people invested in its funds... especially ETF managers, who are apparently exhibiting a “real drive” to achieve shareholder democratisation through proxy voting. %% ## Problem Institutional investors are in a bind. X% of proxy voting power is controlled by five companies globally, and they are unable to wield the power effectively due to the conflicting interests of their multiple stakeholder groups (institutions, companies, and the public). As a result, their risk of regulatory action is high and they are actively seeking ways to unwind that risk, while continuing to improve their positioning in a competitive marketplace. Blackrock recently took action toward both these objectives when they [expanded proxy voting choice](https://www.blackrock.com/corporate/about-us/investment-stewardship/2021-blackrock-voting-choice) for their clients. Others will follow suit as they seek to avoid regulatory or reputational damage, acquire new clients, and fulfill their ESG obligations. However, (enter problems: expensive from cost and time perspective for new voters, [phony ESG](https://techcrunch.com/2022/05/25/sec-weighs-crackdown-on-phony-environmental-and-social-justice-funds/)) %% ### Scraps Have concentrated too much power (X% voting is controlled by five companies globally) amidst a populist backlash and are unable to appropriately wield that power due to the conflicting interests of multiple stakeholder groups (institutions, companies, the public). Risk of regulatory action is high and they need to unwind that risk (Blackrock) while continuing to compete/differentiate themselves in a competitive marketplace. The solution is to cede that power back toward the retail investor. Phony ESG easy, go away, no work, don’t mess with profits BUT we have an ESG obligation - help me meet it institutional linkages for proxy voting and sharing research & insights costs - v0 = Allow ESG research from Advocacy groups & ESG Activists to be packaged for large Institutional investors voting and engagement is the excuse to not take any hit to their p&l and continue to own shitty assets (could be unintentionally supporting the greenwashing) “It’s a competitive marketplace and fund companies want something to point to,” They’re not going to read through all the proxy votes or the resolutions,” McGlothlin said. “But if they find a fund manager they like and shares their values, then it becomes a collective effort. transparency of ownership and data What am I building? And why do I think it needs to exist? Why the existing options don't work, demand for values driven investing, but X% voting is controlled by five companies globally, who are hamstrung (fiduciary responsibly law and conflict of interest / multiple stakeholders) - Problem - retirement & endowments & pensions are unsure how to straddle fiduciary vs esg and other goals - Idea - liquid voting to understand those you represent and their values - Nuance - is this allow you take lower returns and/or how to measure this? TBD - TODO: Talk to company Rebecca knows & get their tech for whitelabelled thing ## Potential Solution Must be low friction A managed vertical marketplace matching voters with proposals. (market maker) V1: connecting with proposals / how to express your values V2: based on stated values, recommended voting mix for maximum impact AND rank companies by impact on specific issue (e.g. equity pay, walmart ranks above goldman) / how to map your values to issue areas + voting V3: identify highest impact proposals, who holds voting power and how likely they are to tip. Optimize engagement/lobbying resources // where should your incremental pressure go if you had the ability to advocate indirectly? / build database of voting history and build voter profiles (is this info publicly available? how difficult to build this database?) ### Scraps MVP: shop 5-7 proposals to 15 family offices, get their commitments and take back to dogooders. there's like someone, a buyer on the like, institutional asset side who's getting like, a way to express the ESG. And what they did through supporting proposal. So like, it's like a SAS ish business where the institutional investors pay and do good people get increased support. Medium term: white label voting for everyone who owns stocks. You're a retirment adviors? Add a tab called voting. You're robinhoon? Add a tab called voting. Everybody who has assets has a tab called voting that's being invented, which will be powered by us using like sort of really interesting behavioral science and nudges to get your expressed opinions into what you want to vote. And then if you want to, you can custom tune every single vote, but the simple option would be totally care about, and I will bless your ideas on to 10,000 stocks and like, you know, 80,000 votes for you. Long term: sliding scale, how much return are you willing give up to support these values? (need professor to do research on this complicated, multivariate problem) %% ### Why is voting the right place to make systems change? Systems tend to offload externalities until they're forced to consider them. This change can come about in four forms: consumer pressure, regulatory pressure, investor pressure, or company stewardship (IKEA, Patagonia, etc). Of these four, investor pressure has the potential to deliver maximum impact for minimum cost. %% ### Scraps There's a separate piece that I want to like think through first with you, but it's like, why is voting the right place to make system change. And I think the argument there is much more simple. And I have this chart I drew up which is like, like concentrate power. Systems tend to not consider externalities until they're forced to consider them. And the only ways for you to consider them is through consumer pressure, regulatory pressure or investor pressure or companies being good stewards (IKEA, patagonia, etc). In this case we're applying investor pressure because the other two are hard to apply. These things are happening as well, like in parallel. %% %% ## Market [ESG assets may hit $53 trillion by 2025, a third of global AUM | Bloomberg Professional Services](https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/) ## The PLayers and their incentives ### The institutional Investor (The buyer) directly own equities, or indirect through mutual funds/ETFs How do I make this compelling for institutional investors and be like, Yo, you need this, because the pressure is coming to you. And I'm giving you a really easy way to buy hire and pointing people to voting and just use this infrastructure to start channeling your ESG goals or your like, company's values and ethos into actively supporting proposals to make the companies better and therefore preserve the planet, reducing inequity. And in the process, booster shareholder returns, right? voting and engagement is the excuse to not take any hit to their p&l and continue to own shitty assets (could be unintentionally supporting the greenwashing) ### The non-profit / SUbMITTERS (pension funds, family offices (beachead), endowments) ability to vote, handicapped to free: pensions, insurance/endowments, family office pensions: ERISA fiduciaries could consider ESG factors when making investment decisions impacting ERISA retirement plans. **Do Gooders**Third piece is why the do good people need to care that easy. I've already written that. And everyone knows that it's very simple. And they're giving them the support without doing any work. If they give me their data, and their plans basically, say, tell me you want to go after and I'll get you millions more dollars, and you have to chase and fight for companies, like double charged change on board with shares and shareholders. ### The Retail Investor ### The company ## Competitive Landscape Retail investor engagement: - [Tulipshare](https://sifted.eu/articles/how-to-gen-z-fintech-2022/)   - [Clim8](https://sifted.eu/articles/clim8-launches-sustainable-investing-app/) Institutional investor engagement: - [Tumelo](https://www.tumelo.com/personal) ## Challenges The challenges with davos stakeholder capitalism: [^1] **The first challenge is measurement.** **The second is managerial complexity.** **The third challenge is the difficulty of ensuring accountability** - Companies stop going public - Populism in the base - Voting rights are now paid (new lobbying) - Companies are strangled / unable to progress - More supervoting companies (G / FB like) - Difficult sales cycle, legal complexity My view is the only way to preserve capitalism and a flexible economy is for the investors who have voting control over companies to work closely with management, eliminate activist pressure for short-term performance, and continue to have open competitive markets. Without it, we’re going to move rapidly in the direction of Europe with stricter and stricter limitations on both companies and investors. The EU has already moved to impose ESG mandates on both investors and financial institutions as well as listed and other large companies. To preserve capitalism we must ensure that companies perform well and increase long-term value by taking into account the interest of all stakeholders, including the public. ## Key findings - The environment is a top concern when it comes to socially responsible investing: Of investors who say it’s important to invest in a socially responsible way, 45% say it’s most important to them to choose investments that focus on environmental impacts. - A gap between desire and understanding may be keeping some from investing in a socially responsible way: More than two-thirds of investors (68%) say they aren’t sure about the best way to invest according to their values, which could explain the disconnect between those who say this type of investing is important and those who actually hold socially responsible investments. - Perceived lower returns are a major concern with socially responsible investing: Of those investors who say it’s not important that they invest in a socially responsible way, the top reason why is that they want their investments to have the highest returns, regardless of if they are socially responsible (41%). - Investors are skeptical about the impact of socially responsible investing: More than three-quarters of investors (77%) believe many companies that promise to operate in socially responsible ways don’t actually follow through. Close to the same proportion (73%) think it’s difficult to figure out whether socially responsible investing actually benefits society. “There are many reasons why an investor interested in socially responsible investing would let their values slide when it comes to their portfolio,” says Alana Benson, a NerdWallet authority on investing. “It can require time-consuming research, and it's hard to measure your individual impact and choose investments. But investors should know that there are more options than ever, including robo-advisors that offer socially responsible portfolios.” ## Business model On the one hand, the company operates on a subscription model with pension and investment platforms, who pay Tumelo for its API feature on a per user basis according to customer engagement. And on the other, Tumelo operates a “Data as a Service” model, collecting data and providing insights on how users are voting to fund managers so they can better align with investors. ## LInks - https://www3.weforum.org/docs/WEF_Integrated_Corporate_Governance_2020.pdf - [Stakeholder capitalism arrives at Davos](https://www.brookings.edu/blog/future-development/2020/01/21/stakeholder-capitalism-arrives-at-davos/) - [https://www.blackrock.com/corporate/literature/whitepaper/viewpoint-investment-stewardship-ecosystem-july-2018.pdf](https://www.blackrock.com/corporate/literature/whitepaper/viewpoint-investment-stewardship-ecosystem-july-2018.pdf) - [Shareholder Democracy Is Getting Bigger Trial Runs - The New York Times](https://www.nytimes.com/2021/10/15/business/shareholder-democracy-stocks.html) - [Was Milton Friedman Right about Shareholder Capitalism?](https://corpgov.law.harvard.edu/2021/04/21/was-milton-friedman-right-about-shareholder-capitalism/) ## Thank you: - Tumelo - (Shree lists other people he wants to thank) ## Shree Notes [Notion – The all-in-one workspace for your notes, tasks, wikis, and databases.](https://www.notion.so/shreenath/RAW-Master-plan-v0-ActiveMoney-41d691467fb64baa8b2f7e714c667bcf) - world is changed - Voting matters - ESG matters - Millennials matter - Stocks are growing - ETF / MF are growing (as is Retail) - Board decisions are becoming more democratic (Measured by X) - Voting importance becomes more clear and important - User research - What do investors want - - easy, go away, no work, don’t mess with profits BUT we have an ESG obligation - help me meet it - What do ESG / do good people say is the issues? - Help us drive more investor coalitions behind good proposals - Give us data on tracking on existing data - E has lots of focus; S is broken; G is okay ish - What do non profits / old school climate players say? - Divestment > advocacy since voting & engagement is an excuse to take no financial penalty for being invested in shitty companies - Engagement does not work since companies cannot change who they are (e.g. o&g won’t become solar) - Consumer and investor divesting = higher cost of capital (_Counter: not really - PE just picks up)_ - Data is awful on compliance and metrics and voting and ownership tl;dr coalition building for climate (and DEI and ESG) action via shareholder activism and building voting tech for shareholders - Build and facilitate easy institution → institutional linkages for proxy voting and sharing research & insights costs - v0 = Allow ESG research from Advocacy groups & ESG Activists to be packaged for large Institutional investors - v0.1 Pick 3-5 significant issues & get commitments from Activists to facilitate / educate - Mirror Microsoft gender justice proposal at XYZ companies - Arjuna + MSFT woman that Ziv knows - ONE OF - Climate - methane reduction target at XYZ companies - As You Sow? or Ceres? - Climate - emission reduction target at XYZ companies - As You Sow or Ceres? - Disclosure of lobbying -(Which company funded which lobbyist) - v0.2 Identify 5-10 family offices to pilot the topic + get commitments - P0 - Pratap has 3-5 offices ready - P0 - Eric (Friend of Ziv) - has 3-5 family offices ready - Georgia + Tumelo - Pensions - _Felix + Pebble finance - retail (NOT a p0)_ - [v1 = Tech platform for advocacy & think tanks to enable Institutions to be more accountable, transparent and vocal by getting voting rights from folks to](https://www.aspentechpolicyhub.org/climate/) - v2 = Bring all sources to an even keel market of sorts & drive the desired behaviour. Companies act in pure short term (or medium) self interest maximizing returns Current key influence points (shareholders) are not actively engaging on ESG Institutional owners (via passive ETFs) own a majority of the largest 5000 world companies Passive ETFs are facing pressure to be better ESG is now hitting focus in PR / press / attention Acitvist investors are smaller by order of magnitude and not growing “fast enough” to match the scale of passive retirement funds Big ETF owners are willing to cede control ## Key Hypotheses Hypothesis [Hypothesis Tree](https://www.notion.so/shreenath/4bfd70bc80e14b7f994b360dd1362f92?v=074630dcb069412aabaec9203a220709) - Conviction - Evidence Gaps in the current ecosystem - Transparency on voting for each public company - End to end ownership structure - End to end voting structure - End to end voting record (proposals and also core issues) - Exposure or risk - materiality, profitability and source of profits - Using public / unique data, we can estimate the ESG Risk as well as the CO2e Footprint of every asset owner no matter their size - Tie to Societal (conflict minerals / bonded labour) - Tie to governance (TBD **Ranking of institutions ( partner with Journalists)** - We want to enable clarity on how every family office, bank, insurance or any other asset manager votes - We will enable data analysis and support ## Scraps ## Backlinks ```query "Market Analysis - Stakeholder Social Activism" ``` %%