Engine No. 1 Transform 500 ETF (Ticker: VOTE)

overall rating:

0.3

planets

Lucy Li
10/24/2021
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Engine No. 1 is an activist investment firm that aims to encourage companies to adopt better environmental, social and governance practices using an active investing approach (where it uses its shareholder voting powers to influence the strategy of companies). As an activist fund, Engine No. 1 can have a greater impact on the practices of companies, compared to passive ESG-labelled funds, directly resulting from its holdings in the companies (that enable it to vote on practices and interact with management). Investing in purely ESG friendly companies does not provide additional capital to these sustainable companies to enable them to grow. Divesting companies with poor ESG practices also does not guarantee that they even change their dismal ways. In this way, Engine No. 1’s approach is arguably more effective than other so-called ESG ETFs.

However, the product in this review, its Transform 500 ETF (basically just another S&P 500 index) which is marketed as a way to vote for their way of doing things over the usual stock market, is unlikely to have much of an impact resulting in its low planet rating. You may be better off at least waiting for its “Transform Climate ETF” which launches later this year which will invest in companies that are changing their practices to address climate change or are helping other companies to do so.

What it's made of:

0.1

The pure contents of the ETF itself are nothing special. It tracks the Morningstar US Large Cap Select Index, a market-cap-weighted index that invests in just over 500 of the largest companies in the US and represents over 80% of the US equity market. The unique aspect about the ETF comes from how Engine No. 1 plans to use these shares in companies to support its proxy campaigns (i.e. when shareholders join forces to vote and affect corporate change) which aim to encourage companies to adopt ESG strategies that better serve their employees, communities, customers and the environment.

It is unclear which of the 500+ companies they will actually target as they simply cannot target all of them. The CEO herself said that there will be “very, very, very few cases” where they are actually an activist and that they purposely do not disclose which companies they plan to engage with. So the fund is advertised as being better than a standard S&P 500 product and as being somewhere you can invest to vote in line with its framework. The explicitly stated lack of engagement with most of the companies means that there will be little impact from investing in this ETF making its rating very low.

How it's made:

0.5

Engine No. 1 assesses the value of companies and its investments using its ‘Total Value Framework’. The uniqueness of its approach comes from how it tries to numerically incorporate ESG factors into financial analysis by assigning dollar values to damages or benefits from environmental, social and governance factors for companies. This bumps up its sustainability rating as it allows the influence of ESG factors on investment decisions to be more concrete than current ESG scores that are difficult to integrate into spreadsheets and algorithms.

Part of whether this fund is sustainable or not relies on whether Engine No. 1 can enact change on companies’ strategies. The only example we have of this impact so far was its campaign against ExxonMobil. Engine No. 1 managed to vote in 3 of its recommended board of directors with the necessary experience to achieve its vision for the oil and gas giant to significantly reduce its carbon emissions and transition into a global leader in profitable clean-energy production. This may seem like a win for sustainability, but the success came from how the proposals made sense from a business perspective (the campaign also included ways to increase the general profitability of the company) rather than being driven by wanting to do good for the planet. (This is largely what persuaded large asset managers to back Engine No. 1’s campaign and ensure it received enough shareholder votes to pull through.) Engine No. 1 also did not offer specific ways ExxonMobil could improve its financial or climate performance during the campaign; however, it has recently announced that it is keeping oil output at the lowest level in two decades in the years through to 2025. This was labelled an “early win” by Engine No. 1’s CEO and may indicate that the fund can have some impact on companies, but it is still too early to be sure. What this means for the ETF is that how much impact Engine No. 1 actually achieves is very uncertain both in terms of being able to gain enough support from large asset managers (with the voting power to change corporate strategy) and the subsequent measurable impact it makes on companies’ practices. The lack of clarity makes it hard to trust that investing in the ETF will actually enact the change we want and brings down its sustainability score.

Who makes it:

0.3

Engine No. 1 was founded by Chris James, known for his technology investing but also has considerable energy investment experience. Charles Penner, who led activist investment firm JANA Partner’s campaign against Apple to allow parents to limit child phone usage in 2018, and CEO Jennifer Grancio, who co-founded BlackRock’s iShares ETFs business, were also members of the founding team. The team has experience in driving impactful change in corporate strategy in ESG terms which bumps up its score.

However, by nature as an investor, Engine No. 1’s key goal is still to deliver financial returns. Its own framework focuses only on ESG factors that have a direct impact on financial valuation. If your concern is about businesses meeting climate goals, then the transformation Engine No. 1 delivers (if their proxy campaigns are even successful) may not be sufficient, despite being a step in the right direction which caps how sustainable this ETF can be and so also caps its score.