Immersion Learning

A Different Breed of Activist Investors

by Johann Tritthardt, MBA'14 and Environmental Finance and Impact Investing Fellow (5/5/14)
Johann Tritthardt, MBA'14 and Environmental Finance and Impact Investing FellowThe SGE Immersion visited Calvert’s offices as a part of its 3-day trek to Washington D.C. and learned how Calvert seeks to encourage management teams to adopt or improve their company’s sustainability practices.

In recent years, financial markets have seen the rise of a new breed of investors. Names such as Third Point Capital’s Dan Loeb or Pershing Square’s Bill Ackman have become increasingly commonplace in mainstream financial media. These individuals, and their investment funds, are part of a growing cohort of investors known as activists. In short, their strategy entails purchasing a small ownership stake in public companies and publicly voicing changes the company’s management should make. Often their requests relate to corporate governance matters, but may also be strategic or operational. This strategy has become so pervasive that in August 2013, Forbes Magazine published an article on the topic entitled “The Golden Age of Activist Investing”[1]. This strategy has become increasingly pervasive, and one investment management firm is relying on a similar approach to bring sustainability changes to corporate practices.

On March 23, 2014, the SGE Immersion at the Samuel Curtis Johnson Graduate School of Management at Cornell University visited Calvert’s offices as a part of its 3-day trek to Washington D.C. Calvert, which is often most recognized for its socially responsible funds, not only invests in companies that meet its SRI requirements, but seeks to encourage management teams to adopt or improve their company’s sustainability practices.

Our first meeting of the day was hosted by Mike Lombardo, a member of Calvert’s Sustainability Research Department. According to the company, Calvert boasts one of the largest teams of sustainability research in the country with each analyst specializing in a social issue and a sector. In addition to conducting sustainability due diligence on companies, this group engages in shareholder advocacy on behalf of Calvert’s funds, which can be accomplished in several ways.

Proxy voting is the first way Calvert exercises its right as a shareholders. Proxy voting is the practice of delegating one’s vote to another voting member, often in the goal of forming a bloc with greater influence. Calvert actively votes their proxies on governance and compensation issues, among others. Calvert also discloses how they vote on proxies.

The second approach is to submit shareholder proposals which serve to start the conversation with the company’s management teams. Calvert has filed proposals on traditional governance issues as well as environmental and human rights issues. They have often co-filed proposals with other asset managers in order to increase their influence. A significant proportion of proposals are eventually withdrawn with a high success rate, indicating that management has acknowledged the issue and is committed to continuing the dialogue on the matter.

Calvert also seeks to implement change through corporate engagement, which can be either proactive or reactive. Calvert works closely with organizations such as the UN’s Principles for Responsible Investing group, who pull investors together to work on various environmental, social and corporate governance issues, including climate change. This has facilitated discussions with companies such as GAP, Levi Strauss and many airlines, which have all begun publishing annual sustainability reports.

Finally, Calvert pursues a public policy role by encouraging greater regulation related to sustainability work. The organization has engaged policymakers on various issues ranging from climate change and energy to human rights for indigenous people and forced labor. A notable success is their work restricting investment in conflict minerals in the Congo.

Calvert is based on three key pillars: to be a leader in policy research since corporations can be an actor for positive change; to deliver performance at or above industry averages; and to run the company the way they expect companies to run themselves. Since its inception in 1987, Calvert’s Signature Equity Portfolio has earned an average annual after-fee return of 7.88%, outperforming its benchmark by 4 basis points. With such strong performance, Lombardo showed that being socially responsible doesn’t come at a price.