Eric McKay is very passionate about global warming, and the new resident of Knoxville has a distinct plan on how to influence the decisions made by corporations on that topic. It’s clearly a long-term play, but it starts with identifying a few key investors who share his passion and vision.
“The biggest long-term threat to companies is global warming,” McKay says, yet their corporate policies don’t recognize that impact, and he blames big funds with sort-term return horizons for much of the problem.
“Index funds have a huge influence on boards (of directors) and the operations of corporations,” says the Arizona State University graduate – just two years to earn his undergraduate degree – and 2011 Peter Thiel Fellow.
The three biggest funds – BlackRock, Vanguard and State Street – have about $15 trillion under management. Vanguard owns about eight percent of every company in the S&P 500 and, as a result, gets to vote eight percent of the shares on proposals at each company’s annual shareholder meeting.
“Collectively, the ‘Big 3’ index fund managers own about 18 percent of every company in the U.S.,” McKay says. “This gives them a significant influence on corporate policies.”
To begin to reverse some of those decisions as they relate to climate change, he recently created Green Governance that, in turn, started the “Fund Climate Vote Database” and will soon launch a new index fund that will use the power of shareholder investments for good. The two initiatives are very complementary.
The database is capturing information on how institutional investors are voting on shareholder proposals related to global warming. According to a recent post on the Green Governance site, McKay reported that Vanguard’s largest fund voted against 87 percent of climate change proposals in 2018 while BlackRock’s largest fund voted against them 93 percent of the time, and State Street’s largest fund came in against them 63 percent of the time.
Having this level of knowledge available to investors and fund managers is only part of McKay’s solution. The other is a $10 to $15 million index fund that will, as it grows over time, gain clout for investors to bring pressure on corporations to change their policies on climate.
McKay says the fund he visualizes, technically known as an exchange-traded fund (ETF), will invest in firms in the S&P 500 just like the ‘Big 3.” That will allow Green Governance to vote on proposals related to global warming are presented and offer an opportunity to suggest alternative policies.
“This index fund will aggressively use shareholder advocacy to fight climate change,” McKay explains. “Other environmentally friendly funds screen out misbehaving companies. Our fund will instead invest in the full index and use its position as a shareholder to push firms to reduce their emissions. This offers investors both maximum diversification and maximum impact.”
McKay worked for a number of start-ups in New York City and Federal Reserve Bank of New York before relocating to Knoxville in August 2018 when his wife accepted a position in the Haslam College of Business at the University of Tennessee, Knoxville.
“During my work at the Fed, I started getting interested in how index funds have so much power,” McKay said.
He started working full-time on the effort in mid-2019.
“My team won’t make any investment decisions,” McKay said. We’re responsible for marketing the fund and making the corporate governance decisions.”
McKay needs at least $1 million to launch the fund and says he can have it active three or four months after securing the anchor investors.