By the rude bridge that arched the flood,
Their flag to April’s breeze unfurled,
Here once the embattled farmers stood
And fired the shot heard round the world.
From “Concord Hymn” by Ralph Waldo Emerson
Are you worried about climate change? What about social unrest stemming from inequality or polarization? The rise of authoritarianism and decline in the rule of law? The next pandemic, or microbial resistance to antibiotics? Using your financial rights to fight these harms may be more effective than your vote.
Politically active citizens vote, organize, attend meetings, rallies, and protests, and phone and write letters to their elected representatives. As citizens, these are our political rights. The majority of Americans also have robust financial rights, granted to us as participants in retirement and benefit plans, as customers of mutual and exchange-traded funds, and as shareholders. Few of us are aware of these rights, and fewer exercise them. We are missing an important opportunity to affect policy, society, the economy, and our own livelihoods.
Why bother? First, corporations are powerful, and their decisions affect our lives just like policy decisions do. Maybe even more so if you believe in the premise of “corporate capture,” that corporations have strong influence over our political system through revolving-door hiring, lobbying and political contributions. As investors and beneficiaries, we can alter these decisions.
Second, while we can try to affect political decisions in our own country, it is much harder to influence deforestation policy in Brazil or forced labor laws in Asia. But corporations have global reach, and a U.S. citizen can become a citizen of the world by influencing corporate behavior.
Third, in our polarized society it’s increasingly difficult to exercise our political rights. Conservatives in blue states, and progressives in red states may believe that their votes no longer count. Yet a shareholder or beneficiary has financial power no matter where they live.
Your Power Is Rooted in your Fiduciary Relationships
If you have ever tried to influence a large corporation directly, you probably came away frustrated. Your individual power is minuscule compared to the resources of a corporation. But if you participate in a retirement plan, or exchange-traded or mutual fund, you have an important intermediary: your fiduciary. A fiduciary is a person or organization, like a retirement fund trustee or investment management firm, who is empowered to make decisions about money that doesn’t belong to them. This type of relationship is obviously open to abuse, and that is why your fiduciary has special obligations to you. For example, your fiduciary can’t put their own financial interests ahead of yours. You always come first. This is called the duty of loyalty. Another obligation is that your fiduciary must invest your money prudently. This is called the duty of care. Because fiduciary duty involves both ethical and legal considerations, the fiduciary obligation is “the highest known to the law” (Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir. 1982)).
Your fiduciary has the clout that you lack. About 70% of all of the stock in U.S. public corporations is controlled by fiduciary institutional investors. Fiduciaries can change corporate behavior through their stock ownership, by voting for corporate resolutions that they file or that other shareholders file, by voting for or against corporate board directors and other management-sponsored resolutions, or simply by making strong statements of their expectations. Fiduciaries also own most corporate bonds. Since corporations raise the majority of their capital in the debt markets, fiduciaries can change corporate behavior by refusing to finance, or re-finance, a company’s debt securities. Finally, fiduciaries can lobby governments all around the world on your behalf.
Fiduciaries Guard Your Investments from Financial Risk
Fiduciaries exercise their duty of care by investing your money wisely. We normally think about “wise investment” from only one side, expected return. But professional investors never think of expected return in a vacuum; investing is a balance between return and risk. Many investments with a high expected return are imprudent, because they are too risky. The duty of care therefore includes both investing for acceptable future returns and also investing to minimize unacceptable risk.
Risk comes in several flavors. One is the risk that an individual asset or related group of assets will decline in price. This is known as “idiosyncratic” risk because it only affects a subset of the market. This risk can be prudently minimized through diversifying a portfolio; for example, a decline in oil prices will cause oil producers to make less money but will also allow airlines to reduce their costs. A well-diversified portfolio with assets from different sectors will normally allow an investor to offset various idiosyncratic risks. That is why the U.S. Department of Labor requires fiduciaries to “diversify the plan’s investments in order to minimize the risk of large losses.”
There is another type of risk that cannot be prudently minimized through diversification, however, called “systemic” or “systematic” risk. Systemic risk causes assets to decline in value together; diversification is of no help. The investing world was jarred into recognition of systemic risk by the Global Financial Crisis of 2007-2009, when broad markets declined in sync (the peak-to-trough decline in the S&P 500, for example, was 57%). That particular systemic risk was unforeseen by most investors, but presently there are a number of systemic risks that we can identify and even expect, that will have severe implications for retirement accounts and funds. One of these is climate change. The Government of Singapore estimated that its diversified, balanced global pension fund could decline by up to 40% from a reduction in world-wide economic output, caused by climate-related increases in weather disasters, rise in sea level, and government clamp downs on polluting businesses around the world. The British defense company BAE Systems calculated the same magnitude of risk for its defined contribution plan. Your long-term, diversified investments face the prospect of comparable declines. Another systemic risk is economic inequality: inequality makes financial crises more likely. The rise of authoritarianism and corresponding erosion of the rule of law may cause economic growth to decelerate, meaning your portfolio may not grow as fast as you expect. Health-related risks like pandemics, the opioid crisis, and anti-microbial resistance impose trillions of dollars of financial burden on the economy as well. These risks make up an intertwined “polycrisis” with the potential to wipe out your retirement funds. Many of the corporations in your portfolio contribute to these risks, and your fiduciary can play a powerful role in influencing companies to reduce them. Part of the duty of care is the obligation to investigate material risk. If your money manager, mutual fund, or retirement fund trustee isn’t investigating material risks to your investments, and taking actions to prudently mitigate them, that could be a breach of fiduciary duty.
What Actions Have Fiduciaries Taken?
Some fiduciaries have used forceful engagement with individual companies to reduce systemic risks. One example is the California State Teachers’ Retirement System (CalSTRS), the second-largest public pension fund in the U.S., which has set methane reduction as one of its 2024 priorities. CalSTRS is urging that its portfolio companies join a U.N. effort to measure, disclose and mitigate methane emissions, to which the oil and gas behemoths Exxon and Chevron have already agreed. CalSTRS backs up its engagement with strong sanction: in 2023 it voted against board directors at over 2000 companies considered to be lagging on climate. Methane has accounted for 30% of the rise in global temperatures since the Industrial Revolution; therefore, this fiduciary is reducing the systemic risk of climate change for its beneficiaries.
Another example is the successful campaign that forced Starbucks Corp. to acknowledge workers’ collective bargaining rights. Launched by a coalition of labor unions, and supported by the five New York City pension funds, the campaign nominated three dissident board directors who favored unionization. The nominations were withdrawn in response to Starbucks’ agreement to work toward a collective bargaining framework with its union. Although the rationale for the board challenge was concern that the company’s anti-union actions “threaten employee well-being, and consequently, the Company’s ability to maximize shareholder value,” fiduciaries should recognize that union suppression is a driver of income inequality, a systemic risk to the financial markets.
Fiduciaries also mitigate systemic risks by financing risk-reducing projects and withholding financing from companies that increase these risks. Some Morgan Stanley Investment Management fixed-income funds, as one example, deny capital to thermal coal producers but will provide capital to their projects if they credibly reduce carbon emissions.
Activate Your Fiduciary Relationships
You may think that your portfolio is so small that your fiduciary won’t bother with you. In that case, you should think again. Another critical aspect of the duty of care is the duty of impartiality. This means that a fiduciary must take impartial account of the interests of all beneficiaries and cannot place another beneficiary’s interests above your own. If you’re worried about outliving your retirement savings, then you must be concerned with the systemic risks that will affect your portfolio value. It is your fiduciary’s obligation to you to take reasonable steps to address these concerns.
You may be unaware of the actions that your fiduciary is taking to investigate and reduce systemic risk. You have a right to find out. If you own a mutual fund or ETF directly, call your fund family on its customer service line. Ask to speak on a recorded line (your fund company will allow this if you state that you have a complaint). Tell your rep that you are concerned that your fiduciary is not protecting your portfolio from systemic risk, and you want to know what precautions are being taken. Your rep will probably be speechless, but if enough people do this your fund company will get the picture. If you own a mutual fund or ETF in your 401(k), or are part of a pension plan, call your plan sponsor with the same request.
If you wish to escalate, write a letter. Establishing a paper trail is always a good idea. A group called Vanguard S.O.S. organized 1400 Vanguard fund holders to express their displeasure with the firm’s approach to climate change. A letter using similar language, sent to your fund company or plan sponsor, will get noticed. Ignoring systemic risk can land a fiduciary in hot water, as a pension fund in Australia, where fiduciaries are similarly treated, learned several years ago. For citizen stockholders who wish to learn more, helpful resources can be found here and here.
A Call to Action: Go Make Change!
You are a citizen of two worlds. One is the political world; you are the citizen of a nation. The other is the financial world; you are a citizen if you have a retirement account or own mutual funds and ETFs. Each world gives you powerful rights. Most of us concentrate on our rights in one world while ignoring our rights in the other. Join the citizen stockholder movement: you and your portfolio will benefit as a result.
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