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What US gun controversy says about the future of passives

In the wake of a string of shootings in the US, firms are facing calls to drop arms investments. Putting pressure on the fund giants to meet with gun manufacturers could be the best way to enact change

What US gun controversy says about the future of passives

Fund giants BlackRock and Vanguard have recently faced boycott calls from a survivor of the Parkland school massacre over holdings in firearms manufacturers.

Student David Hogg, 18, has become a gun reform advocate since the shooting on 14 February, in which 17 people were murdered at Marjory Stoneman Douglas High School in Florida.

In a series of tweets, Hogg said: ‘[BlackRock] and [Vanguard] are two of the biggest investors in gun manufacturers. If you use them, feel free to let them know.’ This was followed by the hashtags #BoycottBlackrock and #BoycottVanguard.

BlackRock and Vanguard are two of the largest managers of exchange-traded funds (ETFs). They are also the biggest owners of publicly traded firearms manufacturers, including Sturm Ruger and American Outdoor Brands.

Applying pressure

But is calling for a boycott, as advocated by Hogg, the best way to put pressure on these investment giants?

Mike Lambrakis, partner adviser at Los Angeles-based AdvicePeriod, said a better approach would be for campaigners to switch targets.

‘Vanguard and BlackRock don’t have a say in the stocks they buy in most of the funds that own gun company stocks,’ he said. ‘You could ask S&P to consider excluding them from their indexes. Or you could ask Capital Group, Invesco or other firms that choose gun companies.’

A different tactic would be to turn the ETF providers' clout to their own ends.

Lambrakis said each share owned by these asset managers gives them a vote on company issues, such as the composition of the board of directors. Vanguard and BlackRock collectively own 20% of American Outdoor Brands and 25% of Ruger. ‘That gives them a lot of say in how those businesses are run,’ he added.

The adviser suggested it would be more effective for Hogg to encourage people to press Vanguard and BlackRock on how to vote with those shares. He also highlighted investment options that excluded firearms manufacturers and retailers.

Screening stocks

BlackRock is creating several options for investors wanting to avoid the AR-15 semi-automatic rifle, which was used in the Parkland shooting, and other civilian firearms. The world’s largest investment manager will exclude gun manufacturers and retailers from the broader socially responsible mutual funds and ETFs it runs.

Historically, these have omitted companies manufacturing cluster bombs, nuclear weapons and cigarettes. But BlackRock is going one step further. It now offers institutional investors the chance to screen out gun stocks from endowments, and includes gun-free index funds in its employees’ pension choices. 

Vanguard also offers a social fund that excludes gun companies. And Newsweek recently reported both firms are in talks with gun manufacturers.

A statement from Vanguard said: ‘Importantly, Vanguard is taking action by meeting with the leaders of gun manufacturers and distributors. We want to know how they will mitigate the risks their products pose, and how they plan to help prevent such tragedies from happening again.

‘We believe when a business poses a risk to society, it can also pose a risk to investors. We are expressing this viewpoint directly with company leaders, because greater focus and transparency on these issues will ultimately benefit society and investors alike.’

Giving back to society

Hogg might not have picked the right battle in this instance. But these kinds of tragic events thrust the subject of ‘socially responsible investing’ back into public consciousness.

BlackRock chief executive Larry Fink recently warned financial performance was not enough. Instead, firms must ‘make a positive contribution to society’.

Both the asset management industry and financial advice profession are coming under pressure to prove value for money. But what values investors want for their money is another question when it comes to something like firearms in the US. 

There, public proponents of stricter gun laws are starting to influence the conversation about ethical investing, and gun stocks in particular. 

Back in the UK, low cost exposure to markets which also takes ethical preferences into account is still not something that can be easily bought off the shelf.

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