Family foundations beginning to shame public companies to invest more in ESG causes

John D. Rockefeller founded Standard Oil Co., and as a result was the richest person on the planet when he died in 1937. Yet, some of his 200-plus living descendants have embarked on a mission to challenge Standard Oil offspring Exxon Mobil Corp. on climate change.

So it should come as little surprise that the investment company that traces its roots to John D.’s family office is contending with a related question: deciding just how much it wants to change the world.

In March, Rockefeller & Co. transformed into Rockefeller Capital Management following a transaction led by former Morgan Stanley wealth management chief Greg Fleming, with financing from hedge fund Viking Global Investors. The rechristened company, with Mr. Fleming as chief executive officer, is owned by its management, Viking, and a trust representing the Rockefeller family.

Mr. Fleming’s plans for the company, which had $12.7 billion in assets under management at the end of 2017, include bulking up its asset management effort, starting a strategic advisory operation and expanding its wealth management arm, which provides advice and planning for wealthy clients. Part of that effort involves catering to women and millennials with socially responsible investing products.

For Mr. Fleming, whose 30-year Wall Street career included a stint as president of Merrill Lynch & Co., such environmental, social and governance-based offerings are integral to winning clients.

“The millennials are actually going to treat ESG investing as something that’s important to them forever,” he says.

In a 32-page January report discussing the performance of its sustainability and impact analysts last year, the company said it voted 2,696 proxies and supported 46% of shareholder proposals, including two it co-filed. Among the steps it took to engage with companies it invested in, Rockefeller voted against an entire board slate for the first time because of “corporate responsibility shortcomings.” In the report, the company said it was “dissatisfied” that Oracle Corp.’s board hadn’t made more progress in aligning CEO compensation with long-term performance. The report said it will continue to engage with Amazon.com Inc. on human capital management, particularly regarding working conditions at its distribution centers.

Still, Rockefeller Capital’s chief investment officer, David Harris, says the company will go only so far. It doesn’t want to rail against a company’s management in the press, for one thing.

“The beauty of being in public equities is that we can exit the position,” he says.

Responsible investing in public markets was long considered by many financial professionals to be an underperforming niche. Managers screened out businesses that investors disapprove of — tobacco makers and oil companies — and clients accepted that investing in this manner was likely to curb returns.

More recently, however, many investors have come to believe that socially responsible investing doesn’t necessarily forgo gains, and that such stock holdings can create an avenue to making companies behave better. Earlier this year, BlackRock Inc. CEO Laurence Fink wrote an open letter to chief executives urging them to measure their success beyond earnings. Among his suggestions was that CEOs evaluate their companies’ impact on the environment or the communities they serve. In the wake of the Marjory Stoneman Douglas High School shooting in Florida that killed 17 people, BlackRock and State Street Corp. said they would engage with gunmakers.

Getting their ear

To get a large public company to pay attention typically requires one of two things: deep pockets or a loud voice. The vast majority of shareholder proposals seeking to improve a company’s environmental or social impact are still put forward and supported either by large pension funds, such as the California Public Employees’ Retirement System, or by nonprofit activists, such as the Sisters of St. Francis of Philadelphia. Several small companies that manage money for wealthy individuals, foundations and endowments — including Zevin Asset Management, Arjuna Capital and Trillium Asset Management — fall into the activist camp, but they control a small fraction of the alternative investment industry. Otherwise, money controlled by rich people has rarely been used to push for corporate responsibility.

So should private wealth embrace shareholder engagement and even shareholder activism? Why are few foundations or billionaires with strong values using their public stockholdings to push for change?

Such questions are drawing the attention of wealthy people and family foundations across the country, particularly after the Ford Foundation announced last year that it would devote up to $1 billion of its $12 billion portfolio to investments that would make the endowment money while also advancing its social justice mission.

Meredith Shields, managing director of the Sorenson Impact Foundation, says Ford’s decision was part of what pushed Jim Sorenson, founder of Sorenson Communications, to reconsider how he was investing the publicly traded funds that endow his foundation. After a yearlong discussion, the foundation shifted a quarter of its publicly traded investments into socially responsible strategies at the end of last year. Ms. Shields says this was the first move in a two-year process conducted in conjunction with the foundation’s financial adviser, Sepio Capital.

The foundation’s goal at an existential level is to bring about change, Ms. Shields says.

“So to the extent that that requires being more engaged with the companies — and saying, ‘We view you as a great investment, with the exception of this thing you’re doing over here’ — I could see that as certainly a path we’d go down.”

Other foundations and family offices have started to engage indirectly. Some are key supporters of Oakland, Calif.-based nonprofit As You Sow, which explicitly champions corporate accountability through shareholder action. Ian Simmons, who runs single-family office Blue Haven Initiative with his wife, Liesel Pritzker Simmons, is a member of the U.S. Impact Investing Alliance, along with Mr. Sorenson and Ford’s Darren Walker.

Still, many family offices and foundations remain unconvinced that they can succeed in pushing for change at a large public company. That requires either an enormous amount of capital or a public campaign, says Greg Neichin, director of Ceniarth, a single-family office founded in 2013 that oversees the wealth of the late Eugene Isenberg, former chairman of Nabors Industries, and his family. Ceniarth’s mission is to make investments that benefit underserved communities, but it typically sticks to private-market investments where it can play a bigger role in the decision-making.

“The family office world is sort of stuck in the middle without either of those tools,” Mr. Neichin says. “They don’t necessarily hold enough capital to make that kind of impact.”

Strength in numbers

Although it may be difficult for individual families to play a more active role as shareholders, there may be strength in numbers.

“If they group together or get together with asset managers, they could reach critical mass,” says Martin Whittaker, CEO of Just Capital, a nonprofit that ranks companies on values such as environment and community impact. Just Capital was established by a group that includes billionaire Paul Tudor Jones. Companies might take notice if the family office for someone such as Microsoft Corp. founder Bill Gates announced criteria for the companies it would invest in.

“I think they’d have to be willing to be public about what they’re doing,” Mr. Whittaker says.

That may not be a role Rockefeller Capital wants to take on. Yet, meanwhile, the company’s team of five sustainability and impact analysts are helping it “find better companies, to identify risk that a typical CFA, traditionally trained economics or finance major might not necessarily be flagging,” CIO Mr. Harris says. Although not all the company’s equity products are specifically ESG, most of its portfolios loosely track its ESG investing.

In other words, Rockefeller Capital sees its sustainability team as key to making money. Perhaps that’s the smartest strategy of all.