Arms-makers again a target of institutional engagement
Conversations about what role, if any, investors should play in stemming gun violence are heating up following the Feb. 14 shooting at Marjory Stoneman Douglas High School in Parkland, Fla., that left 17 dead.
BlackRock (BLK) Inc. (BLK), the world's largest money manager, on Feb. 22 said it planned to speak with weapons manufacturers and distributors in which it invests "to understand" their response to the Florida high school shooting. A few days later, State Street Corp. (STT) announced it would engage with weapons-makers and sellers to learn more about how they will ensure the safe use of their products.
BlackRock and State Street's initial announcements lacked specifics on their future or previous engagement efforts about gun safety. But industry experts said the firms' comments were still significant and not something they recalled hearing in the wake of other mass shootings.
BlackRock followed up on March 2 by disclosing on its website some of the questions it is asking gun-makers and distributors, including what their strategies are for managing "the reputational, financial and litigation risk" associated with making and selling civilian firearms; whether they are investing in research and development to ensure the safe use of their products; and what their policies are for determining who can buy the products.
Part of what is driving managers to be more vocal about their engagement efforts now, sources surmised, is growing investor attention to environmental, social and governance issues. One sign of this has been commitments from managers like BlackRock and State Street over the past year or two to increase their engagements with companies on ESG issues, said Jon Hale, Chicago-based director of sustainable investing research at Morningstar Inc.
With the growth in index investing, passive managers also are holding larger stakes in portfolio companies now than in the past, noted Patrick McGurn, special counsel, head of strategic research and analysis at proxy-advisory voting firm Institutional Shareholder Services Inc. in Rockville, Md.
BlackRock and State Street Global Advisors, State Street Corp.'s money management arm, are largely passive investors. As large shareholders, they have "a certain responsibility to be responsible shareholders" and engage with companies on issues that could affect the companies' bottom lines as well as society or the environment, Mr. Hale said.
In letters last week, Sen. Elizabeth Warren, D-Mass., urged BlackRock, Fidelity Investments, Vanguard Group Inc. and six other large gun-company investors to use their financial leverage to ensure gun-makers are taking steps to reduce gun violence.
BlackRock is the largest shareholder in firearms manufacturers American Outdoor Brands Corp. and Sturm Ruger & Co., Bloomberg LP data show.
BlackRock's most recent 13F filing shows the firm held a total of 8.9 million AOB and Sturm Ruger shares, for an estimated combined valued of $202.3 million as of Feb. 26, according to Bloomberg data. The rifle used in the Florida shooting is made by Smith & Wesson, a subsidiary of AOB.
Ms. Warren's office suggested in a news release the actions that gun companies could take to reduce gun violence include establishing "tougher self-regulation, asking retail outlets that sell their products to impose their own standards such as higher minimum age requirements for purchase of weapons, or requiring waiting periods prior to purchase," and directing "company research toward the development of safer weapons and violence reduction."
Judy Byron, director of the Seattle-based Northwest Coalition For Responsible Investment, a group of faith-based investors, said she would like to see large money managers support gun safety shareholder proposals that have been filed at AOB and Sturm Ruger this proxy season, much the same way that BlackRock (BLK) and Vanguard got behind the climate change proposal at Exxon Mobil Corp. in 2017. With BlackRock and Vanguard's support, the Exxon climate change proposal received majority support last year after failing in 2016. BlackRock and Vanguard declined to comment.
Gun safety proposals filed at Sturm Ruger in 2001 and 2002 were supported by 5.43% and 4.26% of investors, respectively, Ms. Byron said.
Both the AOB and Sturm Ruger 2018 proposals call for gun manufacturers to report their efforts to make guns safer and mitigate gun violence.
At least one other proposal was filed this proxy season. The proposal, targeting firearms distributor Dick's Sporting Goods Inc., was withdrawn in January after conversations with the company, said Valerie Heinonen, New York-based director, shareholder advocacy, at Mercy Investment Services, which filed the proposal.
On Feb. 28, two weeks after the Florida shooting, Dick's announced several changes to its firearms policy, stating it would no longer sell high-capacity magazines or sell firearms to anyone under 21 years of age. Assault-style rifles already had been removed from Dick's stores after the 2012 shooting at Sandy Hook Elementary School in Newtown, Conn. Walmart Inc. and Kroger Co. also have tightened their firearms policies since the Florida high school shooting.
Mr. McGurn of ISS noted that for most companies with annual meetings in the first half of 2018 the deadline to file shareholder proposals occurred before the Florida shooting. However, investors can still attend companies' annual shareholder meetings and engage with the companies, he said.
He also noted that just because proposals are filed does not guarantee they will make it onto company proxy ballots. Whether the companies engage with investors or attempt to have the proposals omitted remains to be seen. Officials at Sturm Ruger and AOB could not be reached for comment.
The proposals at AOB, Sturm Ruger and Dick's all were submitted before the Florida shooting.
Call for action
Similar to what was seen after the 2012 shooting at Sandy Hook Elementary School, elected officials and pension fund participants in some states are calling on pension fund officials to divest and restrict new investments in gun companies.
On Feb. 26, New Jersey state Sen. Vin Gopal introduced legislation that would ban the $76.3 billion New Jersey Pension Fund, Trenton, from investing in gun manufacturers. Calls to the New Jersey fund were not returned.
Outside of media inquiries, Florida State Board of Administration spokesman John Kuczwanski said he has received about a dozen inquiries about the board's investments in gun companies since the Feb. 14 shooting, some from participants that wanted the Tallahassee-based fund to divest its holdings. Mr. Kuczwanski, who has been at the SBA eight years, said it was the first time he had received inquiries from pension fund participants on the fund's gun company holdings.
The board oversees a total of $209.7 billion, including the $167 billion Florida Retirement System.
The Florida pension fund has a total of $1.7 million invested in gun manufacturers Vista Outdoor Inc., AOB and Sturm Ruger through an internal managed passive account benchmarked to the Russell 3000. It also has $906,000 invested in AOB and Vista Outdoor through active external managers, according to data provided by Mr. Kuczwanski.
No decision on divestment has been made so far. Mr. Kuczwanski emphasized the SBA has a fiduciary duty to "act only in the economic interests of participants" and noted "there are alternatives to divestment." He declined to say what actions the board might be considering.
Marija Kramer, head of ISS' responsible investment business, which provides portfolio screening services, said the firm has seen "growing interest among institutional investors in ISS' firearms screening solutions as a result of recent events, most notably in Florida and Las Vegas, where at least 58 people attending an outdoor concert were killed.
"Depending on their world view, some institutions are choosing to completely exclude any company with ties to firearms manufacturing, while others may choose to screen out a firm based on a percentage of revenue derived from such activity," Ms. Kramer said. "One recent screening request we have received concerns investors' desire to screen for corporate sponsors of the National Rifle Association."