Activist investors: the new climate enforcers?

By Anthony Hughes

With the SEC issuing a new draft proposal to add standardised climate reporting to required disclosures by public companies and TCFD reporting requirements coming into force in the UK last week (6 April), ‘ESG’, in all its glory, looks like it is finally starting to materialise into something more concrete that will see more positive climate action from businesses.

While these requirements are a positive way for investors and companies to start measuring climate risk more effectively, companies should be wary of treating this as just another governance box ticking exercise. New disclosures could leave companies even more vulnerable to attack, providing a treasure trove of information for activist investors to launch attacks on companies that are not listening to their shareholders and taking action. 

According to Lazard, last year saw the rapid proliferation of ESG as a key plank in activists’ campaigns. Whilst the overall number of activist investor campaigns declined in 2021 as compared to 2020, the number of ESG-related campaigns, and the impact and success of investor activist campaigns, rose year over year. From January to August 2021, 13% of ESG activist campaigns were successful, compared with 11% for the same period in 2020. 

The use of ESG in campaigns ranged from fundamental strategic attacks to more ancillary “wedge” criticisms (i.e. driving a wedge between companies and shareholders) intended to curry favor with index funds and the rapidly growing number of ESG-focused investors. According to the Harvard Law Forum, companies need to prepare for a new strategic threat: a two-front “pincer attack” from ESG activists, on one side, and the more traditional financial ‘total shareholder return’ (TSR) activists, on the other. An ESG activist attack presents a golden opportunity for TSR activists to pile on, free-riding on the ESG arguments that many institutional investors support. This is a new twist on “wolf-pack” activism that provides new opportunities for activists to drive a wedge between a company and its key stakeholders. 

Some of the world’s largest asset managers are also fueling ESG related shareholder activism. Norges Bank executives say they want to see companies prepare for a future in which robust ESG policies will be necessary just to survive. Similarly, BlackRock says in its proxy voting guidelines that: “We may signal concerns about a company’s plans or disclosures in our voting on director elections, particularly at companies facing material climate risks.”

It is likely that activist investors are just getting started when it comes to ESG related attacks. There are a growing number of activist ESG-impact funds, whose stated purpose is to invest in companies that “need help” in meeting ESG goals and then seeking board seats to provide that help. A recent high profile example of this is the new ESG-focused activist fund Engine No. 1’s successful campaign to elect three directors to the board of ExxonMobil in a bid to push the company toward transitioning to a low-carbon economy. Other companies closer to home have also come under attack for climate related issues including Prudential Plc.  

Communication is a key part of the mix, as the old adage goes “prevention is better than cure”. The simple fact is if companies can show that they are listening to the investment community, have a clearly articulated ESG strategy and are making quantifiable progress towards those goals, they are significantly less likely to end up on an activist hit list in the first place.   

Sources: 

Harvard Law Review – Shareholder Activism and ESG

Lazard Annual Review of Shareholder Activism 2021