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Ethical activism – the economy’s mushrooms

24 June 2020

By Henry Adefope & Anthony Hughes, Associate Partners

The Covid-19 pandemic has had an unravelling effect on many of the systems we used to rely on and shaken up the way we think about things.  It has also created a moment – or perhaps an opportunity – to reflect on how we can improve things for the better, in particular how to build our broken economies back ‘better’.

For many, a good starting point for this change is through the implementation of ‘ESG’ principles (Environmental, Social, and Governance). The ESG ‘movement’ has been spurred on by high-profile investors signalling a change, such as Larry Fink’s letter advising CEOs that Blackrock has placed sustainability at the centre of its investment approach. While this letter is heavily motivated by climate change risks, it is clear that the firm’s thinking extends more broadly. Prior to the pandemic, investors (and some activist investors) were primarily focused on the ‘G’ and latterly the ‘E’ in ESG. The pandemic has pushed the ‘S’ to the fore. 

As governments shut down large parts of the global economy to fight Covid-19, socially conscious investors started making a new wave of ESG demands. Companies from Amazon down are now being asked by their shareholders to both provide greater disclosure regarding their pandemic response and to improve worker safety generally.  One of the potential drawbacks to the current ESG investor approach it that it is a blunt instrument, that, whilst well intentioned, could do more harm than good. If we take, for example, the protection of workers’ health in isolation, CEOs may turn to the least costly option to address it, leading to increased unemployment and widening inequality because employee safety and health are added costs that eat into a firm’s bottom line. Perhaps what is needed therefore, is a more nuanced, case by case approach. Enter the activist investor.

Activist investors have always presented an interesting conundrum for those who are ethically minded. On the one hand many disapprove of their endless quest for improved shareholder value and financial gain.  On the other, they keep companies on their toes, they are the scourge of bloated management packages and they force change to companies that are underperforming. They also increasingly use ESG markers as a lever to call for change in the management or corporate strategy of businesses.

If we really are to build back better we need a more nuanced approach that views, and celebrates, the business ecosystem on an holistic basis. Perhaps what we need is a new breed of ‘ethical activist investors’ who are recognised as an essential part of the ecosystem like the planet’s most successful and oldest known life form – the mighty fungi. Fungi’s main role in ecosystems is decomposition leading to recycling of nutrients. Fungi are mutualistic and many plants are dependent on fungi symbionts aiding roots in absorbing nutrients and water from the soil, leading to greater productivity. 

The activist approach is by definition somewhat nuanced and specialised (like fungi) in that it seeks to affect change in a specific company’s issues rather than generalities. Maybe a new breed of ethically conscious activist investors might just be a key component of the ecosystem in ‘building back better’, after all, even activist funds have investors.