Business

Tarnished by greenwashing, ESG is about to enter a much more effective wave, shareholder activism

As if inflation and war weren’t enough, businesses – including family enterprises – need to get ready to deal with rising shareholder backing for ESG activism. 

According to a recent Harvard Law School publication: “Boards of public companies should be establishing oversight of ESG issues as a priority matter.” Rash promises could easily result in a shareholder revolt.

We saw a tipping point in May 2021 when activists won shareholder support for boardroom seats at Exxon even though they only owned a 0.02% stake. 

Carl Icahn has raised the tempo by starting a proxy fight over the way pigs are reared for Mcdonald’s. He only has a tiny stake, but there is a good chance he is going to win. 

This year has seen a 23% increase in US proxy filings following an SEC decision to broaden their parameters. Millennial investors are calling more of the shots at institutions and they take ESG really seriously.

Roughly $40 trillion is managed for clients using Environmental, Social and Governance guidelines. For years, investors were happy enough to let their managers use benchmarks tilted towards ESG. 

But their benchmarks were too similar to cap-weighted indices because managers were fearful of underperforming. They often invested in companies whose policies were not sustainable, as Family Capital reported on 27 July 2021

ESG turned into a marketing scam and managers are getting worried they will get sued by their clients.

This is not unprecedented. The Rest pension scheme of Australia recently faced a negligence claim over climate issues from a millennial client and ended up settling out of court.

Legal firm Pallas Partners says vague or misleading marketing material could lead to misselling claims. The European Union is producing a taxonomy of sustainable companies, which could help clients decide whether their portfolios were fit for purpose.

But even if ESG.01 is discredited, there are trillions of dollars that could help turn activists into ESG.02, with support from sympathetic institutions and family offices who are weary of corporate greed, evasions and short-termism.

Activist investors who buy stakes in companies with a view to shaking them up in a proxy fight have realised they can tap into growing ESG unrest to win their battles.  

Quite apart from Exxon and McDonald’s, Chris Hohn’s Children’s Investment Fund has been winning support from shareholders for his “say on climate” campaign. After checking out opinions, dozens of companies have agreed to consult shareholders over decarbonisation in 2021. Hohn has also started to campaign against the banks for lending money to fossil fuel operators.

Activists have forced companies like Netflix to reveal their political donations. Elliott Management, the largest activist in the world is not renowned for its sustainability but its head of stewardship, Christine O’Brien, is proactive, lately getting involved in campaigns to get women in boardrooms.

Lynn Forester de Rothschild, chair of EL Rothschild family office, has teamed up with Jeff Ubben at Inclusive Capital, to develop a sustainable activism programme. 

Cevian Capital, Europe’s largest activist, currently targeting Vodafone, is campaigning for directors’ pay linked to ESG targets. In a release, it said: “Significant, measurable and transparent ESG targets form part of senior management compensation plans for European public companies.”

For the record Cevian was backed at inception by Carl Icahn who has never liked excessive pay. 

Kimmeridge, an oil and gas investor, has campaigned for pay linked to ESG returns, as well as positive drilling results.  

According to Harvard Law School: “By integrating criticisms of ESG failures into campaign narratives, activists may gain additional traction with investors at the ballot box.”

It adds: “For an institution to turn its back on an ESG-themed activist campaign could mean running the risk of being criticised for disregarding the financial and ethical priorities of its clients.”

It adds that data released through ESG disclosure requirements could come back to haunt companies making impossible promises. Woe betide directors who see their pay rise in lockstep with their carbon emissions.

In a review published by Insightia, Schulte Roth & Zabel said: “ESG has added something to the marketplace. It’s added to the ability, where you see there is value and money, in trying to drive change.”

Etelvina Martinez, managing director at Alliance Advisors says: “Perceived weaknesses in a company’s ESG practices can open up a useful front for attack.”

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