Many companies have faced increased investor scrutiny on environmental, social and governance (ESG) issues in the last few years, but investor activist campaigns related to ESG accountability are still relatively uncommon. As an example of what may be coming, during 2020 the Children’s Investment Fund Foundation, a UK-based activist investor, called for action at three banks to end the financing of coal fuel projects.
Many large institutional investors continue to expect companies to quantify and report on how they meet investors’ enhanced ESG disclosure expectations. However, some activists believe additional disclosure provides a unique opportunity to challenge perceived weaknesses at companies and create greater long-term shareholder value.
These two evolving dynamics, mounting pressure from traditional institutional investors together with new activist investor tactics, may combine to create the perfect storm for ESG activism in 2021.
The year 2020 saw ESG-focused activist funds deploying new strategies. In June, Jeffrey Ubben, founder of ValueAct Capital Partners, relinquished his position at the firm and announced the formation of Inclusive Capital Partners. The new fund’s premise is investment in companies that sustainable funds often avoid, such as oil and gas, chemicals, food processing and for-profit education. Ubben believes that disfavored companies offer the greatest potential to effect positive social and environmental change and become revalued up in the process.
Another noteworthy development in ESG activism involves a proxy contest launched by Engine No. 1, whose strategy has involved targeting director seats. Shortly after forming in late 2020, it targeted a multinational oil and gas company, requesting that the company invest in more profitable drilling and clean energy activities to better position the company for long-term sustainable success. Further, in January 2021, Engine No. 1 formally nominated four independent directors with clean technology expertise for the company’s board.
Investor pressure on the oil and gas sector to reduce greenhouse gas emissions is not new, but other investors may be more likely to support Engine No. 1’s concerns about environmental and social (E&S) accountability during the 2021 annual meeting season. The California State Teachers’ Retirement System has already come out publicly in support of Engine No. 1’s campaign, along with other investor groups that voiced similar concerns while supporting the board changes.
Georgeson’s 2020 Annual Corporate Governance Report showed that overall investor support for E&S shareholder proposals has increased in recent years. Within the S&P 1500 index, 18 E&S-related proposals received majority support in 2020, up from eight in 2019. Five of these were environmentally focused proposals. This support is not surprising in the context of the top risks to the economy identified in the World Economic Forum’s recent annual report, which included extreme weather, climate action failure, natural disasters, biodiversity loss and human-made environmental disasters. Increased support for E&S shareholder proposals, coupled with growing pressure from institutional investors to see improved company E&S disclosure on issues such as climate change and human capital management, has put many companies in a vulnerable position heading into the proxy 2021 season.
In 2021, poor ESG disclosure may lead to increased levels of support for shareholder proposals demanding more accountability and transparency as well as votes against directors at companies that are perceived to be lagging. The outcome of the 2021 proxy season presents activist investors with an opportunity to further engage companies and institutional investors on E&S accountability during the post-season.
In preparing for their 2021 annual meeting, we recommend that companies concentrate on understanding and addressing their perceived environmental and social vulnerabilities. If presented with a shareholder proposal, companies should review how similar proposals have fared historically at other firms, including how specific institutional investors voted in support or opposition. If negotiation with the proponent is possible, companies should consider the potential impact on their E&S strategy and goals.
By understanding how ESG factors influence investors’ proxy voting decisions, companies may better understand their own vulnerabilities, providing a blueprint for enhancing ESG reporting and disclosures while maximizing support at annual general meetings.
William P. Fiske is the Head of M&A and Contested Situations for Georgeson, LLC. He and his team advise boards of directors and company executives on a range of issues including shareholder activism.