ESG (Environmental, Social, and Governance) continues to grow as one of the hottest topics in the investment world, and activists are embracing it with vigor. Indeed, in 2016 and 2017, the proportion of total shareholder proposals focused on ESG topics rose to 31% and 41% respectively. Activists are laying out recommendations for companies to improve their environmental and social practices with specific courses of action on everything from tying executive compensation to reductions in carbon footprint, to building a more diverse workforce, to adopting more sustainable sourcing strategies.
Of course, these new activist campaigns are not purely motivated by conscience. Activists believe that sustainable business models and addressing issues such as climate change, food supply, and human capital management will lead to reduced operational risk and, ultimately, more profit.
Apparently, asset managers agree. In 2017, four out of 10 of the world’s largest asset managers voted in favor of ESG activist proposals for the first time. Major players like BlackRock, Vanguard, Fidelity, and Capital Group are dipping their toe into supporting ESG activism in the name of better long-term stock performance. As the industry becomes increasingly sensitized to ESG issues and the potential gains to be had, the inclination to consider and support activist agendas in these areas will only grow. Boards and management teams need to be prepared. And, as usual, a good offense is the best defense.
First, the players: 3 types of ESG activists worth noting.
ESG activists fall into three basic camps:
- First, there are traditional activists like Elliott Management and Starboard Value that are interested in making major changes in a company in short order. This group tends to exploit corporate governance weaknesses as a way to pass their agendas through.
- Next, there are the set that are more willing to partner with a company’s management team to enact often gradual improvement. Those that fall into this camp are creating ESG-dedicated funds as a way to instill change in companies and improve returns. For example, Jana Partners recently started the Jana Impact Capital fund and ValueAct Capital recently started the ValueAct Spring fund with the goal of investing in companies willing to adopt more sustainable practices.
- Groups like As You Sow, the nation’s non-profit leader in shareholder advocacy, make up the third set. They take on social issues and they want corporations to be willing partners in their solutions. However, these groups often need to partner with institutional investors to pack a heavier punch and make real progress toward their goals.
All three types of activists have one thing in common: they’re actively looking for targets. So, if you don’t want an activist to call the shots in your business, it’s time to start putting your own ESG plans into place.
Keeping control in managements’ hands.
Establishing an ESG strategy is not just about insulating your company from the threat of activism. More importantly, it can ensure sure top passive investors are comfortable with your ESG trajectory. Passive asset managers view increased ESG awareness as a fiduciary duty, and you can bet they will be looking at your companies’ actions in this area. Read this post for more on passive ESG investments.
To set your own ESG agenda, here are a few relatively easy actions board members can take:
- Make ESG a top priority. The more board members are aware of and invested in ESG, the more likely management is to make progress on environmental and social initiatives. In this recent post, we outlined some ESG questions to ask at your next board meeting to put the topic on everyone’s radar and demonstrate the board’s commitment to having a more active presence in this area.
- Increase ESG disclosure. This can be done both by responding to inquiries from the major ESG rating agencies, such as MSCI and Sustainalytics, as well as by making ESG-related information publicly available in shareholder communications, including your sustainability or annual report and on your investor website.
- Adopt sustainability reporting principles and frameworks. If you haven’t already, give some serious consideration to GRI standards and reporting frameworks like SASB standards, which are designed to help businesses report on sustainability topics that matter most to investors. You may also want to consider getting your CDP Certification. Actions like these send the message to investors that you’re taking ESG seriously and that your company is committed to making real progress.
Make your ESG story as impactful as possible.
Today more than ever, ESG communications need to be a part of your overall investor story. As independent counselors, Clermont Partners excels in helping companies build unique investor narratives that can specifically address ESG issues as well as shareholder activism defense. To learn more about our approach and expertise in these areas, check out our services. Or contact us today to discuss your specific financial communications needs.