Activism in the ESG sphere

August 2019 | FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

August 2019 Issue

Beneficial for companies and the communities they serve, environmental and social governance (ESG) oversight has increased dramatically in recent years, to the extent that it is now a core component of companies’ corporate policy and strategy, often leading to improved long-term performance.

Much of this escalation is due to the prevalence of activist campaigns, particularly in the US. Indeed, since 2014, there have been more than 250 campaigns in the US spanning multiple industries – driven by a record number of exempt solicitation filings which, in turn, encourages shareholders to vote in favour of ESG-related shareholder proposals.

According to David A. Katz, a partner at Wachtell, Lipton, Rosen & Katz, one of the most significant recent ESG trends is the increasing desire among major institutional investors for issuers to be more responsive to environmental and social issues. “Governance issues have always attracted attention,” he says. “But most institutional investors have not scrutinised environmental and social issues, other than in the area of sustainability, which has been a major focus by companies and institutional investors over the last few years.

“Many institutions have publicly expressed interest in engaging with issuers on these topics,” he continues. “In response, public companies are spending significantly more time and resources on these concerns, and are attempting to publicise their success and progress.”

That said, any attempt to measure the success of ESG engagement can be hampered by a lack of any real metric to ‘grade’ companies on their performance. In addition, investors may struggle to differentiate between companies operating in the same industry.

ESG strategies

In Mr Katz’s view, an ESG strategy should focus on two company viewpoints in particular: from inside the corporation looking out and from the outside looking in.

“Companies often look at issues facing their industry peers or their customers generally and try to react, but they can also look at their resources and how these can be used to promote positive ESG impacts,” suggests Mr Katz. “To the extent a company has poor corporate governance, it is far less likely to focus appropriately on ESG issues, because it will fail to recognise the positive impacts that an effective ESG strategy can provide.”

“Ideally, companies need to be looking at ESG from multiple perspectives – how it impacts day-to-day business, what it means for shareholders and how it impacts other constituencies of the company.”

Therefore, to implement an effective ESG strategy, good governance is needed in order to provide a solid base for positive ESG approaches. And with many significant ESG issues in the frame – such as generic climate change risks or company-specific concerns, including diversity or living wages – companies’ boards need to focus on what is feasible so that positive ESG behaviour can be promoted.

Ideally, companies need to be looking at ESG from multiple perspectives – how it impacts day-to-day business, what it means for shareholders and how it impacts other constituencies of the company. “Companies need to continually benchmark themselves against their peers so that they are not seen as laggards, but can try to use good ESG practices to indicate appropriate management focus on key corporate issues and strategies,” believes Mr Katz.

Rising activism

In the aftermath of the proxy season, there is an expectation for a more critical focus from both institutional investors and companies on issues such as gender diversity, pay inequity, climate change and environmental impact.

“Sustainability will continue to be important but is likely to be eclipsed by far more serious issues, such as human capital, pay inequities, diversity and climate change,” says Mr Katz. “Every industry is likely to have different ESG concerns. Not only are we likely to see an increase in shareholder proposals on ESG issues, but also increasing shareholder support for such proposals.”

Furthermore, with significant pressure likely to come from large institutional investors that are in a strong position to dictate results and enforce adherence to positive ESG goals, companies will be keen to highlight their ESG successes in an attempt to avoid being targeted.

“Companies will be proactive in reaching out to particular activists with ESG concerns in order to avoid the public scrutiny that accompanies a public fight,” suggests Mr Katz. “This will be a better use of resources and will allow both companies and investors to benefit over the longer term, which should have a positive societal impact.”

While ESG activism is still largely in its infancy – there being few activist firms that are purely focused on ESG issues – its increasing prevalence is undeniable. As a consequence, companies need to treat ESG concerns as real issues and avoid putting their heads in the sand.

Fraser Tennant