Actionable Ideas for Companies and Sponsors

Increasing Investor Focus on ESG and the Momentum of “ESG Activism”

In the wake of the global COVID-19 pandemic and amidst widespread social unrest, environmental, social and governance (“ESG”) emerged as a central investment theme in 2020. ESG-oriented funds recorded unprecedented capital inflows, while traditionally passive institutional investors increasingly took an active and public stance on ESG issues. In its annual letter to CEOs, BlackRock earlier this year called on public companies to improve disclosure around long-term strategies to combat climate change and social issues. The push for public companies to adhere to ESG best practices will likely continue to intensify as ESG-related disclosures remain central to assessing sustainability and the societal impacts of an investment while continuing to generate financial returns.

Once considered at best a tertiary theme in activist campaigns, hedge funds are more frequently using ESG as a wedge issue to extract concessions from target companies. European activist investor Cevian Capital recently called on companies to link ESG metrics with executive compensation by 2022, noting it will vote against directors who fail to do so. Also last year, prominent activist investor Jeff Ubben left ValueAct, the highly successful activist fund he founded, to launch a dedicated ESG-driven fund, Inclusive Capital.

Most recently, dedicated ESG-focused activist fund Engine No. 1 launched a proxy contest at Exxon Mobil and nominated four director candidates, with sustainable value creation at the forefront of its critiques. Influential public pension plan CalSTRS subsequently announced support for Engine’s nominees. In response, Exxon appointed several new directors, including ESG advocate Ubben, although the proxy contest continues.

Given the ongoing flows of capital into ESG-focused funds, as well as the general rising level of importance of ESG to traditional investors such as BlackRock, we expect to see an increase in ESG-related activism. We continue to advise directors and management teams to take proactive steps to prepare in advance for potential ESG-related activism, including articulating to investors a defining corporate purpose and adopting ESG policies that support long-term strategic goals.