Since writing the latest cover story from Activist Insight Monthly required no little exploration of an unfamiliar topic, I thought it might be worth offering some personal observations on ESG investing, the flavor of the moment.
Environmental, social, and governance (ESG) issues are the talk of almost every conference. At the Council of Institutional Investors’ Fall event last month, almost every session addressed some aspect of it. At the New York Times’ Dealbook conference a week ago, BlackRock CEO Larry Fink made bold predictions about the future role of ESG in investing, saying, “The demand for ESG is going to transform all investing… [In one or five years] ESG will be a major component of how everyone is looking and investing and it will be a tool of every active manager.”
When Activist Insight first began tracking shareholder demands, we consciously excluded those that were designed to generate social or environmental change with no apparent impact on shareholder value. Activist investors have traditionally – and to some extent still do – seen their role as fixing governance to allow for higher stock prices. Advisers still speak of ESG with a silent “G.”
Increasingly, however, investors see ESG as a whole and as impactful on long-term shareholder value. That matters, because most investors have a fiduciary duty to generate the maximum possible return. Whether as a risk mitigation strategy or as an alpha generating tool (the jury is still out on the latter), carefully targeted ESG issues are considered material.
The change, to the extent that there has been a sudden shift, comes in several parts. First, the growth in assets under management linked to ESG mandates – up 200% in the U.S. over the past decade, according to J.P. Morgan. Long focused on private equity and fixed income, ESG is starting to impact public equities. Second, the growing accessibility of data has allowed companies to generate new insights into their workforce and wider social or environmental impact. That, in turn, has allowed investors to ask companies whether they track such data, and to either demand greater disclosure or identify when management teams are lagging their peers. Third, the growing involvement of stewardship teams, as many institutions’ primary point of contact with companies, and their willingness to back shareholder proposals on environmental or social topics.
How this affects activist investors is not entirely clear. Their record of caring about the issue is not deep but they are already making efforts to appear less shallow. In my feature article and on our podcast this month, I lay out three ESG strategies for activists. Taking credit for things their portfolio companies are already doing is not an option.
MiMedx Group was removed from the Nasdaq stock exchange this week, marking a victory for short sellers which have been targeting the company since 2017. Although the number of short campaigns looks likely to be flat or slightly down on last year’s numbers – and a big fall from the 2015 peak – several developments over the past few months mark it out as a hot space. First, several short sellers are capitalizing on their scarce skillset by launching funds that accept outside money. Second, the severity of allegations has been ratcheted up to account for the tough market dynamics; witness Corporate Travel Management’s battle with VGI Partners. Third, as at Rallye-Casino, short sellers have attempted to paint themselves as guarantors of equity holders. As markets are expected to get choppier, the stage might be set for more interesting stories on the short side, which we’ll be keeping track of at Activist Insight Shorts.
Kase Learning have kindly increased the discount they are offering Activist Insight readers ahead of their December 3 short selling conference to 40%. This offer is good for both in-person and livestream registrations. Just use the code ACTIVIST40 on the ticketing site.
Quote of the week comes from Danske Bank’s outgoing chairman, Ole Andersen, whose exit from the troubled institution was hastened this week by a special meeting requisition from the Maersk family’s AP Moller Holding. AP Moller seeks two board seats, including one for its chief investment officer, Jim Nielsen, and another for Karsten Dybvad, who it says could be the next chairman. In response, Andersen said he would make way, adding:
"The board of directors fully supports both proposed candidates who based on their individual competencies and experience will be able to contribute considerably to the further development of the bank, including the particularly important task of recovering the confidence of all the bank’s stakeholders.”