ESG Activism In 2022

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ESG activism had a breakout year in 2021 but its highest profile examples in the proxy season just past were mostly failures. Our latest report, ESG Activism in 2022, examines whether that trend is likely to continue.

First, the backlash. After building up steam for several years, ESG activism is on the back foot.

Shareholder proposals have broadened in scope but have also been criticized – especially those on climate topics – for being “overly prescriptive.” Investor support has dipped.

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This year's proxy fights have struggled to identify issues that investors care enough about, or targets where change is viable. Only one in three campaigns linking board demands with environmental or social demands saw partial success so far this year, down from five out eight last year.

Investors Are Not Giving Up On ESG

On the other hand, investors have made clear that they are not giving up on ESG. In a letter to 19 state attorneys general this week, BlackRock Head of External Affairs Delia Blass argued, "We believe investors and companies that take a forward-looking position with respect to climate risk and its implications for the energy transition will generate better long-term financial outcomes."

Its plan to offer beneficial owners of the assets it manages the opportunity to vote their shares may be a pressure valve that allows it to avoid further scrutiny.

Activists might also gain more opportunities than they lose from concerns about the economy. While some value-creation options may be harder to justify, hesitancy on the part of boards and management teams usually serves only to highlight choices that need to be made.

Investors have made clear that in the long-run, they will not be dissuaded from pursuing the goals they have subscribed to under the auspices of the UN Development Goals and Principles for Responsible Investment.

In short, activists should be able to recalibrate for next year. But what they will focus on is less certain. If the build up to 2021 was all about specialist ESG activist funds, 2022 was the year the generalist funds latched on. Who and what follows are two questions that will be closely related.

The obvious focus should be climate. The Economist recently argued that "the E should stand not for environmental factors, but for emissions alone" emphasizing that tracking carbon footprints should be more important than the rest of ESG.

The introduction of mandatory climate reporting will undoubtedly create laggards of some companies, especially those that haven't been preparing to report Scope 3 emissions if called on.

Recreating The Exxon Mobil Campaign

Yet few hedge funds have attempted to recreate the success of the Exxon Mobil Corp (NYSE:XOM) campaign at U.S. companies this year, even as more scrutiny has been applied to companies in Australia and Europe.

Leading with a climate thesis is challenging for an activist. Exxon's capitulation, following so much frustration and with such modest demands, is proof of that. Most of 2022’s climate-related demands by activist hedge funds have been shrugged off.

Moreover, the past proxy season has identified many topics investors are interested in besides emissions – many of them more amenable to a successful outcome than attempts to set emissions targets.

Racial Equity Audits

Racial equity audits have proven to be a popular topic for investors and could be something activists seek to exploit. Elliott Management identified employee safety as one of its concerns at Suncor in the run up to a successful settlement.

Compensation plans – including those that don’t sufficiently incorporate ESG metrics or that do so in a way that is too easy or short-term for management to achieve – could be singled out amid rising opposition to "say on pay."

This week, Italian company Solvay SA (EBR:SOLB) announced it would invest in a pollution-reduction program, following a long campaign by Bluebell Capital.

There is plenty of room for ESG activism to grow and the default assumption is that it will. Guessing what shape it will take will keep all of us on our toes.

-- Josh Black, Editor-In-Chief, Diligent, Formerly Insightia