The Nexus Between Shareholder Activism and Sustainability
In today's post, we look at how ESG is influencing investor activism.
Activism has played a pivotal role in the investing community over the past decade. The activist mentality has shifted as people’s perception of value and the market dynamics continue to change. ESG activism is likely to continue as disclosure becomes more transparent and data starts to be more consistent. Investors are increasingly recognizing the connection between an effective and well integrated ESG strategy and the value it adds to the financial performance of a company. A well defined ESG strategy is not created overnight, and with a long term focus from investors, a company must assess their impact on employees, the environment, suppliers and other stakeholder groups.
For our readers who are not as familiar with the concept of activist investing, the goal of an activist investor is to target companies that they view are underperforming and have the potential to create significant shareholder value. Value investors, as we discussed in a previous post, enter a stock they perceive to be underperforming and therefore believe management has the skills and expertise to drive the stock price up. Activists, on the other hand, do not share this thought and typically buy enough shares to capture board positions and therefore drive the change themselves.
Activists have historically, and to this day, targeted companies that display inadequate fundamentals. This could include high cash balance and minimal payout to shareholders, poor capital structures leading to a buyback push, or the company is losing too much money trying to keep a subsidiary afloat. The activist may try to change the strategic direction of the company, maybe push to sell off the underperforming business unit, or adjust the company's capital deployment strategy.
Having worked in capital markets for years, we saw first hand how an activist stake in a company could really shake things up. High profile activists everyone always kept an eye on included Starboard Value, Elliott Management, Icahn Enterprises, Third Point, Trillium, and Pershing Square. Because filings are backwards looking and filings could be under a different custodian name, public companies monitor their shareholders closely. One indicator we kept watch for included 13D filings. 13Ds are also known as “beneficial ownership” filings and are submitted to the SEC form any investor that takes on 5% or more of a company. This filing provides information on individuals or firms who have significant ownership of the company.
2022 Notable Campaigns
Source: Insightia
There were several activist campaigns that made headlines this year but not all of them ended in success for the activists.
Most notable was Carl Icahn's campaign against McDonalds which didn't go very far as he lost the proxy fight. Earlier this year, Ichan criticized McDonald’s for failing to meet its original deadline for eliminating its suppliers’ use of gestation crates for pigs. He also claimed the company was supposed to ban the use of crates entirely but has since changed the scope of its commitment. Other shareholders were not on board and due to the fact that he held little shares with minimal influence the campaign eventually failed.
Another campaign we followed closely this year was Bluebell Capital pushing Glencore to sell off their thermal coal business. Bluebell's partners claim “Due to its coal business, Glencore is not an investable company for investors who place sustainability at the heart of their investment process,” Bluebell’s partners wrote in the letter dated Nov. 8. “A clear separation between carbonized and de-carbonized assets is needed to increase shareholder value and remove the ‘coal discount,’ whilst simultaneously ensuring that coal assets will be managed responsibly.”[1] Apart from the spin off of the coal business, Bluebell’s main vision is for the company to divest from the agriculture business to transform itself into a pure player in the energy transition sectors.
Other notable campaigns included Elliot Management as they pushed for board enhancements, enhanced capital return strategy, and improvements in safety performance.
Source: Insightia
ESG Activism
Activists continue to leverage ESG as a way to drive change within a company. One of the most widely discussed activist campaigns took place last year and focused on how the inability to transition away from fossil fuels could cause long term stock depreciation. This famous campaign was led by Engine No.1as they managed to replace three of Exxon’s directors. This campaign came down to the different view points of both a sides as Exxon believed that oil demand will continue to be high for decades to come and therefore should not have to plan for the energy transition. On the other hand, investors wanted capital allocation decisions to include the increase of renewables entering the market and how this would influence Exxon’s long-term strategy.
More recently, with the invasion of Ukraine, we saw activist investors, along side with other climate activists, become more vocal and called upon oil and gas companies to sever ties with Russia. Clearway Capital, an activist based in Germany, sent a letter to TotalEnergies asking them to immediately commit to halt investments in Russia and suspend oil trade in the country. [2] Other large operators like BP, Exxon, and Shell all moved quickly withdrawing their operations.
In the U.S, ESG activist campaigns peaked in 2019 prior to the pandemic but since then we have seen activity cool off. In 2019, the number of campaigns reached a high since 2013 with 90 campaigns. 2020 dropped to 61 and 2022 continues the decline with 49 different campaigns. Activism in Europe has remained fairly consistent while we continue to see an increase in campaigns in Asia. From a recent poll conducted by Insightia, 47% of their readers stated that Greenhouse Gas emissions is the biggest ESG concern followed by executive pay with 19% and workforce diversity with 17%. Additionally, the majority of climate activist campaigns have largely been against US based companies. [3]
2023 Expectations
As we enter 2023 and with the SEC Climate proposal looming, this could be the perfect opportunity to see new activists emerge. At a high level, the SEC proposal aims to set requirements to standardize climate related disclosure for investors. If a company fails, or isn't sufficiently disclosing this could be a motivating factor for an activist. Investors and potentially soon to be regulators are now holding corporates to even higher standards and demanding accountability. The stakes for corporates could not be higher to have a well integrated ESG strategy tying to their overall corporate strategy. Now is the time for companies to be forward thinking in their ESG priorities or we may just see activist investors do it for them.
Hot Tea
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Sustainability Movers & Shakers
Our mover and shaker this week is Mahesh Ramanujam, the Chief Executive Officer of the U.S. Green Building Council and President and Chief Executive Officer of the Global Network for Zero.
One of the exciting things Mahesh is working on is ESG verification that “will live largely in blockchains (and even in the metaverse), decentralized and transparent to prevent greenwashing”.[4]
Bio
As President and CEO of the U.S. Green Building Council (USGBC), Green Business Certification Inc. (GBCI) and the global technology platform, Arc. Mahesh led the movement for transforming green building standards to ensure public health, equity and environmental sustainability in communities across the world.[5]
Driven by his belief in a brighter future, the Global Network for Zero Co-Founder, President, and CEO Mahesh Ramanujam convenes a coalition of leaders dedicated to progressing society toward greater ESG compliance and ultimately a zero greenhouse gas economy. [6]
[1]https://www.bloomberg.com/news/articles/2021-11-30/activist-bluebell-asks-glencore-to-separate-its-coal-business?leadSource=uverify%20wall
[3]https://www.insightia.com/esg2022
[4] https://www.esgtoday.com/guest-post-a-new-approach-digitizing-climate-action/
[5] https://www.linkedin.com/in/mahesh-ramanujam/
[6] https://www.linkedin.com/in/mahesh-ramanujam/