Is Greed Good After All?
By Josh Black, Skytop Contributor / September 7th, 2021
Josh Black is the editor-in-chief of Insightia, a financial news and data company focused on shareholder activism, proxy voting, and corporate governance. In that role he leads a team of reporters and multimedia journalists. Based in New York City, Josh is a frequent speaker at industry conferences and an expert for the media. His weekly newsletter on developments in shareholder activism, as well as Insightia’s two monthly magazines and frequent special reports, are among the most widely read analyses of what is happening in these exciting areas of the investment world.
About Insightia: Financial news and data providers Activist Insight and Proxy Insight announced in October 2020 that they had merged to form Insightia, a leader in the field of public company information. Activist Insight was formed in 2012 and offers an extensive range of products including Activist Insight Online, Activist Insight Governance, Activist Insight Vulnerability, Activist Insight Shorts, Activist Insight Monthly magazine, and The Activist Insight Podcast. Proxy Insight has quickly become the world’s leading source of information on global shareholder voting, covering such hot topics as director and auditor elections, “say on pay” resolutions and environmental, social, and governance (ESG) proposals.
The proxy fight at Exxon Mobil is a high-water mark in ESG activism. “Investors’ rapidly changing ESG priorities will keep both hedge funds and issuers on their toes,” writes Josh Black, the editor-in-chief of Insightia.
Exxon Mobil went into its historic proxy fight with Engine No. 1 earlier this year unconcerned about the threat posed by the new hedge fund with a 0.02% stake and unprepared to listen to shareholders’ growing concerns about the materiality of environmental, social, and governance (ESG) issues.
The toxic combination created the conditions for an unlikely upset and a watershed moment in ESG activism. Hitherto, all activist campaigns with an environmental or social thesis had played for a settlement, a public relations victory, or an uncontroversial operational change. Engine No. 1 played hardball and walked away with three seats – not least because it was backed by all three major index funds.
Exxon Mobil was warned. In 2017, it lost a vote asking for a report on the company’s impact on climate change. In 2020, investment giant BlackRock opposed two board members. But despite growing concern from its owners, Exxon Mobil remained committed to increasing oil production until a global pandemic made its spending plans unrealistic. Its board refreshment, designed to head off criticisms that none of its independent directors had oil and gas expertise, failed to impress other shareholders. Neither did its insistence on carbon capture technology, which Engine No. 1 said was no substitute for finding alternative sources of energy to head-off an irreparable level of global warming.
“A couple of years ago, there would have been a split in how investors think about these issues,” Andrew Logan, a senior director at sustainability nonprofit Ceres, told me presciently in an interview during the proxy fight. “Investors now understand that the strategic business issues and the environmental issues are all the same.”
Revolution or Evolution?
What ESG activism really means is still hotly contested. There are as many takes on it as there are self-proclaimed ESG activists, and in August Inclusive Capital Partners’ founder Jeffrey Ubben poured scorn on the proxy contest as a vehicle of change.
Yet while the campaign at Exxon Mobil set a high bar for subsequent fights, it seems inevitable that more will follow. Engine No. 1 itself has set its sights on retail investors, launching the Engine No. 1 Transform 500 ETF and with it a new model for engaging a wider number of companies through voting and public and private engagements.
The dizzying rise of ESG activism makes it important to reflect on how it developed to date, and where it might be heading. Those are questions addressed by our special report, published days after the historic Exxon Mobil annual meeting in June.
In the report, which is free to download, we look at how activists coalesced around environmental issues (especially at energy utilities and oil and gas companies), thanks to their easy measurability, tight correlation with valuation, and popularity with investors. A new regime in Washington D.C., most notably at the Securities and Exchange Commission (SEC), seems determined to unshackle demands for better data on both environmental and social issues.
At the same time, shareholder proposals – the hard graft put in year after year by nonprofits and determined individuals – have been a bellwether of how investors feel about their portfolio companies’ efforts at transparency and progress. Both environmental and social proposals received record levels of average support this year, with carbon-intensive industries held to a particularly high level of scrutiny.
Who Benefits?
ESG used to be an opportunity for companies to talk about the good work they were doing beside their core business activity. Now, the pace of change has them on the back foot. Black Lives Matter has convinced many investors, and some quasi-regulators, to call for ethnic diversity to be elevated to a similar level as gender diversity when it comes to board composition. The first demands to link ESG issues to executive compensation are forcing board committees to the drawing board, thanks to a lack of established best practices.
Yet, if activists think that what is tough for issuers is good for them, two other proxy fights this year where the dissidents tried to inject ESG issues into an otherwise straightforward argument about corporate strategy show that the connection has to be a logical one. Investors expect ESG activism to link underperformance, failures of board oversight, and nominees that address deficiencies, at a minimum.
Engine No. 1 got the balance right but plenty that follow them will fail. At worst, a wave of poorly designed ESG activism could increase skepticism that its adherents are wolves donning sheep’s garments.
The future of activism is green, but it’s not greenmail.
* Data correct as of the report’s publication and may change as new campaigns are added to our database.
ESG Activism 2021 is available to download at www.activistinsight.com/esg.