For ESG activist investors, 2022 has not exactly gone according to plan. Yet the environment for ESG activism remains quite rich, and should provide activists with plenty of opportunities to advance ESG-oriented campaigns in the year ahead.
Leveraging a broad array of data and analysis, a new report from Insightia examines this complex environment, highlights the evolving views of activist investors, and offers perspective on how companies and their boards can protect themselves.
You can access the full report here or download it below.
ESG Activism Q&A with Lawrence Elbaum, Patrick Gadson and Margaret Peloso
How are activists in the U.S. adjusting their ESG campaigns?
Every single proxy season, activists find even more ways than in previous years to promote ESG themes in their proxy fights and other campaigns for corporate control. Of course, at the heart of each activism campaign is a thesis on unlocking corporate value for shareholders. However, activists know very well that the institutional shareholders – the electorate they need to win over in a proxy contest – are also increasingly focused on corporate hygiene, which includes championing growing lists of ESG initiatives. As a result, activists are including a growing number of demands for ESG reforms in their campaigns in order to win over shareholders and to punctuate their cases to unlock value.
Has ESG activism already peaked or is 2022 a deceptive lull?
ESG activism will never peak, unless institutional shareholders abandon these causes, which, in our view, is an impossibility. However, with COVID-19 headwinds fading somewhat in the rearview mirror, we expect that there will be an increase in campaigns targeting companies, and their boards, for significant drops in market value. We believe this will also lead to an uptick in activism focused principally on M&A. In the end, ESG activism will still be a significant force in these campaigns, but it may be masked by compelling economic campaign themes by activists.
What could the impact of the universal proxy be on the 2023 proxy season?
We expect the universal proxy to create a rich environment for first-time activists, particularly with small or ESG-focused funds, to seek minority board representation. This is because the new rules tend to make it easier from a cost perspective for these types of funds to run campaigns. And these activists will probably seek just one seat in most instances; trying to lean on companies to relent using an uncompelling “what’s the harm in adding just one director?” argument.
Looking forward, do you expect the Securities and Exchange Commission’s (SEC) proposed climate disclosure policy to impact ESG activism?
Yes. Anytime there is a new regulation, a crop of shareholders will rise up, looking for companies to make foot fault errors, or even worse, to develop policies with which they subsequently fail to comply. Additionally, the SEC’s proposed rule has a number of areas where enhanced disclosure is required if a company has adopted particular risk management techniques or targets. These requirements are likely to shape the asks in climate shareholder proposals in 2023.
What is your biggest tip for issuers looking to protect themselves against an ESG-oriented activist campaign?
Well-prepared boards and their companies have a team of lawyers, investment bankers, boutique advisors, communication firms, and proxy solicitors in place long before a shareholder activist shows up. They are up to speed on the latest and greatest in terms of activism trends and defense techniques. They are closely monitoring and processing shareholder feedback, whether through routine quarterly engagements, annual meeting voting results, or proxy advisory firm recommendations and ESG scores.
Boards and companies with demonstrable track records of taking all this feedback seriously and, where appropriate, making proactive board, governance, and business changes, tend to be better situated for a successful defense when an ESG-oriented campaign arises.