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April 26, 2023

Are small activist funds key to saving the planet?

…That might be a stretch, but the value of targeted investor activism linked to environmental and social ends is increasingly in evidence.

By Hannah Duncan

Activist investment, Carl Icahn, shareholoder activism
Investors such as billionaire Carl Icahn are raising the profile of ethical activist investment. But is this style of engagement doing enough? (Photo by Neilson Barnard/Getty Images for New York Times)
  • Shareholder activism campaigns in Europe hit record highs in 2022 and show little sign of slowing.
  • Today, $10trn worth of assets are under scrutiny from either shareholder activism or corporate engagement.
  • Today, the average age of a shareholder is just 37 years, down from 45 in 2021. And a notable 18% of today’s investors are between 18 and 24.

May 26 2021 was not your average trading day. In a Wall Street version of David and Goliath, the small and relatively unknown hedge fund Engine No.1 struck a serious blow to the oil industry. The group used its influence as an Exxon Mobil shareholder to force climate-friendly directors onto the board. It was a remarkable moment for shareholder activism.

For Exxon Mobil, it was about time. For years, the world’s fourth-largest oil and gas producer had faced little scrutiny by investment managers as to why it features on so many environmental, social and governance (ESG) funds. Engine No. 1 had placed this discrepancy firmly in the public spotlight.   

Engine No.1 is not the only one using shareholder rights to shift the ESG needle. Activism on ballot sheets has grown between 2021 and 2022 across all major sectors, according to FTI Consulting research.

In Europe, the number of shareholder activism campaigns has hit record highs and shows little sign of slowing. Research conducted by law firm Skadden found the number of open live campaigns jumped from around 60 in 2016 to a staggering 341 as of December 2022. In the last year alone, 52 shareholder campaigns were launched.

Retail investors want to engage with holding companies

Today, $10trn worth of assets are under scrutiny from either shareholder activism or corporate engagement, according to 2020 Global Sustainable Investment Alliance research. In this environment, blue chip companies are panicking a little; 71% of European corporations anticipate a rise in shareholder activism and 48% expect it to be “significant”, according to Skadden.

Record numbers of investors are taking matters into their own hands. Voting in AGMs has surged by 30% since 2021, according to Interactive Investor. One platform facilitating this is Tumelo. It provides pension holders and retail investors with pass-through voting proxy technology.

But there are limitations. Whether shareholders can vote on ESG criteria “depends on the rules of the country”, explains Tumelo’s co-founder, Georgia Stewart. Issuers must abide by regional laws.  

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In the US, for example, shareholders cannot use their power to help the planet. “There does have to be a link to financial materiality,” Stewart says. Votes around ESG will only come up if they pose a material risk to the company.

Activists are increasingly pushing against these boundaries. In 2022, billionaire activist investor Carl Icahn attempted to block fast-food chain McDonald’s from sourcing pork from “cruel” factory farms. Companies such as TJ Maxx are facing shareholder scrutiny over policies on accessibility to abortions. Despite the clear rules, activists are increasingly demanding social and environmental accountability.

“Long gone are the days where shareholders make investments simply for financial gain,” notes Lumi’s 2023 report. “A new breed has arrived – a group that wants a say on climate change, pay and diversity.”

Today, the average age of a shareholder is just 37 years, down from 45 in 2021. And a notable 18% of today’s investors are between 18 and 24. Their future depends on the climate actions taken today. After all, how can they retire comfortably if their home is underwater?

In the UK, there’s another frustrating block. Nine in ten shareholders would like to attend AGMs, but practically half cannot because they traded through a broker and are not registered as the holder, according to Lumi.

While technological workarounds are improving, shareholders have a long way to go before they can truly influence change.

Investment managers are too cautious

While the limitations for retail investors are stark, eyes are also shifting to investment managers; 68% of high-net-worth investors want and expect to see ESG criteria reflected in their portfolios. As custodians of shares, wealth and asset managers should be fighting their corner in the AGMs, right?

Yet worryingly few managers seem to be pushing the agenda. Of the 77 largest managers, ShareAction found only six filed ESG shareholder resolutions in 2021 – the main tactic used to drive engagement.

Even when asset managers do vote, they are generally blockers rather than facilitators. In 2021, it emerged that the six largest asset managers consistently vote more conservatively on ESG than their own proxy advisors recommend, according to ShareAction.

Despite the carbon pledges and Larry Fink’s iconic annual letter, BlackRock is one such manager. 18 ESG resolutions failed to pass because of negative voting from either BlackRock, State Street Global Advisors or Vanguard, ShareAction has found.

There is a systemic ESG inertia that seems to choke hold investment management. Some put it down to short-termism. Others point to game theory, the psychological labyrinth that managers go through as they compete against other firms. They’re looking over their shoulder, nervous to upset their boss and cautious to lose the clients’ money. Time and time again, managers opt for the easy option, sabotaging the entire ESG strategy in favour of quick and dirty fossil fuels, plastic pollution or poor ESG holdings.

Be an activist: Harnessing the fear and inertia

But it’s not all bad news. Credit Suisse executive and co-author of Sustainable Investing in Practice, James Purcell, sees hope in “the rise of collective engagement” – or in layman’s terms, safety in numbers. When managers rally together, they feel more confident about turning down short-term profit and sticking to the ESG strategy.

As we saw in the case of Engine No.1, one tiny fund did all the work. While major players – including the "Big Three" – simply listened, finally got involved and enjoyed sharing the worldwide credit. Like it or loathe it, could this be the way forward?

After all, both Purcell and the CEO of ShareAction, Catherine Howarth, pinpoint “significant media attention and drum-up of public pressure” as a key motivator for asset managers.

Activist funds who get the press fired up may be our best shot at achieving true engagement. Especially if they can make it easy for the big players to side-step in when the heat gets too much. It’s a strategy that plays well to the industry’s inherent inertia and fear.  

Ironically, perhaps the best way to boost real ESG progress is to embrace the investment management flaws in all their glory. 

[Read also: Investor Voting Right Battle Heats Up]

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