Investor influencers: how impact investors are working together for a greener future

In May 2021, a new­ly formed impact invest­ment group called Engine No. 1 per­suad­ed Exxon­Mo­bil share­hold­ers to vote three of its can­di­dates onto the ener­gy giant’s board, send­ing shock­waves through Big Oil and board­rooms around the world. 

To achieve this, the rene­gade fund – which defines its mis­sion as cre­at­ing “long-term val­ue by har­ness­ing the pow­er of cap­i­tal­ism” – empha­sised the exis­ten­tial risk of the cli­mate cri­sis to share­hold­ers, includ­ing large asset man­agers like Black­Rock and Van­guard. Exxon­Mo­bil wasn’t doing enough to secure the company’s finan­cial future in a post-car­bon world, argued Engine No. 1.

It was the most strik­ing exam­ple of share­hold­er activism to date. How exact­ly Engine No. 1 will use its equi­ty to steer Exxon­Mo­bil towards the desired ener­gy tran­si­tion remains to be seen, but the move pro­vides a rad­i­cal reminder of the inter­nal influ­ence mon­ey can buy at a com­pa­ny – and how eth­i­cal­ly inclined investors can make an impact through own­er­ship.

The growth of impact investing

Impact invest­ing describes invest­ments that are mea­sured accord­ing to the pos­i­tive envi­ron­men­tal and social impacts they deliv­er, as well as their finan­cial returns. Accord­ing to Joe Dharam­pal-Horn­by, pub­lic affairs man­ag­er at the non-prof­it Impact Invest­ing Insti­tute, the prac­tice is grow­ing at a stag­ger­ing rate as ESG moves beyond vague notions of eth­i­cal invest­ment and into tar­get­ed fund­ing with mea­sur­able impacts.

“Glob­al­ly, we’ve seen the impact invest­ment mar­ket grow expo­nen­tial­ly over the last five years; it’s now worth more than $2tn,” he says, with poten­tial to expand to more than 10 times this lev­el in less than a decade.  

Impact invest­ing isn’t just about being nice or hav­ing noble inten­tions, says Sha­mi Nis­san, head of respon­si­ble invest­ment at Actis, a glob­al emerg­ing mar­kets invest­ment fund. Long-term investors have a finan­cial respon­si­bil­i­ty to con­sid­er the envi­ron­men­tal and social impli­ca­tions of their invest­ments.

“These are mat­ters of glob­al urgency that impact every­thing. Investors who have a long-term invest­ment hori­zon, such as pub­lic pen­sion plans and sov­er­eign wealth funds, wouldn’t be ful­fill­ing their fidu­cia­ry respon­si­bil­i­ty if they didn’t think about the risks of cli­mate change, for exam­ple.”

The expec­ta­tions of asset own­ers and ben­e­fi­cia­ries have also evolved to pri­ori­tise envi­ron­men­tal and social impact, she notes. “We’ve seen a real sea change in what the client wants their mon­ey to achieve. Of course, they want returns, but they want impact along­side that,” Nis­san says.

The ‘S’ in ESG

Envi­ron­men­tal ini­tia­tives, espe­cial­ly net zero, often get top billing when it comes to impact invest­ing. How­ev­er, Dharam­pal-Horn­by says it’s also impor­tant to con­sid­er social sus­tain­abil­i­ty, recog­nis­ing that “E”, “S” and “G” at an organ­i­sa­tion are inter­linked. “If we’re going to tran­si­tion to a low car­bon econ­o­my, and for it to be sta­ble, we need to have that invest­ment in reskilling and edu­ca­tion to deal with poten­tial unem­ploy­ment and eco­nom­ic fall­out,” he says.

To this end, the Impact Invest­ing Insti­tute has part­nered with the Green Finance Insti­tute and the Lon­don School of Eco­nom­ics and Polit­i­cal Sci­ence (LSE) to pro­pose a sov­er­eign bond called Green+ Gilt, which ties in envi­ron­men­tal and social code ben­e­fits. “It would be the first of its kind in the world,” says Dharam­pal-Horn­by. He has high hopes for its suc­cess: the first UK green bond, issued in Sep­tem­ber, was over­sub­scribed by a fac­tor of 10. 

Nis­san feels the pan­dem­ic “helped put the S of ESG on the table, but there is still work to be done”. She is part of the G7 Impact Task­force, set up to encour­age col­lab­o­ra­tion on impact invest­ing between G7 nations. “We talk a lot about enabling a ‘just tran­si­tion’,” she says.

“It isn’t sim­ply about car­bon and send­ing tril­lions into renew­ables, it’s about ensur­ing that invest­ment and infra­struc­ture are inclu­sive and equi­table and that there is val­ue at a very grass­roots lev­el to the com­mu­ni­ty, not just the investor who takes the returns and then gives them back to their base in New York or Lon­don.”

“You can choose to be an active own­er and to extract impact every year that you’re there as an own­er,” she says, cit­ing the exam­ple of a renew­ables com­pa­ny Actis works with in Latin Amer­i­ca called Atlas that has trained 800 women to install solar pan­els dur­ing the pan­dem­ic. “It shows what is the art of the pos­si­ble,” she says.

The port­fo­lio com­pa­nies that Actis works with are man­dat­ed to have an ESG sub-com­mit­tee that reports to the board and a head of sus­tain­abil­i­ty. Actis also encour­ages col­lab­o­ra­tion between dif­fer­ent com­pa­nies in its net­work so they can learn from each oth­er.

The power of shareholder activism

While Actis works through active own­er­ship, share­hold­er activism on the Engine No. 1 mod­el is anoth­er effec­tive impact invest­ing tool. Cather­ine Howarth is chief exec­u­tive of the non-prof­it Share­Ac­tion. She says share­hold­ers con­trol a suite of tools to push com­pa­nies to be more sus­tain­able. “These range from dis­creet pri­vate meet­ings with com­pa­ny man­age­ment and board mem­bers through to more force­ful tools like fil­ing share­hold­er res­o­lu­tions to change cor­po­rate pol­i­cy or vot­ing against direc­tors where progress on ESG issues is alto­geth­er unsat­is­fac­to­ry.”

Being a share­hold­er is a huge advan­tage when it comes to exert­ing activist influ­ence, Howarth believes.  “Share­hold­er activists aren’t just con­cerned cit­i­zens, they’re con­cerned own­ers of the com­pa­ny. That legit­i­ma­cy is recog­nised by com­pa­nies them­selves, who are usu­al­ly far more will­ing to lis­ten to share­hold­ers, espe­cial­ly large ones, than they might to oth­er types of activists.”

Some forms of activism have the pow­er to change the arti­cles of asso­ci­a­tion and force com­pa­nies to change tack, says Howarth. “For exam­ple, in the UK, a share­hold­er res­o­lu­tion which receives 75% back­ing from the share­hold­er base becomes legal­ly bind­ing on the com­pa­ny.”

She points to ShareAction’s res­o­lu­tions at HSBC and Tesco, where it con­vinced some of the world’s largest investors to back share­hold­er activist cam­paigns. “We were able to secure a com­mit­ment from the bank to phase out financ­ing of the coal sec­tor and from the super­mar­ket to set stretch­ing new five-year tar­gets to sell more healthy food,” she says.

In nei­ther exam­ple did the share­hold­er res­o­lu­tion actu­al­ly come to a vote, Howarth notes. “Well before the AGMs, the boards of these FTSE 100 giants had decid­ed they would accede to our demands,” she says, though it’s now vital to watch and ensure they deliv­er on their com­mit­ments, she adds.

Is there a risk that share­hold­er activism could be har­nessed for neg­a­tive envi­ron­men­tal or social out­comes? Dharam­pal-Horn­by isn’t too wor­ried. “Glob­al reg­u­la­tion is mov­ing in one direc­tion. Pub­lic mood is mov­ing in one direc­tion. Whether these com­pa­nies are being forced by a share­hold­er meet­ing or just read­ing the room, we see things mov­ing in one direc­tion of trav­el.”