Activist shareholders reach a ‘watershed moment’ in their ESG fight

A year and a half after its launch, impact invest­ment firm Engine No. 1 record­ed its first major vic­to­ry. In a bat­tle of David-and-Goliath-pro­por­tions, the small hedge fund suc­cess­ful­ly staged a board­room coup of oil and gas giant Exxon­Mo­bil, installing three rebel direc­tors who have com­mit­ted to speed­ing up the company’s ener­gy tran­si­tion. 

The Exxon­Mo­bil deci­sion fol­lowed anoth­er upset at oil major Chevron, where Dutch activist share­hold­er group Fol­low This tabled a cli­mate res­o­lu­tion which received a 61% back­ing from investors. While share­hold­ers have often talked about the need for com­pa­nies to take action on envi­ron­men­tal, social and cor­po­rate gov­er­nance issues (ESG), these lat­est rebel­lions show a new will­ing­ness from large investors to pun­ish exec­u­tives who have been resis­tant to change.

Fol­low This founder Mark van Baal tabled his first rebel res­o­lu­tion at a Shell share­hold­er meet­ing in 2016, but he looks back on the vic­to­ries of the past two months as a tip­ping point for groups like his. “When we start­ed fil­ing res­o­lu­tions, it was very unusu­al to use vot­ing pow­er because the com­pa­nies did a very good job of con­vinc­ing investors that it would dam­age their rela­tion­ships,” he says. “Now, investors realise that cli­mate change is such a big threat to their oth­er assets that it needs to be stopped.”

Getting backing from big investors

With only a 0.02% stake in Exxon­Mo­bil, win­ning over the company’s largest share­hold­ers was cru­cial for Engine No.1. The US oil com­pa­ny opposed the board changes request­ed by the small hedge fund, with Exxon­Mo­bil CEO Dar­ren Woods stat­ing: “We respect­ful­ly dis­agree with Engine No. 1’s con­clu­sion and pro­posed approach. Our cur­rent board of direc­tors is among the strongest in the cor­po­rate world.” 

How­ev­er, with the back­ing of some of the world’s largest invest­ment funds, includ­ing Black­Rock, Van­guard and State Street, the res­o­lu­tion passed when put to a share­hold­er vote at the end of May. Explain­ing the deci­sion in its vote bul­letin, Black­Rock says: “We con­tin­ue to be con­cerned about Exxon’s strate­gic direc­tion and the antic­i­pat­ed impact on its long-term finan­cial per­for­mance and com­pet­i­tive­ness. In our view, the board would ben­e­fit from the addi­tion of diverse ener­gy expe­ri­ence to aug­ment exist­ing skillsets.” 

The back­ing of larg­er invest­ment groups strength­ens the hand of these dis­si­dent share­hold­ers and increas­es the like­li­hood of fur­ther upsets at future annu­al gen­er­al meet­ings (AGMs). Many are increas­ing­ly pay­ing atten­tion to the risk that the envi­ron­men­tal cri­sis and oth­er long-term threats rep­re­sent to their invest­ments, with Black­Rock CEO Lar­ry Fink direct­ly link­ing cli­mate change and a lack of diver­si­ty to invest­ment risks in his 2021 let­ter.

Natasha Lamb, co-founder and man­ag­ing part­ner of US invest­ment advi­so­ry organ­i­sa­tion Arju­na Cap­i­tal, was buoyed by Engine No. 1’s vic­to­ry and claims it rep­re­sents a “water­shed moment” for activist share­hold­ers. “The big dif­fer­ence now is that the largest investors, such as Black­rock and Van­guard, are no longer sit­ting on the side­lines, they under­stand the greater com­mer­cial risks of not tak­ing suf­fi­cient action on cli­mate change,” she adds.

Other causes taken up by activist investors

Lon­don Busi­ness School pro­fes­sor and mem­ber of the World Eco­nom­ic Forum’s sus­tain­able devel­op­ment expert net­work Ioan­nis Ioan­nou believes a change in focus has also helped bring activist share­hold­ers greater suc­cess.

“These recent pro­pos­als rep­re­sent a step change in terms of the sophis­ti­ca­tion of the meth­ods used to bring about change at com­pa­nies,” he says. “Share­hold­er votes are not bind­ing, even if they get a major­i­ty, so we’ve seen a shift to pro­pos­als where votes do mat­ter, such as decid­ing the board of direc­tors.”

He believes that this could lead to a rise in the num­ber of share­hold­er pro­pos­als of a sim­i­lar nature, espe­cial­ly with­in com­pa­nies that have been less respon­sive to cli­mate change. He adds: “The clear­er the requests on the com­pa­ny, the eas­i­er it will be to form investor alliances because you can agree on pre­cise­ly what it is that you’re try­ing to achieve.” 

The growth of social move­ments, such as the Black Lives Mat­ter, are also issues that activist share­hold­ers are increas­ing­ly like­ly to take up with the boards of major com­pa­nies. “I expect to see this pres­sure expand into a num­ber of oth­er areas,” Ioan­nou says. “Investors are increas­ing­ly inter­est­ed in, not only under­stand­ing and pric­ing the risk of today’s ESG issues, but also the risks of tomor­row. And the ESG issues of tomor­row can already be seen in the social move­ments of today.” 

Arju­na cap­i­tal has raised gen­der equal­i­ty pro­pos­als with the likes of Apple, Intel and Ama­zon, while share­hold­er advo­ca­cy group As You Sow has lob­bied for Amer­i­can Express, Campbell’s and Mon­ster Bev­er­age to pub­lish diver­si­ty and inclu­sion reports.  

As You Sow’s pres­i­dent Danielle Fugere says: “We’re see­ing tremen­dous social unrest at the moment and these social risks cre­ate eco­nom­ic risk as well.

“Mar­kets are not nec­es­sar­i­ly good at antic­i­pat­ing these types of long-term risks, so we have an impor­tant role to play in bring­ing these issues to the atten­tion of com­pa­nies, to help make them more resilient and increase their val­ue.” 

A fast-track to change?

Although many activist share­hold­ers claim to have the long-term inter­ests of these com­pa­nies at heart, they are still reg­u­lar­ly met with oppo­si­tion from the c‑suite and board of direc­tors. Shell CEO Ben van Beur­den recent­ly ques­tioned why share­hold­ers had backed a cli­mate res­o­lu­tion from Fol­low This, when the com­pa­ny had already put for­ward its own ener­gy tran­si­tion strat­e­gy.

The res­o­lu­tion, which calls for stronger action on cli­mate change, went on to receive 30% of share­hold­er votes – more than dou­ble the amount it gained the pre­vi­ous year. While Fol­low This led the cam­paign, van Baal claims “the real heroes are the indi­vid­ual investors who had the guts to vote against one of the most pow­er­ful com­pa­nies in the world”.

Despite not win­ning a major­i­ty, he believes the vote “still sends a very strong mes­sage” to Shell. “The strength of our res­o­lu­tions are that they’re attract­ing a grow­ing minor­i­ty,” he says. “Until share­hold­ers con­vince the exec­u­tives that they need to change or one of the oil CEOs has an epiphany, they need to be sup­port­ed – or in some instances forced – by share­hold­ers to change.” 

Ioan­nou adds: “The major pos­i­tive now is that busi­ness lead­ers should be unafraid to take on these ESG change man­age­ment chal­lenges because they might find their investor base not only legit­imis­ing the process but actu­al­ly sup­port­ing it.”