Georgeson Managing Director Brigid Rosati & Global Head of Corporate Governance Don Cassidy
By Brigid Rosati and Don Cassidy
Investor attention to a company’s environmental, social and governance (ESG) characteristics and vulnerabilities has given rise to a new form of activism – one focused on strengthening companies with perceived environmental and social (E&S) weaknesses while holding directors accountable.
Although broad investor focus on ESG matters isn’t new, activist campaigns targeting companies based on their E&S accountability were still relatively uncommon until this year. In 2021, two notable campaigns that directly target director seats were launched against companies that activists perceive to be ‘environmental laggards’.
Engine No. 1 is a newly formed investment firm. The company targeted a multinational oil and gas company to set a net-zero goal and launched its first proxy fight by formally nominating four independent directors with clean technology expertise to the board. Other investors may be more likely now to support Engine No. 1’s concerns about the oil and gas company’s E&S accountability during the 2021 AGM season. The California State Teachers’ Retirement System (CalSTRS) has already publicly supported Engine No. 1’s campaign and sees it as the “first foray into the practice of activist stewardship.”
In January 2021, private equity firm Kimmeridge Energy Management claimed that a North American energy producer’s board had allowed the company to underperform relative to its peers for too long and had become an environmental laggard. Kimmeridge formally nominated three independent directors for the energy company and urged the company to focus on improving board governance. Kimmeridge owns 2.5% of the North American energy producer’s common shares.
Inclusive Capital Partners was recently formed by Jeffrey Ubben, who also founded ValueAct Capital Partners. It invests in companies that sustainable funds have often avoided – such as oil and gas, chemicals, food processing and for-profit education. The fund believes these types of companies offer the greatest potential to affect positive environmental and social change, resulting in greater shareholder value. Ubben also has a track record creating activist campaigns that target board seats specifically.
The evolving activist investor tactics and mounting pressure from institutional investors for enhanced disclosure are creating the perfect storm for ESG activism to increase further in 2021.
Institutional investors pledge support to E&S
After receiving criticism for their low support of climate-focused shareholder proposals in the 2020 proxy season, many institutional investors and activist funds publicly pledged to increase their commitment to E&S in the 2021 season. As a result, many institutional investors announced new strategies that will likely affect the 2021 annual general meeting (AGM) season. In 2020, BlackRock, State Street and Vanguard issued statements noting how they will support E&S resolutions in the future, including those focused on director responsibility and accountability.
Vanguard indicated that it is more likely to support shareholder proposals seeking reasonable disclosure of greenhouse gas (GHG) emissions and proposals that ask companies to pursue climate risk mitigation. The firm has also demanded that boards should “get smart on climate risk,” calling for companies to ensure that they have directors on the board with relevant experience.
In its July 2020 stewardship report, BlackRock announced that it had placed 191 global companies ‘on watch’ for voting action in 2021 should their management of climate-related risks not improve. BlackRock has also clearly stated that it may make director election decisions based on disclosure or management of climate matters.
In 2020, State Street focused on voting against S&P 500 directors at companies that (1) scored on the bottom tenth of their industries on the firm’s proprietary R-Factor ESG scoring system and (2) could not articulate how they would improve their score. Given that State Street intends to extend this voting action to all companies within its portfolio in 2022, it is likely that directors at companies scoring poorly on the R-Factor will likely receive lower shareholder support in the 2021 AGM.
2021: Activist investors may align with other investor groups on E&S
For now, these recent E&S-related proxy fights are centered around environmental issues that are perceived as concerns by activist investors and other related parties. However, as we approach the 2021 proxy season, more interested parties, including large institutional investors, will continue to take notice of these efforts and may leverage their voting authority to support the agenda of activist investors.
More broadly, a company’s poor ESG disclosure may lead to increased levels of support for shareholder proposals demanding more accountability and transparency as well as votes against directors at companies that are perceived to be laggards.
The outcome of the 2021 proxy season presents companies with an opportunity further to engage activist investors and institutional investors on E&S accountability during the post-season.