Activist investors

Posted by Flux on 

13 March 2024

What’s trending?

Businesses face more and more pressure from investors to fulfil their environmental, social and governance (ESG) commitments. In the year to March 2023, shareholders had filed around 540 proposals asking companies to address ESG issues. “Shareholders continue to work closely with company executives and boards to address material risk for all stakeholders. The extractive economy is winding down; a new economy based on justice and sustainability is emerging. Leading corporations understand that now we are finding solutions, not hiding from big systemic risks like climate change and racial injustice,” said Andrew Behar, CEO of As You Sow which is a non-profit foundation chartered to promote corporate social responsibility through shareholder advocacy, coalition building, and legal strategies. 

Companies are responding to this trend by creating new services that allow investors to monitor the environmental and social impact of the stocks they invest in. For example, the digital platform ‘Globalance World’ created what it calls “Google Earth for Investors”, giving investors a way to analyse the sustainability and future preparedness of over 6,000 listed companies and selected stock indices.

However, it should be noted that there is a growing backlash against ESG. In a 2023 survey by The Conference Board of more than 100 large U.S. companies, nearly half said they had already experienced ESG backlash, and 61% expect it to persist or intensify in the next two years.

Why is it important? 

Activist investors hold companies to account for failing to adequately comply with their ESG commitments and relevant regulations. After all, offending companies run the risk of disinvestment, reputational damage and financial penalties. The US Securities and Exchange Commission reached a US$35 million settlement with video game giant Activision Blizzard in February 2023 after the company failed to maintain disclosure controls related to workplace misconduct. The company had also barred former employees from communicating directly with the Commission, which the SEC said was not only bad corporate governance but was illegal. In addition to the financial ramifications, companies that pay lip service to their ESG commitments, through ‘greenwashing’ for example, may damage the  environment and even local communities. To guard against this, prominent activist investor Jeffrey Uben has been nominated by the troubled chemicals and drugs company Bayer AG to join its supervisory board. The advocacy of activist investors helps drive positive change, align businesses with societal expectations, and promote a healthier planet for current and future generations.  

What can businesses do about it?

A commitment to and implementation of ESG goals is a necessary part of an overall business strategy: the negative ramifications of non-compliance are highlighted above. It is important to make sure that these goals are clear and measurable while investors and stakeholders should be regularly updated on progress toward ESG goals. For those companies that have already been approached by activist investors, establish a dialogue to understand their concerns. A comprehensive environmental impact assessment of the company’s operations, supply chain, and products should be conducted and areas with the highest societal impact should be identified and prioritised. Third-party sustainability certifications or ratings that validate the company’s commitment to ESG responsibility are advisable. But as ESG becomes a political flashpoint and pushback grows, understanding its impact should be a priority for corporate leaders, because investors are likely to judge them by their responses.

By Flux Trends 

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