Activism Rising – The Role of Shareholders in Shaping ESG Strategy

While environmental, social and governance (ESG) activism has long been a feature of many markets globally, 2021 has signalled the increased willingness of large institutional investors to take or support activist action against corporate boards where they perceive companies’ progress on ESG issues to be slow or halting. While ESG-related shareholder activist campaigns may have been driven by non-governmental organisations (NGOs), community groups and worker groups in the past, it seems that institutional investors are increasingly willing to draw from the activist ‘toolkit’ to improve ESG performance within their portfolios.

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Particularly relevant during the year was the election of three external candidates to the board of ExxonMobil in May 2021 on the back of a climate action campaign by 0.02% hedge fund investor Engine No. 1 (see case study below). This type of activism is not new. In this instance, however, it was notable for both the size and prominence of the target, as well as the institutional investors that supported the campaign. While institutional investors have for some time indicated their intentions to vote against board members if they feel that progress is not being made on ESG issues that are important to them (most typically, climate and gender diversity), the amount of capital that was mobilised in support of Engine No. 1’s climate campaign at ExxonMobil may represent ‘the beginning of the end of the road’ for investors’ patience on ESG progress.

Activist pressure for companies to adopt and deliver a corporate strategy aligned (or at least not perceived to be inconsistent) with improved ESG outcomes has not been confined to proxy fights and shareholder proposals either. Importantly, the past 12–24 months have also seen the increased use of regulatory complaints and litigation as part of the activist toolkit. Alleged duties of care and claims of greenwashing will mean that even boards that are market-leading in respect of climate response and other ESG issues will still need to ensure that their commitments and disclosure are underpinned by robust systems of governance and diligence.

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This article was first published in the ICLG - Environmental, Social, & Governance Law 2022.