F&P Quarterly: Are you ready for the ESG activists?

For many years now the importance of Environmental, Social and Governance (ESG) criteria have been increasing when conscious investors look for sustainable and future-proof investments. However, change has accelerated over the past year. In the wake of the global debate on climate change, the topic has become paramount. This has not only resulted in the transformation of some major companies’ business models, but also new disruptive business models from companies with ambitions to be a proactive part of the solution, changing the dynamics of whole industries. At the same time, many ‘traditional’ companies are forced to a more reactive approach.

Sustainability is the ‘it’ word of corporate communications in 2019. It is also gaining more traction in the investor community, and beyond the traditional ESG-profiled asset managers we are starting to see a new type of activists – the ESG activists – calling for action. Just a few weeks back, the Climate Action 100+ investor initiative made one of the world’s largest oil companies adopting a binding resolution to set out a business strategy consistent with the goals of the Paris Agreement on climate change, backed by its board. At the same time, both institutional and retail investors are increasingly opting for sustainable stocks, requesting more extensive disclosure and guidance from the companies they are researching.

Focus on risks and opportunities

As an executive, it is vital to understand the drivers behind this shift. An investor will always study a company both from a risk and opportunity point of view, and today any company that lacks strategies and processes regarding sustainability-related aspects will be considered to be connected with larger risks than a company that have them in place. In a worst-case scenario, a company that is unable to adapt its business to more sustainable operations might very well face extinction in a not too distant future. Likely, a long-term investor will pass on such an investment. If a company, on the other hand, is able to demonstrate how the business can contribute to solving environmental or social challenges, it will be in the sweet spot.

The sustainable investment case

To integrate the sustainability perspective into an investment case, one need to do the homework with a thorough analysis of the risks and opportunities connected to the specific industry and business. Focus not only on what to achieve from a company-specific standpoint, but also a wider context – as an example, by mapping the business to the UN sustainable development goals (SDGs). When assessing the risks and opportunities the company should be as specific as possible and focus on areas where the business can make an actual impact, while also gaining from it (in terms of competitive advantages etc). Lastly, as always, it is important to be able to measure and follow up on the progress. Identify KPIs related to the identified focus areas and set clear goals with a time frame.

ESG activists – a blessing or a curse?

In a previous edition of F&P Quarterly, we focused on investor activism and how to best prepare for their possible entry. The ESG activists are similar to the conventional change agents, that will acquire a stake in the company with the intention of seeing through changes in management, business strategy, operations or organisational set-up. Normally, the change agents will meet both support and resistance. However, in the case of the ESG activists, resistance is likely to be lower as the ESG issues are widely embraced. This means that a humble approach is preferable and that the company should be open to potential criticism. In fact, criticism can often be a beneficial catalyst for companies to improve, proven by numerous examples in most industries. Another characteristic of the ESG activists is that they will likely seek a dialogue rather than confrontation – and in many cases also join forces with other like-minded owners. They also take the opportunity to drive their agenda in public settings, both using media and corporate-hosted events such as the general meetings. Before making any type of promises, it is crucial that the company and its executives understand the issues at hand. If possible, the company should work together with the activist to set out a path for change. Needless to say, it is the CEO or Chairman that will be expected to respond and take the lead. By handling the question professionally, the company can ensure and build shareholder trust and value over time.

The Fogel & Partners team wishes you a great summer!