Can Shareholder Activism Help Support ESG Initiatives?

Corporate attention to ESG criteria is increasingly being viewed by investors as a good thing. Therefore, applying ESG best practices is now regarded by companies as a way to potentially yield improved financial results. 

The concept of ESG investing refers to a strategy that considers a company’s dedication to environmental, social, and governance issues. Although it’s regularly referred to as ethical or sustainable investing, ESG is actually more precise than that. Definitively, we can say that ESG data enables us to improve our understanding of how to invest our money ethically. 

Shareholder activism – sometimes referred to as activist investing – is the process of shareholders utilising their investments to attempt to change the behaviour of a particular corporation. Considerate shareholders rely more and more on ESG data to inform and influence how and where they invest their money. That being said, the way that companies track and measure their ESG metrics is still very much a grey area. 

How do companies measure ESG? 

At present, there is no uniform method for measuring ESG. But there is an increasing need for businesses to quantify their performance based upon ESG metrics. Currently, businesses are required to employ the services of a third-party organisation in order to get an ESG score, or they’re required to develop their own ESG methodology. 

Unhelpfully, this typically creates subjective ESG scores, which makes it particularly difficult to interpret ESG data systems, and ultimately understand how one company ranks in comparison to another in regard to fundamental ESG metrics. We are of the opinion that more clarity is required around ESG rankings to ensure that investment decisions are genuinely aligned with ethics. 

How can ESG initiatives be driven by shareholder activism? 

Although the objectives of shareholder activists can vary significantly, the primary focus is often on enhancing corporate governance within businesses that are publicly traded. Historically, shareholder activism was seen as a standalone investment class, which sometimes triggered merger and acquisition activity, most notably within American companies.

But things have changed in recent times. Companies have been forced to adopt more sustainable practices as a result of changing consumer trends. What’s more, the Securities & Exchange Commission, which is the primary financial regulator in the US market, is seeking to regulate the processes by which publicly traded companies disclose environmental information. Hopefully, such a move will help create clarity around many of the grey areas relating to ESG evaluations and reporting. 

The fact that ESG criteria are receiving more corporate attention is generally seen as a good thing by most investors. For this reason, the application of ESG practices can be viewed as a way of increasing competition between businesses and is likely to return better financial results. 

It has also made it more likely for shareholder activists to push for ESG-aligned initiatives in instances where performance is not up to scratch. As such, companies that excel in terms of financial returns might be targeted by activist campaigns because their environmental and social issues don’t reflect the ethics of their investors. 

With this in mind, what does the future of ESG look like? 

One of the best aspects of shareholder activism is that it enables shareholders to directly influence the behaviour of public companies, particularly in relation to their strategies and policies relating to sustainable issues. Because of the increasing popularity of ESG, investors are able to utilise existing ESG terminology and practices to inform shareholders of their objectives, which ultimately makes it easier for them to harness change.

However, there’s a long way to go to combat issues relating to social injustice and inequality within companies. This presents its own unique challenges, as companies might score well in one regard, only for their policies to score poorly when viewed from a different angle – the Toms’ shoes one-for-one policy is a case in point. Furthermore, we need to conceptualise a way to monitor and evaluate ESG reporting, as social issues are always changing and evolving. 

Keeping abreast of these challenges and employing proxy solicitations should enhance ESG transparency and hopefully improve the welfare of companies and consumers alike.