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Sep 04, 2023

Balancing act: Dealing with anti-ESG sentiment

With ESG taking center stage, Hemma Visavadia discovers how companies react to hostile shareholder proposals and coming face-to-face with an activist

ESG reporting has grown from being a CSR tick-box exercise into a variety of measurable corporate benchmarks that investors have fully embraced. The framework has evolved from what was once a regulatory and compliance drill into an integral part of a company’s practices and performance.

This growth has not happened overnight. From the Covid-19 pandemic and lockdown restrictions to the Russian invasion of Ukraine, the world has changed significantly over the past few years. Now moving away from reliance on non-renewables such as oil and gas from Russia, there has been an increase in pressure on companies from investors, activists and analysts to not only do better against ESG frameworks but also explain how they will achieve their targets.

Balancing act
Wael Sawan, Shell

But some firms are still far from reaching their climate goals, with high-profile companies such as Shell being scrutinized for backpaddling in this area. Updating investors on the energy giant’s strategy in June, CEO Wael Sawan said Shell would no longer focus on reducing its oil production by 1 percent to 2 percent each year and will instead pay more attention to shareholder payouts.

As the $208 bn multinational stepped back in making progress with its climate strategy, it still managed to rake in $39 bn in profits for 2022, an all-time high, while many parts of the world endured an energy and cost-of-living crisis.

Proxy progress derailed

According to research by Alliance Advisors, during the first half of this year 721 companies were publicly subjected to activist demands, a drop from the 730 recorded in 2022.

Of the 721 activist demands, 144 were based on social issues such as diversity and inclusion, while only 115 centered on environment-based disputes. When analyzed closely, however, the number of successful climate proposals launched by shareholders gained very little traction.

This is evident with the number of Paris Agreement resolutions filed during this year’s proxy season. The agreement calls on companies to align their ESG agenda with helping to limit global warming to 1.5°C by the end of this century. There have been half a dozen proposals already at big firms like BP, Shell and Toyota, yet none of the resolutions have managed to secure enough votes from investors to pass, suggesting that initiatives pushing companies to do better in reducing their carbon footprint require global effort.

Bluebell vs Solvay

One way people can pressure companies to change is through activism. Any shareholder can challenge with as little as one share, but only those with real influence and a sizable stake in the company can evoke change.

Balancing act

The activist firm Bluebell Capital Partners proved this point. With only one share, it was able to help prevent Solvay, a Belgian multinational chemical company, from allegedly contaminating the Mediterranean. In a two-year public battle, Solvay had been accused by Bluebell and environmental campaigners of leaking limestone residues from its soda ash production plant in Rosignano, Italy into the sea, which would then wash up onto the shore. Bluebell engaged in an activist campaign against the chemical giant and won in 2022.

‘In the case of Solvay, we wanted to share the message that everybody can do it,’ says Giuseppe Bivona, partner and chief investment officer at Bluebell. ‘Any CEO should know that he or she can be challenged by somebody who has a share. We proved that.’

There have been numerous successful activism campaigns over the years but, when it comes to ESG-specific ones, while they may draw media attention, the success rate is far lower. So why has ESG activism become so prominent over the years when it remains insufficiently powerful to make it to a vote at AGMs?

Valid and credible targets

Prabh Banga, vice president of sustainability at construction company Aecon, explains that ESG activism is caused by stakeholders looking for validity and credibility around the targets companies are setting.

She says what has caused ESG activism to increase is the need for investors to have access to ESG information that is ‘consistent, comparable and easily verifiable’ within an organization.

‘What I’ve found is that when it was a tick-box exercise, it was really about just making sure companies are compliant,’ she notes. ‘But now we get more engaged questions, questions about our greenhouse gas (GHG) reduction goals [and] how we plan to get that goal aligned with the Paris Agreement.’

Balancing act
Prabh Banga, Aecon

Looking at how Aecon would handle an ESG activism case, Banga says it’s important to continuously engage with shareholders and focus on being authentic in your operations and company reporting to avoiding greenwashing, for example.

For Aecon’s GHG emission reduction goals, she says the group spoke with clients, investors and other key stakeholders to align the targets and make sure the firm was following best practice for the industry.

Hearing from an activist

Activism does work. It’s tricky to get the backing but, for a firm like Bluebell that has been making headway in this area since 2019, this is where the passion lies: creating change. Over the past few years, it has been relentlessly pushing for commodity trading and mining company Glencore to get out of the coal business, citing environmental concerns as the main reason.

In June, the activist investor wrote to Glencore’s board, calling for company CEO Gary Nagle to step down. Bluebell argued that under Nagle’s leadership, Glencore had seen shareholders’ support for its strategy on coal significantly decline and Glencore breach its commitment to engage with ‘dissenting shareholders to address concerns on the climate action transition plan’.

Bivona says they will keep pushing until Glencore exits coal completely. ‘That’s my objective – we tend to be pretty relentless in things we do,’ he states. ‘It’s not a matter of if but of when and how. But it will exit, I have no doubt whatsoever.’

Anti-ESG movement

One of the notable trends this year has been the anti-ESG movement, one that even big names like BlackRock have been criticized for following. BlackRock founder and CEO Larry Fink said in his 2023 annual shareholders letter that it’s up to governments to make policy and enact legislation and not for companies, including asset managers, to ‘be the environmental police’. He added that for years now, ‘we have viewed climate risk as an investment risk. That’s still the case.’

With trendsetters like BlackRock taking this view of ESG – a term it no longer uses but instead opt for ‘material sustainability-related risks and opportunities’ – what does this mean for the industry?

Commenting on the anti-ESG movement, Emmanuelle Palikuca, head of sustainability advisory at Alliance Advisors, says that in her experience a lot of shareholders this year have been trying to push companies away from environmental and social topics.

‘I think investors are applying a lot more scrutiny to what they support and what they don’t,’ she reflects. ‘As a result, they’re being more purposeful or selective in what they’re choosing to vote on.

‘A lot of the anti-ESG shareholder proposals we’ve seen are asking companies to focus on their fiduciary duties and shareholder returns, but they are not taking into consideration that environmental and social topics are inextricably linked to those items.’

Social is just as important

When it comes to environmental activism, due to the long-term nature of climate goals, an investor may not see the need to back something that will be impactful only in 20-30 years’ time. On the social side, however, due to the short-term value it can bring to the here and now, investors are more likely to vote in favor of it.

There has been a lot of emphasis on diversity and inclusion and Banga, who works in the construction business, says getting more women into this industry has been a huge focus for activism – and the company has noticed.

Balancing act
Emmanuelle Palikuca, Alliance Advisors

‘I’ve seen a lot of companies set targets associated with that,’ she says. ‘And I think a lot of things have happened in the world over the last couple of years that have made diversity & inclusion a high priority for companies,’ she says.

Palikuca adds that a number of social proposals already put forward this year have earned majority support and are ‘faring quite well’. Topics related to diversity and inclusion and several social-related proposals on racial equity, labor and human capital-related topics continue to pop up in 2023, she says.

Looking at the short-term value of social proposals, Palikuca explains that there are a lot more metrics on the environmental side than with social issues, which can make it hard to quantify why people should vote on social issues.

Engage with an activist

When asked what companies should do if an activist like Bluebell comes knocking, Bivona says ‘listen carefully’. Meet with them and have an open dialogue about the issue the activist has, he says. ‘This may seem like common sense but in my experience that’s not always the case.’

Bivona explains that at Bluebell they are mainly interested in ensuring that any company it invests in is fully aligned with pursuing sustainable shareholder value creation and operates responsibly. ‘As a shareholder, when we see a company doing things differently, we get very worried about this,’ he says. ‘The company should at least do what it says it’s doing.’

Palikuca says the most important piece of advice she can offer is to build meaningful relationships with the shareholder base and be more proactive than reactive when it comes to activism. ‘You don’t want to just sit around until you get that knock on your door,’ she cautions.

Adding her thoughts on how IROs can better engage with their shareholders to avoid having hostile ESG proposals, Banga says: ‘You must stay ahead of the issue. Make sure you’re on top of what these issues are because stakeholder engagement is key. Companies should always ensure shareholder engagement and stakeholder engagement is treated as a key feature of their overall governance program.’