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Jun 16, 2021

As companies disclose more ESG data, activists have an opportunity

‘Greater disclosure [offers] more opportunity for analysis and comparison, and therefore challenge,’ says Andrew Archer of Investor Update

The growth of corporate disclosure on ESG issues will offer new opportunities to activist investors as they search for evidence of underperformance, according to a recently released white paper.

Activists are increasingly using ESG issues as a focus area in their engagement with issuers, but it can be hard to build a thesis when there is a lack of data showing how companies stack up against peers.

ESG disclosure, already at record levels, is set to increase further thanks to a range of new regulations being planned or considered in markets such as the UK, the European Union and the US.

‘Over time that will lead to a more efficient reflection of company behavior and industry performance,’ notes the paper from Investor Update, a market intelligence firm.

‘However, during the transition phase, increased regulation and enhanced disclosure... is providing more opportunity for activists as opposed to less. This is because it makes it easier to effectively measure performance and thereby more readily identify the outliers.’

When people think about activism, they instinctively think there is inefficiency of information, Andrew Archer, the author of the paper and head of ESG advisory at Investor Update, tells IR Magazine. ‘Whereas the reality is the opposite,’ he says. ‘Greater disclosure [offers] more opportunity for analysis and comparison, and therefore challenge.’

Under pressure from investors, NGOs and other stakeholders, companies have continued to increase their ESG disclosure. A study by KPMG of 5,200 issuers across 52 markets finds that 80 percent now report on sustainability. For the world’s largest 250 companies, that figure is 96 percent.

Regulators are also exploring ways to enhance disclosure. For example, the UK has announced it will mandate TCFD reporting, while the EU plans to increase the number of companies covered by its sustainable reporting rules from 10,000 to 50,000. In the US, the SEC is considering new disclosure rules on climate risk.

At the same time, activist investors are upping their focus on ESG issues. A number of managers have launched new ventures that target sustainability performance as a way to boost value. Examples include Chris James’ Engine No 1, which spectacularly won three board seats at ExxonMobil, and Jeff Ubben’s Inclusive Capital Partners.

Traditional activist funds are also incorporating ESG factors into their campaigns. This has always been the case with governance topics but, increasingly, environmental and social issues are also being mentioned.

‘There has been a great deal of movement and change over the last 18 months, which reflects the degree to which the key players in activism are repositioning around the ESG opportunity and looking to secure and leverage opportunities where they identify them,’ notes the white paper.

‘This provides an opportunity for potential targets to embrace ESG issues more comprehensively as a way to protect themselves and potentially take back some of the battleground.’

While some companies have their heads in the sand and are likely to be targeted by a range of stakeholders over ESG issues, others are making the necessary changes internally but are failing to properly communicate their sustainability story to the market, says Archer.

‘Those people feel they’re protected because of what they’ve been doing as an organization,’ he says. ‘If there’s a gap between that and what’s perceived externally, that’s a massive risk – and the easiest hit for an activist.’

A key consideration for companies is to make sure they are not just disclosing information, but also setting credible goals for the investment community to track, Archer adds. ‘It’s not a new phenomenon – neither ESG nor activism – and yet there is such a gap between the way people disclose and then set targets.’