ESG, Activism, and Where Boards Should Focus: Mid-Year Highlights from Insightia

Ross Pounds

Every month, Insightia, a Diligent brand, examines the news and trends shaping corporate governance. The July 2022 issue of Insightia Monthly, an inaugural Half-Year Review, reflects on an eventful and sometimes counterintuitive past six months, with war in Ukraine, inflation and new regulations by the SEC and others playing out in the background. 

After a record year of ESG proposals, we’ve seen investor support fall, particularly in areas like climate change. Activists have shifted focus, with more attention being paid to the likes of executive performance, payouts and M&A activity. 

How will the rest of 2022 play out for boards? What can they expect in 2023? Read on for highlights.

 

Momentum Slows on Climate Action — for Now

At the beginning of this decade, shareholder proposals seeking climate change reporting at U.S.-listed companies received strong support: 50.1% on average in 2021 and 39.8% in 2020. 

It’s easy to imagine this support continuing as activists filed a record number of ESG proposals with U.S.-listed companies this year so far and environmental demands flowed into activist campaigns worldwide. Insightia noted:

  • Starboard Value’s pressure on chemical company Huntsman
  • Bluebell Capital’s demands of Glencore, where the activist said, “coal activities are depressing the company’s valuation”
  • Asset Value Investors’ call on on Japan’s SK Kaken to disclose Scope 1 and Scope 2 greenhouse gas emissions

Yet in 2022, average support for climate change proposals actually fell to 30.8%. This trend was particularly notable in the energy and financial sectors. Activist group Follow This has repeatedly called on U.S. and European giants to strengthen their emissions targets. Six proposals received 42.8% average support in 2021. This year, 10 proposals — six to the same companies — received a significantly lower 26.7% average support, with no majority wins. Elsewhere, shareholder proposals asking financial services companies to eliminate financing for new fossil fuel projects won only 11.2% average support. 

One big driver can be found in daily headlines since February 20: war in Ukraine. Insightia cited a voting bulletin by Glass Lewis: “In response to the shortfall from sanctioned Russian oil, world leaders are engaging with other oil-rich nations to boost production, which will likely lead to new or expanded fuel development. Shareholders may be reluctant to limit Bank of America’s ability to participate in such projects.” 

Another reason behind the drop was the natural phenomenon of quantity over quality as more activists wade into the ESG waters with more campaigns. As the volume of ESG shareholders has increased, State Street Global Advisors’ Ben Colton observed the “quality of targeting” has become “more dispersed.” 

Finally, leading investors have been pushing back on what they perceive as activist overreach. BlackRock cited an increasing number of ESG proposals that call for changes to a company’s strategy or business model, “or address matters that are not material to how a company delivers long-term shareholder value,” noting that many of these proposals have been opposed due to their “unduly prescriptive and constraining nature.”

“The demands being placed on companies may have gone too far,” writes Insightia Publications Editor Rebecca Sherratt. 

Corporations should not expect a continued ride on ESG easy street as the year continues, however, particularly as the SEC finalizes its proposed climate disclosure rules and the world overall recognizes the imperative for climate action. In this area, Sherratt cited the words of Black Rock CEO Larry Fink: “In the transition to net-zero we will need to pass through many shades of brown to shades of green."

 

Intensifying Attention on Individual Directors, Social Issues  

Nor should corporations and their boards expect a decrease in activist attention overall. In the first six months of 2022, 678 companies worldwide were subject to activist demands, up from 646 at the same time last year — the first year-on-year upturn in five years.

Where are activists focusing their attention? Insightia noted increased demands for more mergers and acquisitions, reaching record highs in the U.K, and challenges to oversized executive payouts and underperforming CEOs and directors. After three years of declining activity, the 2022 proxy season saw a surge in demands for the removal of personnel, particularly in the U.S. and Australia. For example:

  • Spurred by serial activist Carl Icahn, SouthWest Gas chief executive John Hester retired and left the board
  • Activist Crystal Amber prompted the removal of Allied Minds Chairman Harry Rein
  • Driver Management pressured Republic First Bancorp to push CEO Vernon Hill out
  • As part of a settlement with The Children’s Investment (TCI) Fund Management, Canadian National Railway named a new chief executive officer

Social demands had declined in number during the pandemic. The first half of 2022 saw a rebound: a record 129 globally. Insightia noted a “more muted” recovery in the United States. Here social demands by activists remained just short of figures for 2019. 

What social issues are activists focusing on? Diversity, equity, and inclusion (DEI) represented the largest portion of demands. Insightia also observed that two specific areas were witnessing increased demand for disclosures: political spending and enhanced disclosures related to weapons.

 

The Path Forward for ESG

Throughout all of these shifts and trends, has ESG become a core part of activist strategy? Insightia noted that some industry veterans see ESG as a short-term tactic to win support from influential proxy advisory firms. 

Andrew Shapiro, president of Lawndale Capital Management, talked to Insightia in June about ESG in activism. “[Activists] want to make sure that they touch all the hot buttons of all of the voting constituencies of the shareholder base. They want to make sure that they get the support of Institutional Shareholder Services (ISS) and Glass Lewis.”

Across activists’ many motivations and areas of focus, however, one thing is for certain: ESG’s influence on activism is here to stay. Whether for immediate influence during proxy season or for longer-term strategy, “ESG has become a part of the activism toolbox,” Insightia writes.

Get the full picture of 2022 corporate governance news and trends in progress, including ESG, and download the full Insightia Half-Year Review here.

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Ross Pounds
Ross Pounds is a Content Marketing Manager at Diligent. Based in the UK and a graduate of the University of Warwick, he has worked as a journalist and across a variety of industries in both corporate and early stage environments, and specializes in long-form content and broader content strategy. Ross has'a particular interest in ESG and pre-IPO companies.