ESG criteria in focus: How activist shareholders are urging companies to act sustainably

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• ESG criteria can influence investments
• Shareholders with more voting rights call the shots
• Shareholder resolution as a tool

ESG criteria play an important role for many investors when selecting new investments. The abbreviation stands for Environment, Social and Governance and describes a company’s sustainable actions in environmental, social and management matters. But what can you do as an investor if companies in which you have already invested do not position themselves clearly on the sustainability criteria – or even oppose them?

Interest groups can come up with more voting rights

According to the “MarketWatch” stock exchange portal, investors can certainly demand that companies become active in terms of environmental and social issues. However, due to their generally larger positions and thus more voting rights, portfolio managers and asset managers have more power here and have more leverage when it comes to enforcing claims. The most important requirement, however, is that the fund managers actually own shares in the relevant company. Alternatively, they can also join forces with other managers who already have shares. In general, the more shares an interest group owns, the more votes it has.

Open discussion as the first step

According to MarketWatch, the next step is to contact the investor relations department of the company in question and explain the suggestions for improvement. This can be done in a conversation with the CEO or a department manager. “If you see something that you think would make a company a better investment, it’s in your interest as an investor to at least convey that,” said Julie Gorte of wealth manager Impax Asset Management. So it could be worth looking for an open conversation and building a relationship, which is also the norm for such endeavors.

Shareholder Resolutions

However, should the demands on the company fall on deaf ears, fund managers can still use a shareholder resolution. Ideally, this should be submitted before the company’s annual meeting to give it enough time to reach an agreement. In this case, the resolution could be withdrawn, according to the portal. As the investment company Boston Trust Walden noted in its ESG report for the second quarter of 2022, it has already led or been involved in 15 shareholder resolutions this year. In more than 70 percent of these cases, however, an agreement was reached with the companies, company obligations were negotiated and the applications were withdrawn.

Resolutions not legally binding

But even if no agreement can be reached and the shareholders’ resolution still stands, this is no guarantee that the demands will be implemented. MarketWatch points out that the applications are usually not binding and the companies do not have to implement the required changes. However, a defeat could lead shareholders to reconsider their investment in the group. In the worst case, numerous major shareholders could lose their positions and the share price plummet.

Management control limits potential

In general, according to MarketWatch, it can be a problem for investors if a company’s leadership power is concentrated, as this makes it easier to block changes. As an example, Meta Platforms boss Mark Zuckerberg is mentioned here, who has 55 percent of the voting shares. But also the Alphabet founders Larry Page and Sergey Brin and ex-CEO Eric Schmidt are shared by more than half of the Google group. They sit on the majority of the search engine provider’s Alphabet A and B shares, which come with voting rights. Only Alphabet’s C shares have no voting rights at all.

Shareholder resolution fails at Alphabet AGM

Just this year, Boston Trust Walden submitted a shareholder resolution to Google’s parent company, asking the company to comment on the Paris Agreement’s climate goal of limiting average global warming to 1.5 degrees Celsius. Alphabet should also have explained how the risks of a possible undesirable development in this area could be reduced. In the end, however, only 19 percent of the voting shareholders voted in favor of this plan. Similar motions on sustainability, particularly with regard to diversity, were defeated with even lower approval ratings.

Activist hedge fund secures seat on ExxonMobil board

Nevertheless, there are also situations in which shareholders have been able to assert themselves with regard to ESG criteria. A prominent example of such success is the vote at oil giant ExxonMobil’s annual shareholders meeting in 2021. The fledgling hedge fund Engine No. 1 called on Exxon to do more to protect the climate after investing more than 50 million US dollars. Initially, hardly anyone believed in the success of the asset manager, but he left the shareholders’ meeting strengthened – and with three proposed members for the ExxonMobil board of directors. “We commend Exxon for the strong performance and changes it has made over the past year,” the asset manager said in a May 2022 statement Reducing greenhouse gas emissions and increasing resources for the Low Carbon Solutions business unit.”

Climate change is also affecting the market

Gorte is also satisfied that more and more traditional investors are interested in environmental issues. The asset manager recognizes that climate change is no longer just the concern of protesting activists, but is recognized as a serious risk. “So the market has evolved,” Gorte said, according to MarketWatch.

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