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Wind of
Change

Public companies are struggling to embrace stakeholder capitalism.
Can a new breed of activist investor help?
BY KRISTIN TOUSSAINT

 

When upstart activist hedge fund Engine No. 1 secured three seats on the board of Exxon Mobil, in June, it was a high profile repudiation of the way the United States’ largest oil company has long conducted business: with a laser focus on returns and a blind eye to its impact on the world at large. The fund vowed to push Exxon Mobil to develop a plan to address climate change and reduce its carbon footprint. Exxon’s responsibility as a business would no longer be only to its share holders, the boardroom show down signalled, but also to the public and the planet.

To pull off this coup, however, Engine No. 1 first needed to woo other, bigger shareholders. Launched in December 2020 with a goal of getting companies to prioritise long-term value, the fund found a perfect first target in Exxon. The oil company had ignored the kinds of renewable investments that would set it up for future success, and its stock had been plummeting. Though Engine No. 1 held just 0.02% of the company, it persuaded some of Exxon’s largest shareholders, including BlackRock and the California State Teachers’ Retirement System, that the company’s myopia was a liability. “I think the issue you’ve seen at Exxon, really for years, is an overly short-term focus and a real disregard for the way the industry has changed, where the world is changing,” Charlie Penner, who leads campaigns at Engine No. 1, told Fast Company.

Just how much Engine No. 1 will be able to reform Exxon isn’t yet clear—the three new board members join nine legacy ones, so their influence may be muted—but its successful campaign reflects changes taking place beyond the oil company.
Over the past several years, a new kind of activist investor has emerged. Instead of enacting takeover campaigns simply to achieve higher returns, they’re pushing companies to address their environmental and social impact.

A year ago, just before Engine No. 1 was founded, activist fund Bluebell Capital Partners sent a letter to chemical company Solvay’s board demanding it stop discharging chemical waste from its Tuscany, Italy, plant into the sea. Bluebell, which was founded in 2019 with a $75 million fund, has committed to pursuing one campaign a year focused on getting a company to be more responsive to environmental, social and corporate governance (or ESG) issues. Last year also saw the creation of Inclusive Capital Partners, an ESG focused fund, now worth $1.3 billion. Among its cofounders: Jeffrey Ubben, who previously founded the hedge fund ValueAct Capital, and Lynn Forester de Rothschild, who founded the Coalition for Inclusive Capitalism to get business leaders engaged with ESG. In 2019, Lauren Taylor Wolfe founded the ESG-focused firm Impactive Capital, which has used its stake in companies such as Wyndham Hotels
and the engineering firm KBR to push them toward better environmental practices.

ESG investments have been growing in recent years; the Forum for Sustainable and Responsible Investment estimates that investments that take ESG into consideration have reached $17 trillion in the US, up 42% from 2018, and now represent a third of all professionally managed assets in the US. For the most part, however, these investments prioritise companies that already embrace some form of sustainability and stakeholder capitalism. BlackRock, for example, has championed ESG since 2017, but has only recently started voting on climate resolutions at companies that are not in its ESG portfolios.

Activist funds such as Inclusive Capital Partners are taking a more aggressive approach: Identify companies that are dragging their feet on ESG issues and coax—or push—them to do better. “It’s the dirty companies that are producing our problems,” says de Rothschild. “We run to the companies that are creating the problems and fix them.” The question now is, can the changes forced by activist investors yield enough financial upside that other investors and CEOs follow suit?

“Activist investors have come a long way: from corporate raiders to climate heroes. “

Activist investors have come a long way: from corporate raiders to climate heroes. Historically, activist funds have focused on short-term returns. They hold their shares for one, two, or, in “extreme cases”, three years, according to a January 2020 paper by Mark DesJardine, an assistant professor of strategy and sustainability at Penn State, and Rodolphe Durand, founder of the Society and Organizations Research Center at the business school HEC Paris. The average investment horizon of an activist hedge fund, DesJardine says, is about 13 months. This short-termism is why activist investing has a tenuous track record when it comes to creating long-term value. When DesJardine and Durand studied 1 324 publicly traded US firms that were targeted by at least one activist between 2000 and 2016, they found that activist-targeted companies saw their value increase 7.7% in the first 12 months of a campaign—but drop 4.9% four years later. The new ESG activist investors are flipping this script. Though Engine No. 1 has not said how long it will hold on to Exxon, Penner told Fast Company that it will be “a years-long process of figuring out how to reposition this company for the future”. Ubben and de Rothschild, meanwhile, are not aiming for quick returns either. “Focusing on ESG is a long-term strategy,” explains de Rothschild. “But it’s also a shareholder-value strategy.”

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