Social and environmental consciousness play an increasingly important role in all areas of society — in politics, in education, in the realm of non-governmental organizations, and also, without question, in the corporate world.
No matter what data set you look at or which news outlets you may follow, it quickly becomes clear that adopting ESG principles is emerging as a “do or die” for smaller businesses and larger corporations alike.
Many companies are actively embracing these tides of change. As more and more commercial ventures realize that a commitment to business ethics and improved corporate social responsibility no longer has to hurt their financial potential in any way, it is far from unusual for modern businesses to take proactive steps to do better.
Many companies are moving in the right direction by analyzing their status quo in ESG, identifying where they fall short concerning their goals and their competitors, and implementing proactive ESG integration efforts led by dedicated corporate sustainability teams.
When a company lags, recognizing only the old financial bottom line and failing to onboard the other two principles of the updated triple bottom like — “people” and “planet” as well as “profit” — what happens next? Such corporations will not be left to operate the way they want without any consequences in the current climate.
Activism that targets outdated business practices, whether ad hoc or more formal, comes from all quarters. Lagging companies that have not yet embraced ESG values whole-heartedly are, if they are impactful enough, bound to face pressure from environmental activists, trade unionists, as well as employees who spontaneously organize and social activists of all stripes.
They will inevitably be joined by the media and consumers or citizen activists who start effective physical and online campaigns to force a company to become more socially and environmentally aware. These campaigns can take countless forms, from petitions and widespread news coverage to damning social media attention and even very successful boycotts.
Investors represent a powerful and still underestimated force for change. Many ESG investors choose to divest from companies that don’t share the values they hold dear or actively harm the environment or society. Common examples of companies ESG investors may shun would include, for instance, those within the tobacco, alcohol, gambling, and firearms industries.
Corporations in other sectors revealed to engage in activities that don’t jive with ESG principles will also be met with financial pain.
It is whether they have neglected data privacy, were discovered to have unethical labor practices, have failed in terms of gender equity or onboarding of diverse workers, are causing active harm to the environment with polluting or unsustainable practices, or have fallen short of expectations in the steps they have taken toward climate change mitigation.
Divesting is only one way for ESG investors to show that money talks, though. Some ESG activist investors choose a different approach. Because the adage that “change comes from within” continues to hold, some ESG investors refuse to divest and instead commit to continuing the most important conversations from the inside.
How exactly can this form of ESG shareholder activism affect change within companies?
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At its very core, shareholder activism can be defined as any action the shareholders of a publicly-traded corporation take to induce any ethically motivated change within that corporation’s policies and practices. Shareholder activism can take place at the level of individual investors, or it may be the result of orchestrated efforts on the part of shareholder activists who have joined forces to amplify their voices.
Shareholder activists’ activities may pertain to a single issue or strategically and systematically seek to integrate much broader changes into a company’s corporate culture.
Examples of sometimes extremely successful efforts in the domain of shareholder activism include:
- Hedge fund activism. Hedge funds or investors with close links to hedge funds make efforts to become a major shareholder in a company — with a stake larger than five percent — without taking over the company but creating systemic policy changes.
- “Vote no” campaigns to vote against director candidates or abstain from voting, to influence the company’s management within its upper tiers, and so-called proxy fights in which shareholder activists actively seek to replace board members with their own candidates who will implement the changes they are hoping to see.
- “Say on pay” shareholder activism in which shareholder activists seek to gain a say on the compensation executive officers in a corporation receive.
See Related: Humana Inc. ESG Profile (HUM): Is It Sustainable?
Now that we have an overview of the definition of shareholder activism in general, it is clear that ESG shareholder activism refers to shareholder activism conducted by shareholder activists who focus on ESG principles.
Investors who place a heavy emphasis on steering companies to make a positive impact on all the most important social and environmental issues of our era are fast becoming more common but even mainstream.
Soon, ESG investors are likely to make up the majority of all investors for the simple reason that this is now possible without losing profit potential.
ESG stands, of course, for “environmental,” “social,” and “governance” principles that relate to business ethics and corporate social responsibility. These three simple letters represent a solid and measurable framework through which stakeholders can determine how committed a company is too good corporate citizenship.
ESG investors at large want to invest in corporations that have performed well on ESG metrics, a sign that these companies share their values while tending to avoid investing in (or divesting from) companies that have lagged behind their peers.
Whole industries are now emerging to enable environmentally and socially conscious investors to decide where to invest, with ESG frameworks and standards becoming increasingly commonplace.
ESG shareholder activists are different than typical ESG investors, however. This sub-set of investors commits to investing in the most socially and environmentally progressive corporations as they decide where to invest and seeks to force change from the inside.
In some cases of ESG shareholder activism, sustainability in the environmental realm may be the top priority.
These ESG shareholder activists choose to invest in or refuse to divest from companies with the explicit goal of forcing improvements in terms of reduced pollution, safe water, waste management, a smaller carbon footprint, renewable energy sources, or other climate change mitigation steps.
The issues they aim to resolve may be as simple as encouraging a company to abandon plastic straws or as ambitious as getting a corporation to implement a zero-carbon footprint.
Other shareholder activists may focus on social issues. Again, these ESG activist campaigns may focus on single issues or aim for a complete turnaround. Their goals could be as simple as “stop working with suppliers that rely on potentially-forced Uighur labor” or as broad as “embrace ethical labor practices across the board, at all levels.”
For yet others, the governance aspect of ESG takes priority. As companies implement transparent policies to be held accountable, these shareholder activists believe, all stakeholders can only benefit.
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As ESG investing is becoming more commonplace and shareholder activism is going mainstream, ESG shareholder activism has already undeniably become a potent driving for change.
It does so in a wide variety of ways.
See Related: Dow Inc. ESG Profile (DOW): Is It Sustainable?
- Setting Tides of Change in Motion
ESG shareholder activist campaigns may not always comprise activists who believe that they can pass a resolution and cause policy changes to come about immediately.
Instead, they may have the simpler aim of sowing the seeds of change. When ESG shareholder activists urged McDonald’s to replace its environmentally harmful foam cups with more sustainable, bio-degradable alternatives back in 2011, for instance, that resolution had no realistic chance of passing.
Yet, within two years, this corporation did make a move toward more environmentally sustainable cups. The shareholder activists planted an idea with their resolution. As that idea grew within the company and the wider world beyond it, they ultimately achieved their goal.
ESG shareholder activism does not always have to succeed in pressing ahead with its end goals right away to be successful in the long run. In some cases, raising the possibility of moving in the right direction is enough to induce a company to embrace the goal by themselves after a time.
- Inducing Companies to Establish Corporate Social Responsibility Departments
Financial incentives continue to speak more loudly than just about anything else. As ESG shareholder activism is becoming more commonplace and other investors embrace ESG principles, failure to embrace ESG criteria is fast becoming a significant business risk.
As a result of broader activism and policy changes, lagging behind the times clearly leads to financial risk and significant disadvantages compared to competitors. No large and prominent modern corporation can continue to function effectively without embracing corporate social responsibility goals and ESG frameworks.
To ensure that a company can keep up with the times and implement ESG frameworks that can attract investment, it is now almost unthinkable to fail to put a corporate sustainability department in place.
This is, in large part, thanks to ESG shareholder activists.
See Related: Amgen Inc. ESG Profile (AMGN): Is It Sustainable?
- Forcing ESG Disclosures
Thanks to the fact that ESG investment now ranks in the trillions of dollars, one thing has become clear. Companies who choose to focus on excellent corporate citizenship practices no longer, in the modern world, harm their financial returns.
Rather, the opposite has become true. Failing to make corporate ethics a top priority now routinely hurts any company’s bottom line as ESG investors divest and consumers initiate petitions and boycotts.
This, alone, has forced corporations to place environmental sustainability and climate change mitigation and social policies that pertain not only to the company’s own employees but also to global society at large to adopt changes they would otherwise not have made.
Because of ESG shareholder activism and a broader wish to continue attracting investors — including the larger and larger segment of socially and environmentally conscious investors — it has become routine for large corporations to publish annual ESG reports.
These reports may only have the aim of attracting investors, but they reflect real and measurable changes that have been implemented in the realm of ESG.
Just like no individual exists in isolation, the premise of corporate citizenship makes it clear that no business can thrive without the communities that contribute to it and that purchase its products or services.
ESG disclosure reports in which easily digestible data is presented for all to see are, at their core, a testament to the power of ESG shareholder activism and ESG investment.
- ESG Shareholder Activism Has Caused an ESG “Arms Race” in Corporations
Living in fear of the genuine possibility that ESG shareholder activism will target their board rooms, many modern companies are now forging ahead at great speeds to ensure that they score better on all ESG metrics than their peers and competitors.
In other words, as some companies make great strides — with the precise aim of attracting ESG investors — others cannot reasonably neglect their progress in the area of corporate social and environmental responsibility and still expect to come out on top.
This has created something akin to a corporate “arms race,” in which companies within the same sector are trying their very hardest to outdo each other in the areas of environmental, social, and governance principles.
Thanks to ESG shareholder activism, corporations are now fighting each other to see who comes out as the better corporate citizen, rather than holding on to outdated notions that focus simply on profit at any cost.
It would be fair to say that ESG shareholder activism is, in large part, to thank for the fact that corporations can no longer thrive without also being excellent corporate citizens. That is, in short, how shareholder activism not only helps spur change but also renders it inevitable.
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Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.
Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.
Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.
When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.