ESG Campaigns Seen Falling Out of Favor With Activist Investors (2024)

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ESG Campaigns Seen Falling Out of Favor With Activist Investors? ›

ESG Campaigns Seen Falling Out of Favor With Activist Investors. (Bloomberg) -- Activist investors are expected to carry out fewer environmental and social campaigns this year after the strategy proved less lucrative than other shareholder agendas, according to business consulting firm Alvarez & Marsal Inc.

The backlash against ESG has intensified, yet its issues are no less relevant. Whilst in name, ESG may be falling from favour, in substance, its recommendations continue to drive value, and when well-timed and eye-catching, will engage interest.

Disadvantages of Individual Activist Investors

Individual activist shareholders may not share the same interests or goals as other shareholders and, therefore, may destroy shareholder value. For example, an activist shareholder may only prefer a short-term holding time horizon;.

Activist investors are subject to regulatory and legal risks, including potential litigation and regulatory fines, that can impact their investment performance.

Defining ESG and Shareholder Activism

This form of activism is about influencing financial outcomes and aligning company practices with broader social, environmental, and governance goals.

Political backlash against ESG in the US, the relabeling of ESG products, and the underperformance of sustainable funds (inextricably tied to the underperformance of growth funds) since early 2022 have contributed to these outflows.

An ESG controversy case is defined as either an event or an ongoing situation in which company operations and/or products allegedly have a negative environmental, social and/or governance impact.

The firms that activists target tend to underperform relative to their industry. Due to activists' aggressive attitude toward management and hostile approaches to short-term profit making, they are often perceived as “corporate raiders,” “green mailers” or “asset strippers”.

Multiple studies have shown that activism succeeds in raising share prices, at least temporarily. A major recent study by Lucian Bebchuk, Alon Brav, and Wei Jiang of activist investments from 1994 through 2007 also found five-year improvements in the operating performance of targeted companies.

Activist investors may have sound ideas about how management can use the company's assets better, improve its operations, or enhance shareholder value. Management may or may not be receptive to such ideas. However, the dialog could be productive of positive changes for the individual investor as well as the activist.

Is ESG a political issue? ›

Many ESG-focused efforts are financially material as they have important implications for long-term value creation, but political narrative often undermines this reality. This highlights the need for companies to speak specifically to investors about their ESG initiatives and link them to financial benefits.

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

After weeks of intense debate, on 12 December, they emerged with a promise: 196 nations pledged to take on climate change with the goal of net zero emissions by 2050. For businesses, this signalled the beginning of the "ESG" movement: a focus on environmental, social and governance issues in business decisions.

Investors waning interest

However, starting 2022, AUM of ESG-focussed funds started to dwindle—to Rs10,741 crore and it further fell to Rs10,635 crore in the first six months of 2023. The trend follows a similar script even for flows. ESG -focussed funds have seen the highest outflow ever in 2022 worth Rs941.

The rise of ESG investing between 2019 and 2022 coincided with a surge in clean-tech valuations, and now the reverse is happening. Investors have pulled $2.2 billion from funds dedicated to decarbonization since the start of the year, according to EPFR, and the outflows are getting larger every week.

Some ESG data can be useful in certain circ*mstances, but an over reliance on simplistic ESG scores can be a dangerous strategy, especially when using them to build investment portfolios. Relying too heavily on ESG scores is also unlikely to help reorient capital towards more sustainable companies.

Political and Ideological Bias: Critics argue ESG introduces political and ideological biases into business decisions, aligning with a progressive agenda. Impact on Financial Performance: There's concern that prioritizing ESG criteria could detract from a company's financial performance.