Traditionally, activist shareholders (e.g., institutional investors, hedge funds and other investors) have deployed a handful of tools to push their agendas. Typically, these tools have included pushing for greater shareholder engagement, sponsoring shareholder proposals, “vote no” campaigns and proxy contests. More aggressive activists may turn to threatening or actually engaging in litigation to pursue a particular goal. Obviously, a tactic that works for one activist may not be effective, or even an option, for another, depending on the facts and circumstances. Nevertheless, over the last few years, activists pushing ESG-focused agendas are increasingly leveraging these tools in both traditional and new ways in an effort to compel companies to pursue objectives that are consistent with ESG principles. To date, ESG-focused activists have focused primarily on the environmental and social aspects of ESG. That said, addressing governance issues (e.g., seeking changes to board composition and governance structures, protecting shareholder rights, or tying executive compensation to ESG-related metrics), is becoming a more significant tool.

For example, in December 2020, the hedge fund Engine No. 1 invested $40 million in ExxonMobil Corporation, representing a stake of just 0.02%. The fund’s founder immediately published an open letter to the board of directors calling for radical strategic change in order to adapt to a low-carbon economy. Engine No. 1 argued that ExxonMobil had no strategy for navigating the carbon transition and that $170 billion of shareholder value had been destroyed by poor capital allocation. This letter garnered support from multiple institutional investors, who agreed with the premise that long term board members were not as sensitive as they should be to environmental issues and, ultimately, led to the appointment to the board of three activist-nominated directors with more experience in alternative fuels and energy. This example demonstrates that even with a small percentage shareholding, proactive investors can generate significant change where their campaign resonates with and receives support from major institutional investors that have an eye on their portfolio companies’ ESG strategies.

In the United Kingdom (U.K.), Bluebell Capital Partners, a London-based activist, began in February 2022 to push Glencore plc to demerge its coal mining business, on both financial and environmental grounds, but to maintain voting control via a dual-class share structure so Glencore can ensure mines are properly decommissioned once extraction ceases³. In April, Bluebell Capital then voted against approving Glencore’s 2021 Climate Progress Report⁴; with shareholder dissent of almost 24%, the approval of the 2021 Climate Progress Report was the least-supported resolution at Glencore’s 2022 annual general meeting⁵. While Glencore has not adopted Bluebell Capital Partners’ plans, it did commit in December 2022 to closing 12 coalmines by 2035 in order to meet emissions targets⁶. Nevertheless, this may not be enough to satisfy investors, with Legal & General and HSBC subsequently filing a resolution (to be voted on at the company’s annual general meeting in May 2023) requesting more detail on Glencore’s coal production plans⁷.

It is important to acknowledge that ESG activist investing is no longer an area where only smaller, ethically-driven investors are moving the needle. This has resulted in some significant backlash at the state and federal levels. Such backlash notwithstanding, asset managers continue to see significant capital inflows into, and demand for, ESG- or sustainability-linked products and such demand is not expected to recede for the foreseeable future.

Relatedly, proxy advisory firms, such as Institutional Shareholder Services Inc. and Glass Lewis, also are increasingly playing an important role in shareholder voting decisions as they publish more and more detailed and goal-oriented proxy voting guidelines. Reportedly, some investors have criticized asset managers and the proxy advisory firms for publishing guidelines that are overly prescriptive, while other investors may complain that such guidelines are not sufficiently aligned with particular ESG-related goals. In response, some asset managers have adopted pass-through voting programs so that investors can bypass voting guidelines they view as inadequate or lacking sufficient alignment with their broader goals⁸. This relatively new development may inject additional complexities into how companies manage shareholder votes in the future and will necessitate robust shareholder engagement programs so that companies understand which guidelines or procedures are guiding a particular shareholder vote or campaign.

At the more aggressive end of the spectrum, some more combative activist groups have resorted to aggressive litigation to pursue their goals, particularly in relation to environmental matters. For instance, the successful claim by almost 2,000 Zambian villagers against Vedanta Resources plc⁹ based on environmental pollution has paved the way for group litigation¹⁰ against parent companies whose subsidiaries are alleged to be causing environmental damage. Such class actions are often funded and driven by specialist litigation funders who also may be working with activist investors. Similarly, activist ClientEarth has taken French food producer Danone to court in Paris¹¹ based on its failure to sufficiently reduce its plastic footprint in packaging.