Liekefett and Holly J. Gregory are partners and Leonard Wood is an associate at Sidley Austin LLP. There were 1,485 institutions with $39 trillion of assets publicly committed to some form of divestment from fossil fuels in 2021, up from 181 institutions with only $52 billion in 2014. (go back), 10BlackRock, Inc., Climate Risk and the Transition to a Low-Carbon Economy (Feb. 2021), at 4, https://www.blackrock.com/corporate/literature/publication/blk-commentary-climate-risk-and-energy-transition.pdf. In either case, it's an ESG approach or an impact-oriented approach. 17, 2021, https://www.washingtonpost.com/climate-environment/2021/03/17/biden-climate-change-economy. That's the investment opportunity of a generation, of my generation surely as a millennial. They were "really asking questions about the company's strategy and their future fitness to deal with the inevitable changes that are ahead of us," she said.
And then finally trying to focus on what we can do as active owners to help companies improve, to help companies create more value for their stakeholders, ultimately for their shareholders as well. This is long-cycle businesses, capital-intensive businesses, heavy investments, and heavy risk. The ESMA issued a report last week saying that it has observed a "mismatch" between what fund managers are telling ESG clients and their actual allocation strategies. You saw the acquisition of, say, technologies from Robinhood. Start with VOTE.
", "Absolutely. (go back), 8See RBC Global Asset Management, 2020 Responsible Investment Survey Key Findings, at 5, https://www.rbcgam.com/documents/en/other/esg-key-findings.pdf. I think what we're getting to across the market today, and for sure where Engine No.1 sits, is trying to show that these are the core factors you should be focused on. "Corporate Climate Responsibility Monitor 2022," Page 5. ", "It's amazing the degree to which climate has sort of become this Big Ten issue, where you'd be hard pressed today to find a corporate leader or an investor who do not at least pay lip service to the idea that companies need to understand how to navigate the energy transition. He is a frequent guest on CNBC, MSNBC, Yahoo Finance, and ABC Radio. Additional corporate disclosures on environmental and social issues can provide shareholder activists with a substantial amount of new material to use in their campaigns. But what is needed for more of this push, especially from the retail base, to get into this? It remains to be seen which ESG themes will resonate with investors at the ballot box when factored prominently in an activism campaign. I think that is one thing that's worth keeping in mind that as an investor, we still have to be grounded in reality, grounded in the energy transition, exactly how long that will take, how hard that will be. By integrating criticisms of ESG failures into campaign narratives, activists may gain additional traction with institutional investors at the ballot box. Michael Bloomberg is a billionaire businessman, publisher, and philanthropist, and a former mayor of New York City. During a recent panel discussion chaired by CNBC's Steve Sedgwick, Judy Kuszewski, chief executive of sustainability consultancy Sancroft International, spoke to the above point.
", "And so, December of 2020, we put forth a slate of four new directors, all of them at deep energy experience, but understood how you'd have to approach an opportunity like Exxon to help them transform their business in many ways so they can succeed not just for the next five or 10 or 20 years, but long into the future as they've succeeded in the past. (go back), Posted by Kai H.E. With the world in an unprecedented energy crisis, top CEOs are searching for solutions, From EV batteries to coffee: Ideas about recycling and nature are changing how firms do business, The dust has settled on COP26. ", "So what's needed, Michael, in the industry to drive more change? Investopedia does not include all offers available in the marketplace. Slowly but surely, the effect of such groups is starting to be felt in boardrooms. And that in many ways has always been a part of the traditional investor toolkit and increasingly being part of the ESG investor impact investor tool kit as well. Certain ESG rating organizations are observing how ESG oversight is allocated among the board and its committees and whether a dedicated committee has been established for this purpose. It may be expected that related themes will be integrated into future activist campaigns. 2020 saw a record influx of investor capital in ESG-themed funds, bolstered by the moral prospects of ESG investing in light of the COVID-19 pandemic and positive financial results reported by media organizations and researchers. That compares to three in 2020 and zero in 2019. He is an award-winning business journalist who has previously worked as the Director of Business News at CNN, the Executive Producer of CNN Money, and a Senior Producer at Bloomberg Television. And that one thing you can see with Exxon versus its peers, historically, was that as other companies are starting to reckon with the energy transition and try to understand how they are going to be able to create value even as the world works to decarbonize, that Exxon was behind. And all of which is not to say we've got all the answers, but we think we understand the sort of leaders you would want in the boardroom to be making those decisions. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here). You have a core strategic problem. See, e.g., Rakhi Kumar, Nathalie Wallace & Carlo Funk (State Street Global Advisors), Into the Mainstream: ESG at the Tipping Point, Harvard Law School Forum on Corporate Governance, Jan. 13 , 2020, https://corpgov.law.harvard.edu/2020/01/13/into-the-mainstream-esg-at-the-tipping-point/. Depending on the funds priorities, policies, and agreements with its investors, a fund could be required through contractual obligations to integrate ESG into its investment strategy. "It's about application.". It's passive investing with a twist on ESG, not by changing what it holds, but by changing what it does. (go back), 9See ISS Special Situations Research, ESG Contests: Activisms Holy Grail or Side Show, March 2, 2021. Our idea was, 'What if we could stay on those two ends of the spectrum, a pure passive product (that's VOTE) or a pure active product (that's NETZ)?' Some of our guests may invest in securities mentioned on this podcast. They look like they're making that move right now. Activists could potentially harm their campaigns if investors perceive that the integration of ESG themes is disingenuous. That's the goal. Is it more clarity on what ESG and SRI mean? And so, if you look at the investing continuum from pure active to pure passive, a lot of ESG investing gets stuck straddling the middle, or it's not quite a passive fund because it has real deviation. And that Exxon's leadership, even at the board level, was an extremely impressive group of individuals, with backgrounds leading some of the largest companies in the world, but lacked an energy background relevant to actually helping to navigate this transition. Companies like this, for us, are a critical, critical part to actually achieving net zero. In the United States, the vast majority of shareholder proposals are made pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, which imposes topical limitations on proposals. You can find out more and change our default settings with Cookies Settings. During the Exxon campaign, we owned two basis points of the company, which meant unless we can convince 49.91% of our fellow shareholders that we were right, we were not going to be successful in placing any new structures on the board. I think that's kind of a step in the direction of Robinhood saying, 'This would be an area of greater interest.' It was, 'If you are the fifth-largest greenhouse gas emitter in world history, as Exxon was, and two-thirds of your revenue is coming from countries that have themselves set or are setting net zero targets, you don't have a sustainability problem. Something like $25 billion in the mid-2010s, now $13, $14 trillion of assets. And so, this is a wave that, in many ways, is already crashing across the capital markets, this address and ESG and sustainable investing. An activist could believe in a specific ESG value thesis, for example, that a carbon transition plan is necessary for a given company to enjoy sustainable growth. This is an active, in the fact that you are taking positions, but you're also, as an investment committee, looking at those companies where there is opportunity for them to transform themselves into companies that have sustainability for the future and don't degrade the environment. The State Street R-Factor is a rating of large companies for their management of environmental, social and governance risks. In contrast, shareholders who solicit proxies for their own proposals have a comparatively free hand to make proposals on the topics of their choice and to say want they want to say about their proposals. ", "Kind of a finance 101 view here would be to say their job is to make certain assumptions about the future, the future of oil demand, the future of oil prices, and then based off of those assumptions, try and maximize risk-adjusted return on a project-by-project basis. And then once they realize that, they don't know that oftentimes their votes are being cast in a way that directly conflicts with their long-term interests and their values. There is a significant degree of skepticism about many of the sustainability-related claims businesses make. So, this is not, 'Guys, we're gonna to stop investing if you don't do what we want.' And I think the core point here is that this is how, in today's market, we think we can create value for investors. As ESG rises in prominence among investors, activist shareholders have at their fingertips new and potent themes from ESGs repertoire of concepts and criteria to use in campaigns to change control and strategy at companies. And so, I think for a long time, ESG was seen as adding in some new interest outside of financial interests. And you've been able to do that, not necessarily replace boards, but get into those boardrooms where you're affecting decisions. Well, let's talk about investors in general, because this is a reasonable way of approaching these companies to make change that they have to make ultimately. You're looking to make these changes, and you think investors want that too? It has also launched two ETFs that help retail investors like us participate in its efforts. The Green Investor Podcast from Investopedia, Life, Liberty, and Investing Returns with Perth Tolle, An ETF to Save the Oceans Splashes into the Market, Why Climate Literacy is Critical to Green Investing, Setting the Standards for Green Investors, How Student Activists Pushed Harvard to Divest from Fossil Fuels, The Energy Industry's Stranded Asset Emergency, How Engine No.1 is Driving Change as an Activist Shareholder, Responsible Investing in the 21st Century, Quantifying the Investing Risks of Climate Change, Where the Money is Flowing in Green Investing in 2022, Environmental, Social, & Governance (ESG) Criteria Definition.
Their support has afforded ESG investing and operating principles added legitimacy and credibility. And that helps to show whether or not something like carbon emissions is de minimis, it doesn't make a difference to the company, or is actually a huge fact. Institutional investors have, in turn, developed ESG-themed investment products, although comparable products have been in the market with lesser fanfare for many years. But to your point on GM, when GM made that declaration, when they pivoted hard and said, 'We are going to make this change,' we have one of the best performing stocks of 2021. Most prominently, ESG-conscious investors are looking into how boards and management teams oversee environmental and social performance, how ESG oversight is allocated among board committees, and whether a board has sufficient expertise in environmental issues and social issues. ", "So, you see it in there's a great Morgan Stanley report that comes out every year, a survey asking, 'How important is sustainable investing to you? Subscribe Now:Apple Podcasts/Spotify/Google Podcasts/PlayerFM. [9]. This is happening just as Morningstar removed the ESG label from over $1 trillion in investment funds, saying they don't meet adequate environmental, social, and governance standards. For Delbeke, capitalizing on the moment was key. And that is kind of what I'm feeling is the philosophy behind everything at Engine No.1. They're building financial models in Excel. The company's value to stakeholders, it's going to create value for shareholders as well. How have you noticed that change in terms of the clients that have come in to Engine No.1 and the people you're dealing with now? (go back), 2See, e.g., Attracta Mooney & Patrick Mathurin, ESG Funds Defy Havoc to Ratchet Huge Inflows, Financial Times, Feb. 5, 2021, https://www.ft.com/content/8e9f8204-83bf-4217-bc9e-d89396279c5b. tshabalala exactnewz affirms commitment danone rethinks idea economist How is it performing? I want to be invested in companies that are going to be here in 10 years. When you visit this site, it may store or retrieve information on your browser, mostly in the form of cookies. Another potential ESG-driven innovation would be for shareholder activists to avail themselves more frequently of the right to solicit proxies at shareholder meetings for their own business proposals. So, how do you do it? This is companies like General Motors, that still today is one of the biggest emitters in the auto sector, no doubt, but has now made the ambition to go all electric by 2035, which, if they are successful, could take 200 million tons of carbon out of the atmosphere every year versus what would have happened otherwise. The new age of ESG may bring other innovations in shareholder activism. You want the change, and you want these companies to succeed in making that change. Some of our guests may sell or market securities mentioned on this podcast, but all listeners should do their own research or consult with a financial advisor or broker before making any investment decisions. ", "And so, part of the goal was to say, 'The decisions made today about projects that will continue to live for years, if not decades, need to be based off of reasonable expectations about how the world is or is not going to achieve its climate ambitions.' Liekefett, Holly J. Gregory, and Leonard Wood, Sidley Austin LLP, on, Harvard Law School Forum on Corporate Governance, on Shareholder Activism and ESG: What Comes Next, and How to Prepare, by Oliver Hart and Luigi Zingales (discussed on the Forum, The Illusory Promise of Stakeholder Governance, Companies Should Maximize Shareholder Welfare Not Market Value, Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee, https://www.ft.com/content/fa9946b9-371b-46ff-b127-05849a1de2da, https://www.ft.com/content/8e9f8204-83bf-4217-bc9e-d89396279c5b, https://www.morningstar.com/articles/1017056/sustainable-equity-funds-outperform-traditional-peers-in-2020, , https://www.blackrock.com/corporate/literature/publication/our-2021-stewardship-expectations.pdf, https://www.sec.gov/files/potential-recommendations-of-the-esg-subcommittee-12012020.pdf, https://www.washingtonpost.com/climate-environment/2021/03/17/biden-climate-change-economy, , https://corpgov.law.harvard.edu/2020/01/13/into-the-mainstream-esg-at-the-tipping-point/, https://www.rbcgam.com/documents/en/other/esg-key-findings.pdf, https://www.blackrock.com/corporate/literature/publication/blk-commentary-climate-risk-and-energy-transition.pdf, https://www.ga-institute.com/research-reports/flash-reports/2020-russell-1000-flash-report.html, https://www.sec.gov/news/public-statement/lee-statement-review-climate-related-disclosure. 
