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August 2, 2017

Bruce Goldfarb Explains Why Wall Street’s Big Money Focus On Sustainability Is Here To Stay

 

 

By Bruce Goldfarb

July 27, 2017

When a hedge fund launches a major activist campaign calling for changes at companies here and in overseas markets it’s real news. But under the radar of those headline-grabbing battles, big institutional investors like mutual funds, index funds, pensions and endowments are also getting into the activist game.

As a proxy solicitor that helps both activist shareholders and corporations run voting campaigns, we have a front row seat to the ever-evolving thoughts and behaviors of all types of investors. In 2016, Okapi Partners worked on more activist campaigns (48 in total) than any other proxy solicitor, according to Activist Insight. What we saw during those campaigns represents a sea change in how large investors approach their role in pushing for corporate change.

Mutual fund and ETF complexes like BlackRockState StreetVanguard, Fidelity and others, which control trillions of dollars in stock holdings, have become increasingly intent on holding public company boards of directors and management teams accountable to higher environmental, social and governance standards. The buzzy acronym the industry uses for these issues is “ESG,” and investors of all types are starting to hear those three letters over and over again.

To be sure, investors have focused on the “G” in ESG for some time — shareholder proposals such as separating the Chairman and CEO positions or eliminating staggered boards, have been appearing on proxy ballots for years. What’s new is the emphasis on environmental and social issues, like sustainability and diversity, with a growing belief among major institutions that such issues are directly tied to stock performance.

Witness ExxonMobilXOM +0.21%’s annual meeting just a little over a month ago. The New York State Common Retirement Fund put forth a provision requiring the company to publish an annual assessment of the impact of global climate change policies on the company’s profits. It was approved by more than 62% of ExxonMobil shareholders. Among the large investors believed to have supported the proposal – over the objections of the company’s board – were BlackRock, Vanguard and State Street. Back in 2008, a proposal to separate ExxonMobil’s chairman and CEO roles failed by a wide margin as did several environmental proposals.

The tide has clearly shifted.

Boards, C-suite executives and their advisors should expect and prepare for a new wave of ESG activism, centered not only on environmental priorities, but also on such issues as diversity, customer data and cyber security as well as corporate governance (with board tenure as a particular hot-button). As of the start of 2017 proxy season in March, shareholders had filed 430 resolutions related to “E” and “S” issues, up from 370 a year earlier, according to the Sustainable Investing Institute.

The sharpened focus on ESG activism has several catalysts, including the strong interest in these issues among millennial investors, and the pressure on traditional active managers to demonstrate their value versus quant funds, robo-advisors and big passive index funds. In addition, many investors now see a connection between ESG policies and stock performance. A Bank of America Merrill Lynch study late last year found that companies that scored in the top third on ESG characteristics relative to their peers outperformed stocks in the bottom third by 18 percentage points.

Boards and managements of America’s corporations would be wise to prepare themselves for a rising tide of ESG proposals with strong backing from very large shareholder groups. Being able to articulate to shareholders how you address each of these issues will be extremely important for every corporate board who wants to remain in their jobs.

A recent survey of 320-plus institutional investors found broad support for ESG-related themes, with 80% of respondents stating that companies have not considered environmental and social issues as core to their business and that generating sustainable returns over time requires a sharper focus on ESG issues.

Expect hedge funds and other activist investors to get in the ESG game as well as they look for new measures to improve corporate performance and rally support for campaigns. The bottom line is that the market is demanding more attention to these issues, primarily because shareholders believe they play an integral part in a company’s overall performance.

Read more at Forbes