How activist hedge funds went from corporate raiders to climate heroes

When upstart activist hedge fund Engine No. 1 secured three seats on the board of Exxon­Mobil in June, it was a high-­profile repudiation of the way in which the nation’s largest oil firm has lengthy carried out enterprise: with a laser deal with returns and a blind eye to its impression on the world at massive. The fund vowed to push ExxonMobil to develop a plan to deal with climate change and cut back its carbon footprint. Exxon’s duty as a enterprise would now not be solely to its shareholders, the boardroom showdown signaled, but in addition to the general public and the planet.

To tug off this coup, nonetheless, Engine No. 1 first wanted to woo different, greater shareholders. Launched in December 2020 with a purpose of getting firms to prioritize long-term worth, the fund discovered an ideal first goal in Exxon. The oil firm had ignored the sorts of renewable investments that may set it up for future success, and its inventory had been plummeting. Although Engine No. 1 held simply 0.02% of the corporate, it persuaded a few of Exxon’s largest shareholders, together with BlackRock and the California State Lecturers’ Retirement System, that the corporate’s myopia was a legal responsibility. “I feel the problem you’ve seen at Exxon, actually for years, is a very short-term focus and an actual disregard for the way in which the business has modified, the place the world is altering,” Charlie Penner, who leads campaigns at Engine No. 1, advised Quick Firm.

Simply how a lot Engine No. 1 shall be ready to reform Exxon isn’t but clear—the three new board members be part of 9 legacy ones, so their affect could also be muted—however its profitable marketing campaign displays modifications happening past the oil firm. Over the previous a number of years, a brand new type of activist investor has emerged. As a substitute of enacting takeover campaigns merely to obtain larger returns, they’re pushing firms to deal with their environmental and social impression.

Final fall, simply earlier than Engine No. 1 was based, activist fund Bluebell Capital Partners despatched a letter to chemical firm Solvay’s board demanding it cease discharging chemical waste from its Tuscany, Italy, plant into the ocean. Bluebell, which was based in 2019 with a $75 million fund, has dedicated to pursuing one marketing campaign a yr centered on getting an organization to be extra responsive to environmental, social, and corporate governance (or ESG) points. Final yr additionally noticed the creation of Inclusive Capital Partners, an ESG-focused fund, now price $1.3 billion. Amongst its cofounders: Jeffrey Ubben, who beforehand based the hedge fund ValueAct Capital, and Lynn Forester de Rothschild, who based the Coalition for Inclusive Capitalism to get enterprise leaders engaged with ESG. In 2019, Lauren Taylor Wolfe based the ESG-focused agency Impactive Capital, which has used its stake in firms equivalent to Wyndham Resorts and the engineering agency KBR to push them towards higher environmental practices.


ESG investments have been rising lately; the Discussion board for Sustainable and Accountable Funding estimates that investments that take ESG into consideration have reached $17 trillion within the U.S., up 42% from 2018, and now signify a 3rd of all professionally managed belongings within the U.S. For probably the most half, nonetheless, these investments prioritize firms that already embrace some type of sustainability and stakeholder capitalism. BlackRock, for instance, has championed ESG since 2017, however has solely not too long ago began voting on climate resolutions at firms that aren’t in its ESG portfolios.

Activist funds equivalent to Inclusive Capital Companions are taking a extra aggressive strategy: Establish firms which can be dragging their toes on ESG points and coax—or push—them to do higher. “It’s the soiled firms which can be producing our issues,” says de Rothschild. “We run to the businesses which can be creating the issues and repair them.” The query now’s, can the modifications compelled by activist traders yield sufficient monetary upside that different traders and CEOs comply with swimsuit?

Activist traders have come a great distance: from corporate raiders to climate heroes. Traditionally, activist funds have centered on short-term returns. They maintain their shares for one, two, or, in “excessive instances,” three years, in accordance to a January 2020 paper by Mark DesJardine, an assistant professor of technique and sustainability at Penn State, and Rodolphe Durand, founding father of the Society and Organizations Analysis Middle on the enterprise faculty HEC Paris. The typical funding horizon of an activist hedge fund, DesJardine says, is about 13 months.

This short-termism is why activist investing has a tenuous monitor file when it comes to creating long-term worth. When DesJardine and Durand studied 1,324 publicly traded U.S. corporations that had been focused by at the very least one activist between 2000 and 2016, they discovered that activist-targeted firms noticed their worth improve 7.7% within the first 12 months of a marketing campaign—however drop 4.9% 4 years later.

The brand new ESG activist traders are flipping this script. Although Engine No. 1 has not mentioned how lengthy it should maintain on to Exxon, Penner advised Quick Firm that it is going to be “a yearslong technique of determining how to reposition this firm for the longer term.” Ubben and de Roths­baby, in the meantime, aren’t aiming for fast returns both. “Specializing in ESG is a long-term technique,” explains de Rothschild. “Nevertheless it’s additionally a shareholder-value technique.”

The issue is that the overwhelming majority of traders are nonetheless addicted to quarterly outcomes. Even when it comes to corporate initiatives that appear onerous to argue with on a societal stage—equivalent to Walmart pledging to increase its hourly wage to $15 in February—the market favors a short-term view: Walmart’s inventory dropped 6% after its announcement. Pursuing environmental and social impression targets, which frequently require persistence and capital investments, can even make an organization extra weak to activist hedge funds. DesJardine and Durand discovered that corporations that spent extra on corporate social duty than their friends had been virtually twice as probably to be targeted by activist investors. One hedge fund supervisor interviewed for that research referred to as CSR “wasteful” spending; one other talked about the necessity to “reduce the fats.”

Objective and Revenue:  ESG investing has emerged as a rising drive, however its affect continues to be restricted

[Sources for Purpose and Profit: The Forum for Sustainable and Responsible Investment; SEC; Morningstar Proxy Data, as of 9/25/2020; BlackRock 2021 Letter to CEOs; Governance & Accountability Institute]

Even activist traders that assist ESG efforts have restricted persistence. As Engine No. 1 was concentrating on Exxon this previous winter, Bluebell Capital, the identical fund that went after Solvay for its poisonous waste, started a marketing campaign towards the French meals large Danone. Emmanuel Faber, Danone’s then chairman and CEO, had earned a fame for championing ESG initiatives; he joined a group of firms dedicated to utilizing 100% renewable electrical energy and altered Danone’s authorized construction to “entreprise à mission,” a French construction that prioritizes stakeholder worth. However with Danone’s income down 6.6% throughout its fiscal yr 2020, Faber was ousted in March. “We by no means criticized [the E and S in ESG],” Marco Taricco, cofounder of Bluebell Capital, told the Financial Times in March. “However it could actually’t come on the expense of shareholder returns.”


Having a mission isn’t sufficient, says de Rothschild, who’s cautious of firms that wrap themselves in goal on the expense of shareholders. “It’s a fallacy [to] say that firms that carry out properly on ESG metrics have higher shareholder efficiency throughout the board,” she says. “It doesn’t work like that. You’ve got to be surgical to find these firms the place the ESG actions are worth levers.” ESG, in different phrases, is all properly and good when the market is up and your organization is performing, but when your outcomes tank, even de Rothschild can’t prevent. “You’ll be able to’t be fixing the issues of individuals and planet with out doing so profitably,” she says.

One of many distinguished public firms to efficiently strike the stability between goal and revenue is Unilever. When former CEO Paul Polman took the helm of the patron items large in 2009, he instantly launched into a stakeholder-driven strategy. He stopped issuing quarterly experiences—”I made it very clear we had been working this firm for the long run,” he says, “and we noticed a sure group of shareholders leaving”—and launched a plan to reduce the corporate’s environmental impression in half by 2030.

However he stored his eye on returns. “You need to have a good efficiency, finally, to your shareholders,” he says. Doing so helped him fend off an acquisition by Kraft Heinz in 2017, which got here at a time when Unilever was slicing its carbon footprint and dropping unsustainable supplies, whereas Kraft Heinz was slicing prices and lowering head rely. Although Kraft Heinz’s relentless deal with effectivity may need accelerated Unilever’s profitability, Kraft didn’t supply shareholders a extra interesting plan than what was already in place at Unilever. Inside days the bid was useless. The distinction between the manufacturers at present is much more placing: Unilever’s share worth is up about 40% for the reason that takeover supply; Kraft Heinz’s has been reduce in half—and in 2019, it ranked final on a report that reviewed how prepared meals firms had been to transition to a low-carbon economic system. Unilever, within the private care class of that report, ranked first.

4 years in the past, Polman was an outlier. He had to work onerous to persuade his shareholders that investing in ESG within the current would profit them sooner or later. Following the social and environmental upheavals of latest years, such stances are simpler to take. Polman even welcomes the thought of what he calls “energetic traders” who will become involved in an organization’s ESG efforts. The period of shareholder primacy isn’t over. Far from it. However as Engine No. 1 has demonstrated, the view from the boardroom is decidedly totally different: You’ll be able to’t assist however see the horizon.