Activist investors push firms to go green

The pursuit of corporate profits has contributed to the climate crisis, but some believe it can also help solve it.

Investors want companies to clean up their act when it comes to the environment.

Some say Larry Fink is trying to save the world, and they don't mean it as a compliment. The CEO of BlackRock Inc., the world's largest asset management firm, which oversees more than $10 trillion (€8.9 trillion) in assets, is perhaps the most well known activist investor today.

Activist investors, also known as shareholder activists, are a growing breed. These people use their position as shareholders of publicly traded corporations to put pressure on a company's management and influence how it is run. Their tactics can be as straightforward as speaking with management or as aggressive as threatening a company with a lawsuit. Often they put forth a formal proposal for change, which is voted on at the annual shareholder meeting.

It's Fink's style to share an annual letter in which he puts pressure on CEOs to address climate change. Putting the long-term interest of all stakeholders, including customers and employees, over short- term profits will be better for business overall, he argues, a concept he calls stakeholder capitalism.

His outspokenness has earned critics from all sides. Environmentalists accuse him of exploiting the climate crisis for the sake of profit. Many in the corporate world think he's pushing a green agenda at the expense of profits or growth. "This is fundamentally not the role of a public company, and it's unfair to investors who may not agree with his politics," Charles Elson, a corporate governance expert at the University of Delaware, told Fox Business News in response to Fink's 2019 letter. "A CEO shouldn't use house money to further a goal that may not create economic returns."

Constructive capitalism

But what does Fink himself think? "Stakeholder capitalism is not about politics," the CEO wrote in this year's letter, published in January. "It is not a social or ideological agenda. It is not 'woke.' It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper." Since at least the 1980s, activist shareholder campaigns have targeted a whole suite of issues, from a company's financial structure to how it treats its employees to who sits on its board. Sometimes they even push for the company to be sold or broken up.

In recent years, however, there has been a greater emphasis on environmental, social and governance concerns (ESG). Investors have started demanding more from firms in areas like sustainability and diversity. The number of ESG-related shareholder campaigns has been on the rise, barring a decline between 2020 and 2021, presumably due to disruptions caused by the pandemic. Between January and August 2021, 13 per cent of ESG activist campaigns were successful, up from 11 per cent the year before, according to a report by the Diligent Institute, a market research firm focused on corporate governance.

"If 2021 has taught us anything, it is that ESG is on the radar of investors and it is likely to remain so," Edna Frimpong, head of international research at Diligent Institute, told IR magazine , an investor relations publication. "This year has shown that there is going to be great pressure on issuers and their boards to improve their disclosure on ESG practices, such as climate change targets and focus on diversity, equity and inclusion."

ESG on the investor agenda

ExxonMobil was the most notable case last year, after a small activist hedge fund caused a boardroom upset when it succeeded in filling three positions with advocates pushing for the oil giant to decrease its carbon footprint. That coup was only possibly thanks to the backing of larger institutional investors, which included BlackRock.

The trend has also caught policymakers' attention. In November, the U.S. Securities and Exchange Commission made it easier for shareholders to include ESG issues on a company's proxy statement, which provides essential information ahead of the annual meeting of the shareholders. According to an analysis by Bloomberg Intelligence , at the current rate, global ESG assets could exceed $53 trillion by 2025. "Organic growth in ESG debt is unlikely to slow — driven by companies, development projects and central banks — with pandemic and green-recovery efforts helping to scale up the market in the short term," the Bloomberg analysts wrote.

Fink has made it clear that he sees tackling the climate crisis as above all a smart way to make money. "We know that climate risk is investment risk," he wrote in his 2021 letter. "But we also believe the climate transition presents a historic investment opportunity."

Critics call out hypocrisy

In this way he seems to enjoy the best of both worlds, walking a tightrope between corporate and environmental interests. Not everyone is buying it. Some believe it's misguided to trust in the free market to solve the climate crisis, which it arguably caused, and that activist shareholders are doing more harm than good. Environmentalists have also criticized BlackRock's refusal to divest their holdings in fossil fuels, something Fink has called "a bad answer" to stopping global warming.

"Fink apparently wants to be above the political fray," Moira Birss, climate and finance director at the environmental organization Amazon Watch said in a statement responding to this year's letter. "But by playing nice with those profiting off the causes of climate change, he's making the political choice to reject climate science, which makes absolutely clear that a rapid transition from all fossil fuels is unquestionably urgent and necessary."