Responsible Investment Officer - ACTIAM
As you say, activist investors and hedge funds often look for short-term value creation. This seems at first sight to be at odds with sustainable investment and corporate social responsibility, where the emphasis is on the long-term effects. But things appear to be changing.
“Activist investors are more involved and keener to make their voices heard.”
Institutional investors have traditionally determined the sustainability agenda and they provide the basis for compliance with the PRI, the world’s leading proponent of responsible investment. That was followed by “long-only” and private equity strategies, as their longer-term investment horizon assigns higher value to non-financial factors such as CO2 emissions and water consumption. With both the number of PRI signatories and the assets managed by them having grown significantly in recent years, responsible investment now seems to be becoming increasingly mainstream.
While other asset classes are taking increasing account of sustainability, activist investors and hedge funds now represent a minority within this spectrum. The methodologies and processes used to incorporate ESG factors into decision-making often fail to prove their financial materiality. Therefore activist investors are less concerned with using their influence to make companies operate more sustainably.
This situation is now changing rapidly. Scenario analyses and stress testing are making it increasingly clear to companies what financial risks societal changes are exposing them to. Energy companies, for instance, are now seeing the risks involved in making the transition to a less polluting, greener economy. Such transitions could mean that some sectors of the economy face big shifts in asset values or higher costs of doing business. In addition, given climate change, companies could be faced with physical risks such as extreme weather events, which could directly impact business continuity. According to a study carried out by Cambridge University, extreme weather events, such as flooding, heatwaves, and droughts, could add up to $100 billion of loss every year just by 2040.
Although activist investors have traditionally focused on management issues, many are now tilting their campaigns towards other ESG elements, especially climate.
Unlike institutional investors, activist investors are more involved and keener to make their voices heard in this regard. Activist investors can therefore play an important role in bringing about change in companies with high sustainability risks. This means that activist and institutional investors have become highly complementary to each other, thus putting greater pressure on companies to change.
The result of this is that more and more hedge funds are promoting sustainability. In the United States, for instance, former ValueAct investor Jeff Ubben recently set up Inclusive Capital Partners, while Lauren Taylor Wolfe founded Impactive Capital. These funds target companies that are lagging in terms of sustainability (ESG) and they use their influence to achieve behavioural changes in material themes such as climate change, for instance by exercising voting rights at shareholder meetings.
Time will tell whether these changes are lasting and whether activist investors will indeed be able to positively influence the extent to which companies take account of sustainability risks. Such investors will also place a keen focus on financially material ESG themes. They will not be inclined to also prioritise non-financial themes, such as ensuring a liveable wage. In other words, it is not the Holy Grail, but it may force laggards to act on the biggest ESG risks.