ESG Campaigns Seen Falling Out of Favor With Activist Investors (2024)

FAQs

Is ESG falling out of favor? ›

Activist investors are expected to carry out fewer environmental and social campaigns this year after the strategy proved less lucrative than other shareholder agendas, according to business consulting firm Alvarez & Marsal Inc.

An ESG controversy case is defined as either an event or an ongoing situation in which company operations and/or products allegedly have a negative environmental, social and/or governance impact.

Activist investors are subject to regulatory and legal risks, including potential litigation and regulatory fines, that can impact their investment performance.

ESG efforts have been on the retreat recently. The financial firm Vanguard announced in 2022 that it was withdrawing from the Net Zero Asset Managers initiative, and Blackrock CEO Larry Fink said in June that he was moving away from the term ESG.

The 5 biggest ESG challenges for businesses and manufacturers globally are: climate change, supply chain sustainability, social impact, data privacy and cybersecurity, and governance and ethics.

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

Rather, this could simply reflect a changing climate and a desire by companies to avoid any controversy associated with ESG investing. The money flowing out of E.S.G. funds has gone from a trickle to a torrent as investors sour on a sector hit by greenwashing concerns, red-state boycotts and boardroom debates.

As a result, some companies have toned down their stances on ESG publicly. Firms including Vanguard, J.P. Morgan, State Street, Pimco, and Invesco have left organizations such as the Net Zero Asset Managers Initiative or Climate Action 100+.

There is no standard ESG benchmark. The people who do not support ESG are the ones who want to make money.” In a nutshell, “opponents to ESG argue that consideration of factors undermines corporate competitiveness and will lead to lower returns for shareholders,” says Maloney.

Key Takeaways. Activist investors buy minority stakes in public companies to change how they are run. If they fail to persuade company managers, they may wage a proxy fight for board seats. Some hedge funds specialize in activist investing while institutional investors may engage in it from time to time.

Why do companies listen to activist investors? ›

Activist investors may have sound ideas about how management can use the company's assets better, improve its operations, or enhance shareholder value. Management may or may not be receptive to such ideas. However, the dialog could be productive of positive changes for the individual investor as well as the activist.

"The results of these campaigns over the years have been mixed. The median stock targeted by activist investors outperformed its sector by 3 percentage points in the week after the launch of a campaign. However, excess returns were short-lived and typically turned negative after six months," Goldman Sachs wrote.

BlackRock's decision to shift from ESG investing to transition investing marks a significant evolution in the sustainable investing landscape. This strategic move underscores the importance of actively supporting transitioning companies to drive accelerated change.

The term ESG first came to prominence in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations (UN).

Negative rhetoric surrounding ESG (Environmental, Social and Governance) has intensified into a rapidly escalating backlash in 2024. Vocal critics, who say ESG principles have no bearing on business performance, have dubbed it “woke capitalism,” warning of “ESG cartels” advancing a “secret liberal political agenda.”

The rise of ESG investing between 2019 and 2022 coincided with a surge in clean-tech valuations, and now the reverse is happening. Investors have pulled $2.2 billion from funds dedicated to decarbonization since the start of the year, according to EPFR, and the outflows are getting larger every week.

ESG investing appears to be losing momentum, as evidenced by several developments in October 2023. Lastly, there has been a growing conservative backlash against ESG initiatives, with ESG becoming a politically charged term.

Some of the leading global asset managers have retreated from environmental pledges, taking a back step, and withdrawing from climate change industry initiatives. ESG investing is not necessarily dead though but has simply lost steam.

Missing out on returns from the so-called "Magnificent Seven" tech stocks was one of the biggest reasons for underperformance. Meta, Alphabet, Tesla and Amazon were all excluded from certain ESG indexes due to ESG controversies or because they had a high ESG risk relative to others in their sector.