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.

Disadvantages of Individual Activist Investors

Individual activist shareholders may not share the same interests or goals as other shareholders and, therefore, may destroy shareholder value. For example, an activist shareholder may only prefer a short-term holding time horizon;.

Many perceive activists as being smarter than the average investor. They have extensive experience, important industry contacts, and access to solid research. However, activists aren't always right. Their timing can be off, and they can and do sometimes lose money.

The survey found that, of the 98% of investors surveyed who assess ESG, 72% carry out a structured review of ESG performance, compared with just 32% in the previous survey conducted two years earlier. Moreover, many of those who currently use an informal approach, plan to move to a more rigorous regime (39%).

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.

Retail investors do care a lot about the ESG-related activities of the firms they invest in, but only to the extent that they impact firm performance, independent of ESG performance.

Adopting corporate activism initiatives involves a risk for the company because taking the wrong stand on a controversial issue, that is, a stand not aligned with consumers' attitudes, values, and opinions, produces a public backlash and a lack of consumer brand identifi‐ cation (Mukherjee & Althuizen, 2020).

In 2021, 20 percent of all activist campaigns focused on environmental, social, and governance issues. That number represents the peak of a trend that grew over the previous decade. The most notable example is Engine No.

The reasons for the shareholders' activism may be financial or non-financial. Financial goals include cost-cutting, changes in the corporate or financial structure, or a spin-off or merger.

Activist investors often don't do well because they tend to misunderstand how their targets work, according to a study in the Yale Law Journal.

What is a criticism of activist investor funds? ›

The firms that activists target tend to underperform relative to their industry. Due to activists' aggressive attitude toward management and hostile approaches to short-term profit making, they are often perceived as “corporate raiders,” “green mailers” or “asset strippers”.

If the target company is successful, the activist and its group of investors can suffer damages including a loss of voting rights as stockholders. Such litigation is not only expensive but can also involve reputational harm where seemingly irrelevant dirty laundry may be aired.

ESG investing has been developed primarily by and for large institutional investors (pension funds, sovereign wealth funds, endowments, etc.).

IS IT JUST MILLENNIALS DOING IT? No, the vast majority of money in ESG investments comes from huge investors like pension funds, insurance companies, endowments at universities and foundations and other big institutional investors.

ESG investing focuses on companies that follow positive environmental, social, and governance principles. Investors are increasingly eager to align their portfolios with ESG-related companies and fund providers, making it an area of growth with positive effects on society and the environment. S&P Global.

Firms with ESG controversies will likely suffer from higher financing costs and inadequate investment capability, leading to investment inefficiency.

Global fossil-fuel production rose despite pledges from world leaders to reduce emissions. Even vocal ESG evangelist Larry Fink of BlackRock declared that he would no longer use the term ESG due to its politicization. In the run-up to the pandemic and through 2022, ESG as an acronym became widely used.

Morningstar suggested the causes behind the US outflows included greenwashing concerns, lacklustre returns on investment, the absence of clear regulation, as well as the continued and increasing politicisation of ESG and sustainable investing.

Yet Performance Was a Drag. Investors yanked a record $13 billion from U.S. sustainable funds in 2023, stung by mediocre performance and the continuing backlash against environmental, social, and governance investing.