In May 2021, a newly formed impact investment group called Engine No. 1 persuaded ExxonMobil shareholders to vote three of its candidates onto the energy giant’s board, sending shockwaves through Big Oil and boardrooms around the world.
To achieve this, the renegade fund – which defines its mission as creating “long-term value by harnessing the power of capitalism” – emphasised the existential risk of the climate crisis to shareholders, including large asset managers like BlackRock and Vanguard. ExxonMobil wasn’t doing enough to secure the company’s financial future in a post-carbon world, argued Engine No. 1.
It was the most striking example of shareholder activism to date. How exactly Engine No. 1 will use its equity to steer ExxonMobil towards the desired energy transition remains to be seen, but the move provides a radical reminder of the internal influence money can buy at a company – and how ethically inclined investors can make an impact through ownership.
The growth of impact investing
Impact investing describes investments that are measured according to the positive environmental and social impacts they deliver, as well as their financial returns. According to Joe Dharampal-Hornby, public affairs manager at the non-profit Impact Investing Institute, the practice is growing at a staggering rate as ESG moves beyond vague notions of ethical investment and into targeted funding with measurable impacts.
“Globally, we’ve seen the impact investment market grow exponentially over the last five years; it’s now worth more than $2tn,” he says, with potential to expand to more than 10 times this level in less than a decade.
Impact investing isn’t just about being nice or having noble intentions, says Shami Nissan, head of responsible investment at Actis, a global emerging markets investment fund. Long-term investors have a financial responsibility to consider the environmental and social implications of their investments.
“These are matters of global urgency that impact everything. Investors who have a long-term investment horizon, such as public pension plans and sovereign wealth funds, wouldn’t be fulfilling their fiduciary responsibility if they didn’t think about the risks of climate change, for example.”
The expectations of asset owners and beneficiaries have also evolved to prioritise environmental and social impact, she notes. “We’ve seen a real sea change in what the client wants their money to achieve. Of course, they want returns, but they want impact alongside that,” Nissan says.
The ‘S’ in ESG
Environmental initiatives, especially net zero, often get top billing when it comes to impact investing. However, Dharampal-Hornby says it’s also important to consider social sustainability, recognising that “E”, “S” and “G” at an organisation are interlinked. “If we’re going to transition to a low carbon economy, and for it to be stable, we need to have that investment in reskilling and education to deal with potential unemployment and economic fallout,” he says.
To this end, the Impact Investing Institute has partnered with the Green Finance Institute and the London School of Economics and Political Science (LSE) to propose a sovereign bond called Green+ Gilt, which ties in environmental and social code benefits. “It would be the first of its kind in the world,” says Dharampal-Hornby. He has high hopes for its success: the first UK green bond, issued in September, was oversubscribed by a factor of 10.
Nissan feels the pandemic “helped put the S of ESG on the table, but there is still work to be done”. She is part of the G7 Impact Taskforce, set up to encourage collaboration on impact investing between G7 nations. “We talk a lot about enabling a ‘just transition’,” she says.
“It isn’t simply about carbon and sending trillions into renewables, it’s about ensuring that investment and infrastructure are inclusive and equitable and that there is value at a very grassroots level to the community, not just the investor who takes the returns and then gives them back to their base in New York or London.”
“You can choose to be an active owner and to extract impact every year that you’re there as an owner,” she says, citing the example of a renewables company Actis works with in Latin America called Atlas that has trained 800 women to install solar panels during the pandemic. “It shows what is the art of the possible,” she says.
The portfolio companies that Actis works with are mandated to have an ESG sub-committee that reports to the board and a head of sustainability. Actis also encourages collaboration between different companies in its network so they can learn from each other.
The power of shareholder activism
While Actis works through active ownership, shareholder activism on the Engine No. 1 model is another effective impact investing tool. Catherine Howarth is chief executive of the non-profit ShareAction. She says shareholders control a suite of tools to push companies to be more sustainable. “These range from discreet private meetings with company management and board members through to more forceful tools like filing shareholder resolutions to change corporate policy or voting against directors where progress on ESG issues is altogether unsatisfactory.”
Being a shareholder is a huge advantage when it comes to exerting activist influence, Howarth believes. “Shareholder activists aren’t just concerned citizens, they’re concerned owners of the company. That legitimacy is recognised by companies themselves, who are usually far more willing to listen to shareholders, especially large ones, than they might to other types of activists.”
Some forms of activism have the power to change the articles of association and force companies to change tack, says Howarth. “For example, in the UK, a shareholder resolution which receives 75% backing from the shareholder base becomes legally binding on the company.”
She points to ShareAction’s resolutions at HSBC and Tesco, where it convinced some of the world’s largest investors to back shareholder activist campaigns. “We were able to secure a commitment from the bank to phase out financing of the coal sector and from the supermarket to set stretching new five-year targets to sell more healthy food,” she says.
In neither example did the shareholder resolution actually come to a vote, Howarth notes. “Well before the AGMs, the boards of these FTSE 100 giants had decided they would accede to our demands,” she says, though it’s now vital to watch and ensure they deliver on their commitments, she adds.
Is there a risk that shareholder activism could be harnessed for negative environmental or social outcomes? Dharampal-Hornby isn’t too worried. “Global regulation is moving in one direction. Public mood is moving in one direction. Whether these companies are being forced by a shareholder meeting or just reading the room, we see things moving in one direction of travel.”