Investor relations swing from ESG advocacy to anti-ESG

Investor relations departments have been on a wild ride over the past few years, as activist investors and other stakeholders have made their voices heard. Corporate finance leaders find themselves frequently under criticism from activist investors, whose demands they have to consider and whose concerns have to be addressed. And most recently, that’s meant investors pushing companies to consider their wider ecological footprints, climbing on board the ESG bandwagon.

Much of the process has been friendly: Three of every four activist campaigns begins collaboratively, according to research from consulting firm McKinsey. But that’s not to say they’re joyfully welcomed; half of those eventually turn hostile. “Each contested campaign costs a company between $10 million and $20 million—plus weeks of management time to develop plans and meet with investors,” McKinsey found.

Institutional investors have been key to pushing the ESG movement forward. In 2018, Larry Fink, BlackRock’s chairman and CEO, wrote in his annual letter that companies needed to identify their purpose, and that to “prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.” Since then, BlackRock has doubled down, saying environmental concerns would be core to its investment strategy.

And many companies have taken similar action, offering green bonds, an instrument to fund green projects; developing sustainable finance frameworks; or linking executive compensation to sustainability goals. In 2021, the Rockefeller Brothers Fund announced it was done with fossil-fuel investing, saying its “investment returns beat market benchmarks.”

While corporations have, for the most part, listened to institutional investors, employees, and stakeholders, and released sustainability reports (although not without accusations of greenwashing), a new sort of activist has emerged: the anti-ESG investor. Strive Asset Management’s Vivek Ramaswamy, who is seeking to dismantle what he calls “woke capitalism,” has called into question what the future of ESG initiatives should and could look like.

“Our basic vision is that companies should focus exclusively on excellence over politics,” Ramaswamy told CFO Brew. When asked how the new fund plans to engage with companies, the anti-ESG activist said it’ll be taking a “public and transparent approach.” That’s demonstrated in its recent letters to Apple and Disney, which push for a reversal on racial quotas, and for the House of Mouse to stay quiet on LGBT rights issues.

CFOs have become more vital to the conversation, given the SEC’s proposal to make public companies disclose environmental risk. “The role of corporate finance and chief financial officers hasn’t necessarily been center stage. And I think that’s about ready to change,” Scott Mather, chief investment officer of US core strategies at Pimco, and a co-chair of the CFO Taskforce, said earlier this year at a CFO roundtable.

In recent months, many of the efforts by ESG-friendly activists have come under fire—Nasdaq’s diversity rules have been snarled up in court as conservative groups argue that the SEC was wrong to approve Nasdaq’s board diversity rule. Larry Fink received a letter from 18 state attorneys in Texas and West Virginia arguing that BlackRock’s environmental aims conflict with its fiduciary duty.

Ramaswamy told CFO Brew that Strive Asset Management has been most engaged with energy companies; Chevron requested he meet its CFO for dinner to “exchange ideas.”

Strive Asset Management currently has $300+ million AUM, with the majority coming from retail investors, according to the Financial Times. That might not seem huge, but it sometimes doesn’t take a lot to have a significant impact. Engine No. 1, a small ESG firm, won three board seats at ExxonMobil last year, despite only owning 0.02% of the stock.

“No company should consider itself immune from activism,” the Harvard Law School Forum on Corporate Governance recently wrote. “No company is too large, too new or too successful. Even companies that are respected industry leaders and have outperformed the market…have been, and are being, attacked.”

Despite the recent whiplash-inducing shift among activist investors, Danielle Fugere, president of As You Sow, a nonprofit focused on corporate responsibility, told CFO Brew that companies are saying they’ll continue to take climate risk into account and “will continue going forward with [the] direction of the world.”

“The unfortunate thing is that this anti-ESG push isn’t changing behavior, but it’s costing money; it’s costing time,” Fugere said.

In addition, it’s going to be hard for companies to backtrack some of the ESG statements they’ve already made. Jonas Kron, chief advocacy officer of Trillium Asset Management, told CFO Brew that companies big and small have already put on paper what their values are.

“They will talk about, ’‘gender equity is vitally important to our business,’ or they may talk about climate change, or they may talk about veterans,” Kron said. “Companies talk about their values all the time.”

But more importantly, he added, is that companies “need to put more time and effort into getting alignment between their political spending and their values.”—KT