January 2024 Quarterly InsightsCategory

The Demise of ESG-Focused Activism

By Mergers & Acquisition Team
1 min read

Earlier this month, prominent activist investor Jeff Ubben announced he was shutting down his environmental and social investing fund, Inclusive Capital, marking a blow to the ESG activism paradigm. Considered a leader in the then-burgeoning ESG activism sphere when it launched under Ubben in 2020, Inclusive shut down because its mission unfortunately has not been rewarded by public markets, according to various media reports.

The decision reflects the view that ESG focused funds can be risky as they seek to achieve investment returns while seeking longer-term ESG objectives. Fewer activist hedge funds have recently used ESG themes as a wedge to extract concessions from target companies given the challenge of aligning a fund’s investment horizon with what could be a much longer timeline for ESG focused themes.

Further evidence is seen in the shift of Engine No. 1’s investment strategy. In 2021, it won three board seats in a landmark proxy fight at Exxon, predicated on critiques of the Company’s environmental and social corporate performance. Recently, Engine announced that it will no longer deploy an activism strategy and voted its shares against a shareholder climate resolution at Exxon last year. The fund now invests in private companies, including mining assets with poor ESG profiles.

Hedge fund activists have for many years targeted public companies’ financial, operational and governance performance as a basis for demanding corporate finance changes. Though we believe the pure ESG activist is waning, we believe ESG critiques will still appear if directly impacting a target company’s performance. It is still imperative companies take a rigorous and proactive approach to investor engagement well before the arrival of an activist.