advertisement
advertisement

How activist hedge funds went from corporate raiders to climate heroes

Engine No. 1’s defeat of Exxon Mobile was just the start. A new breed of activist investors is pushing companies to embrace stakeholder capitalism.

How activist hedge funds went from corporate raiders to climate heroes
[Illustration: Álvaro Bernis]

When upstart activist hedge fund Engine No. 1 secured three seats on the board of Exxon­Mobil in June, it was a high-­profile repudiation of the way the country’s largest oil company has long conducted business: with a laser focus on returns and a blind eye to its impact on the world at large. The fund vowed to push ExxonMobil to develop a plan to address climate change and reduce its carbon footprint. Exxon’s responsibility as a business would no longer be only to its shareholders, the boardroom showdown signaled, but also to the public and the planet.

advertisement
advertisement

To pull off this coup, however, Engine No. 1 first needed to woo other, bigger shareholders. Launched in December 2020 with a goal of getting companies to prioritize long-term value, the fund found a perfect first target in Exxon. The oil company had ignored the kinds of renewable investments that would set it up for future success, and its stock had been plummeting. Though Engine No. 1 held just 0.02% of the company, it persuaded some of Exxon’s largest shareholders, including BlackRock and the California State Teachers’ Retirement System, that the company’s myopia was a liability. “I think the issue you’ve seen at Exxon, really for years, is an overly short-term focus and a real disregard for the way the industry has changed, where the world is changing,” Charlie Penner, who leads campaigns at Engine No. 1, told Fast Company.

Just how much Engine No. 1 will be able to reform Exxon isn’t yet clear—the three new board members join nine legacy ones, so their influence may be muted—but its successful campaign reflects changes taking place beyond the oil company. Over the past several years, a new kind of activist investor has emerged. Instead of enacting takeover campaigns simply to achieve higher returns, they’re pushing companies to address their environmental and social impact.

Last fall, just before Engine No. 1 was founded, activist fund Bluebell Capital Partners sent a letter to chemical company Solvay’s board demanding it stop discharging chemical waste from its Tuscany, Italy, plant into the sea. Bluebell, which was founded in 2019 with a $75 million fund, has committed to pursuing one campaign a year focused on getting a company to be more responsive to environmental, social, and corporate governance (or ESG) issues. Last year also saw the creation of Inclusive Capital Partners, an ESG-focused fund, now worth $1.3 billion. Among its cofounders: Jeffrey Ubben, who previously founded the hedge fund ValueAct Capital, and Lynn Forester de Rothschild, who founded the Coalition for Inclusive Capitalism to get business leaders engaged with ESG. In 2019, Lauren Taylor Wolfe founded the ESG-focused firm Impactive Capital, which has used its stake in companies such as Wyndham Hotels and the engineering firm KBR to push them toward better environmental practices.

advertisement
advertisement

ESG investments have been growing in recent years; the Forum for Sustainable and Responsible Investment estimates that investments that take ESG into consideration have reached $17 trillion in the U.S., up 42% from 2018, and now represent a third of all professionally managed assets in the U.S. For the most part, however, these investments prioritize companies that already embrace some form of sustainability and stakeholder capitalism. BlackRock, for example, has championed ESG since 2017, but has only recently started voting on climate resolutions at companies that are not in its ESG portfolios.

Activist funds such as Inclusive Capital Partners are taking a more aggressive approach: Identify companies that are dragging their feet on ESG issues and coax—or push—them to do better. “It’s the dirty companies that are producing our problems,” says de Rothschild. “We run to the companies that are creating the problems and fix them.” The question now is, can the changes forced by activist investors yield enough financial upside that other investors and CEOs follow suit?


Activist investors have come a long way: from corporate raiders to climate heroes. Historically, activist funds have focused on short-term returns. They hold their shares for one, two, or, in “extreme cases,” three years, according to a January 2020 paper by Mark DesJardine, an assistant professor of strategy and sustainability at Penn State, and Rodolphe Durand, founder of the Society and Organizations Research Center at the business school HEC Paris. The average investment horizon of an activist hedge fund, DesJardine says, is about 13 months.

advertisement

This short-termism is why activist investing has a tenuous track record when it comes to creating long-term value. When DesJardine and Durand studied 1,324 publicly traded U.S. firms that were targeted by at least one activist between 2000 and 2016, they found that activist-targeted companies saw their value increase 7.7% in the first 12 months of a campaign—but drop 4.9% four years later.

The new ESG activist investors are flipping this script. Though Engine No. 1 has not said how long it will hold on to Exxon, Penner told Fast Company that it will be “a yearslong process of figuring out how to reposition this company for the future.” Ubben and de Roths­child, meanwhile, are not aiming for quick returns either. “Focusing on ESG is a long-term strategy,” explains de Rothschild. “But it’s also a shareholder-value strategy.”

The problem is that the overwhelming majority of investors are still addicted to quarterly results. Even when it comes to corporate initiatives that seem hard to argue with on a societal level—such as Walmart pledging to raise its hourly wage to $15 in February—the market favors a short-term view: Walmart’s stock dropped 6% after its announcement. Pursuing environmental and social impact goals, which often require patience and capital investments, can also make a company more vulnerable to activist hedge funds. DesJardine and Durand found that firms that spent more on corporate social responsibility than their peers were almost twice as likely to be targeted by activist investors. One hedge fund manager interviewed for that study called CSR “wasteful” spending; another mentioned the need to “cut the fat.”

advertisement

Purpose and Profit:  ESG investing has emerged as a growing force, but its influence is still limited

[Sources for Purpose and Profit: The Forum for Sustainable and Responsible Investment; SEC; Morningstar Proxy Data, as of 9/25/2020; BlackRock 2021 Letter to CEOs; Governance & Accountability Institute]
Even activist investors that support ESG efforts have limited patience. As Engine No. 1 was targeting Exxon this past winter, Bluebell Capital, the same fund that went after Solvay for its toxic waste, began a campaign against the French food giant Danone. Emmanuel Faber, Danone’s then chairman and CEO, had earned a reputation for championing ESG initiatives; he joined a collection of companies committed to using 100% renewable electricity and changed Danone’s legal structure to “entreprise à mission,” a French structure that prioritizes stakeholder value. But with Danone’s revenue down 6.6% during its fiscal year 2020, Faber was ousted in March. “We never criticized [the E and S in ESG],” Marco Taricco, cofounder of Bluebell Capital, told the Financial Times in March. “But it can’t come at the expense of shareholder returns.”

Having a mission isn’t enough, says de Rothschild, who is wary of companies that wrap themselves in purpose at the expense of shareholders. “It’s a fallacy [to] say that companies that perform well on ESG metrics have better shareholder performance across the board,” she says. “It doesn’t work like that. You have to be surgical in finding those companies where the ESG activities are value levers.” ESG, in other words, is all well and good when the market is up and your company is performing, but if your results tank, even de Rothschild can’t save you. “You can’t be solving the problems of people and planet without doing so profitably,” she says.


One of the prominent public companies to successfully strike the balance between purpose and profit is Unilever. When former CEO Paul Polman took the helm of the consumer goods giant in 2009, he immediately embarked on a stakeholder-driven approach. He stopped issuing quarterly reports—”I made it very clear we were running this company for the long term,” he says, “and we saw a certain group of shareholders leaving”—and launched a plan to cut the company’s environmental impact in half by 2030.

advertisement

But he kept his eye on returns. “You should have a decent performance, ultimately, for your shareholders,” he says. Doing so helped him fend off an acquisition by Kraft Heinz in 2017, which came at a time when Unilever was cutting its carbon footprint and dropping unsustainable materials, while Kraft Heinz was cutting costs and reducing head count. Though Kraft Heinz’s relentless focus on efficiency might have accelerated Unilever’s profitability, Kraft didn’t offer shareholders a more appealing plan than what was already in place at Unilever. Within days the bid was dead. The difference between the brands today is even more striking: Unilever’s share price is up about 40% since the takeover offer; Kraft Heinz’s has been cut in half—and in 2019, it ranked last on a report that reviewed how ready food companies were to transition to a low-carbon economy. Unilever, in the personal care category of that report, ranked first.

Four years ago, Polman was an outlier. He had to work hard to convince his shareholders that investing in ESG in the present would benefit them in the future. Following the social and environmental upheavals of recent years, such stances are easier to take. Polman even welcomes the idea of what he calls “active investors” who will get involved in a company’s ESG efforts. The era of shareholder primacy isn’t over. Far from it. But as Engine No. 1 has demonstrated, the view from the boardroom is decidedly different: You can’t help but see the horizon.

advertisement
advertisement
advertisement