Bikaramjit Sandhu writes on the rise of ESG in shareholder activism in the new book Corporate Law and Sustainability from the Next Generation of Lawyers.
In his chapter The Return of Robin Hood: A New Kind of Shareholder Activism, he looks at what's driving the increase in ESG campaigns, how companies can respond to activists, how young lawyers can affect change and more.
Bikaramjit wrote his chapter in 2019 and the book was published in September 2022.
ESG has firmly established its place in the world of shareholder activism. In 2019, investors were beginning to understand the seriousness of the diverse and complex challenges that fall under the ESG umbrella. Now, these factors are being integrated into investment strategies and decision-making.
ESG issues have gained such prominence because they are inextricably linked to a company's valuation. The market rewards companies that integrate ESG in their policies and both short- and long-term planning. Companies that fail to do so may be taking unnecessary risks and failing to maximize their value. A valuation gap creates an environment where activist shareholders can pressure companies to adopt ESG policies.
Activist shareholders are uniquely capable of pressuring corporations into action to adopt policies that improve their ESG footprint. For retail and institutional investors, ESG offers the opportunity to not only make more informed choices with their capital and thereby reap greater returns, but it also allows them to vote on social issues with the same capital.
Many activist shareholders are publicly supportive of ESG initiatives to court major institutional investors who have had positive results with ESG investing in the past. This makes it more likely they will invest in companies in which the activists maintain positions.
Credit agencies have also been playing a part in the rise of shareholder activism. Strong ESG factors allow companies to obtain lower financing costs even though it does not necessarily translate into an instant positive impact.
Shareholders believe that good ESG performance is an indication of efficient management and that the company is performing well—and demonstrates that the company has a strong financial standing. The recognition that ESG issues are material to long-term financial outcomes has been another driving force.
It is important for companies to take into consideration the voices of millennial lawyers because without consideration, there is a likely outcome where millennial lawyers will have to suffer the consequences in the future, based on the decisions made during in the present.
Proxy fights and hostile takeover bids are two commonly used tools.
In most cases, proxy fights are initiated in relation to board independence, executive pay and other similar issues. However, activist shareholders are also using their positions in companies to drive social change.
Trends show that public companies feel obligated to listen to activist shareholders’ proposals on ESG policies. ESG specific proposals are more likely to be withdrawn by proponents, showing that companies see a realistic possibility of them going through. This helps avoid a proxy fight, which can be expensive. And proxy fights are not a good look on a company.
In Canada, hostile takeover bids are rarer due to new statutory requirements that have made takeover bids expensive to undertake. However, if activist shareholders believe that there are fundamental errors of judgment on the part of management and the board in running the company, they may launch a takeover bid despite the cost.
Companies need to hedge themselves against potential risks when it comes to ESG. Risk stems from a lack of ESG policies and weak corporate governance structures, which hinder a company from seeing full returns. Having sound policies and structures will make it less likely activist shareholders will target a company.
Robust ESG disclosure practices also have the potential to mitigate the risk of activist campaigns. Companies should look to incorporate a business and human rights lens when developing and disclosing ESG practices. There have been disruptions in operations to a company that do not have proper human rights practices incorporated within their supply chains.
By developing ESG practices that include all stakeholders, a company has the potential to mitigate many risks to its business. This also creates an opportunity to reach out to all of its stakeholders and tell a company's ESG story.
Companies need to know how shareholder thinking is shifting. In Canada, changing investor demographics is helping driving the need for ESG integration. Millennials are more likely than older generations to examine a company’s environmental and social records and policies when deciding to invest.
It is important for young lawyers to have an open mind and fully assess the situation when advising on corporate and sustainability matters. Also, it is very important to provide advice that provides a greater positive impact for future generations.
I think we will see more activist activity but the activist campaign will be not based on the traditional fundamentals of a company. There is a greater chance that activists will submit shareholder proposals on executive compensation, health and safety records, diversity and climate change policies. Companies can best position themselves by examining current corporate structures and mitigating potential activist campaigns by implementing robust ESG-related policies and providing full disclosure on ESG matter.
This book gives a voice to young lawyers, offering new critical perspectives in the field of corporate law and sustainability. It provides research and insights from a diverse group of young lawyers calling for more corporate accountability within legal and regulatory frameworks, including innovative ideas for reform.
More details on the book and how to purchase it are available here.