The election of activist investors to Exxon’s board illustrates just how important environmental, social and governance (ESG) factors have become.
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Any lingering doubt that activist investors play an important role in corporate governance was squashed by the momentous election. Engine No. 1, a small investment firm with only a 0.02% stake in Exxon Mobil and a clear climate change agenda, won three seats on the energy giant’s board. And it did so with the support of some of Exxon’s biggest institutional investors – BlackRock, Vanguard and State Street. The powerful trio’s move shows a dramatic change in mindset.
Engine No. 1’s express goal is to pressure Exxon to shift away from fossil fuels and reduce its carbon footprint. The firm targeted Exxon because it is one of the biggest oil and gas companies in the world, and one that has shown little inclination to plan for energy transition. The supermajor has instead continued to invest heavily in new oil production.
Engine No. 1 was founded by Chris James, who is not a climate activist; he is first and foremost a seasoned investor. His experiences as an investor are what convinced him of the business case for taking environmental, social and governance factors into account. BlackRock seems convinced as well. Explaining its support of Engine No. 1, the firm said, “We believe more needs to be done in Exxon’s long-term strategy” on reducing climate risk, as it threatens shareholder value. “No issue ranks higher than climate change on our clients’ lists of priorities,” wrote BlackRock CEO Laurence D. Fink in his annual letter to investors.
“We’re finding that there are other components that factor into a company’s overall performance: social, cultural and, now, environmental,” said Andrew Freedman, Co-Chair of the Global Shareholder Activism Practice at law firm Olshan Frome Wolosky. “Shareholders are able to now find a way to run a campaign where there’s alignment on the initiative because it all feeds to the bottom line.”
The might of BlackRock, Vanguard and State Street cannot be overstated. Academic research shows that in 2018, they cast an average of about 25% of the votes in elections for board directors of all of the companies in the S&P 500. Analysts say the mere threat of some of those votes being cast against management, as in Exxon’s case, will force executives to think long and hard about addressing the firms’ concerns. “You’ve seen that kind of shift dramatically overnight,” said Lyndon Park, Managing Director and Head of Governance Advisory Solutions at ICR.
The New York Times reports that last year, over $51 billion was invested in ESG funds, which invest in firms that meet set standards on environmental, social and governance issues. That is more than double the $21 billion invested in 2019. Many investors have seen solid returns from ESG funds. According to Morningstar, three of every four funds categorized as “sustainable” outperformed a market index of comparable conventional stocks in 2020.