Environmental, Social, and Governance Issues : An Altered Shareholder Activist Paradigm

Within capital markets, institutional investors’ nascent focus on environmental, social, and governance (“ESG”) issues is transforming the market for corporate control. Using their ever-increasing ownership of public companies as leverage, these voting blocs color their interactions with two other key players: management and shareholder activists. Institutions are now integrating non-financial ESG risks into traditional quantitative metrics to form optimal strategies for long-term value. The result is that other stakeholders are forced to respond, adapt, and alter their thinking and approaches. Activist hedge funds have responded by incorporating ESG into their campaigns as a means to garner voting support. The corollary is that former short-term investment plays are giving way to longer-term horizons and a wider spectrum of considerations. In response, management must increase its shareholder engagement and appease ESG concerns, or risk facing activist intervention. But, engagement cannot always prove a panacea. As a consequence, ESG is changing the power dynamic between management, institutional investors, and hedge funds activists. These groups are being forced to adjust long-established behaviors, thus collectively altering the shareholder activist paradigm