Investors, fund managers, financial organizations have begun seeking ESG performance updates before making investments.
By Akanksha Sharma
From growing income and wealth inequality to climate change, to biodiversity degradation, to increasing discrimination based on race, colour, unemployment – all these issues have grown graver post the pandemic. However they are also getting more and constant focus– thanks to the activism surrounding these issues under the broad umbrella of ESG.
While there is no dispute or second thoughts regarding the relevance of ESG and its urgency, this aggressiveness to improve environmental, social and governance performance has turned into a movement. Investors, fund managers, financial organizations have begun seeking ESG performance updates before making investments. And rightly so. Each of these issues feature somewhere across every corporate’s value chain. Therefore, increased focus on ESG performance is often viewed as conscious business conduct towards environmental and social elements and activism ensures proactive adoption.
Now, activism usually draws flak, for it comes with a negative connotation of associated rigidity and aggression. It is therefore extremely important to understand its purpose away from its social connotations and prejudices. However, we also need to ensure that this right found awareness regarding ESG performance evaluation does not get deflected or ultimately dampen its actual potential and purpose. A time to time quality check on the demand side of the ESG advocacy is thus equally essential.
The sustainable goals that the UN adopted was an urgent call towards a better, inclusive and managed future. The issues that we face today are way too grave to be left in theory and sporadic decision making. ESG activism allows for coordinated and continuous adoption of frameworks that enable mitigation and facilitate sustained and meaningful change.
And that is exactly what the advocates of ESG adherence expect. Their demands are simple – that corporates should be careful, responsible and contribute towards the interests of others. Their agenda focuses around the fact that businesses need to ensure that their operations and profits do not come at the cost of compromised or negative environmental and/or social impacts.In fact, it is really interesting to note that the pumped-up demand for ESG criteria is a call limited not only to activists who lie outside the direct business participation or tend to pressurize businesses to align their operations or funding depending on the issue relevant to just their concern. The spectrum is also witnessing shareholder activism. These are the investors – the shareholders, whose interest as per traditional business set-ups were limited only to profits and return, who are now actively advocating ESG criteria.
For the first time a large scale tangible change of such kind tookplace – in the spring of 2021. The investor activist Engine No. 1 managed to create such pressure on the board of Exxon Mobile, towards the use of clean energy, that the corporate giant, a public company made significant changes and a major turnover in its board. Engine No. 1 with its ESG activism, specifically toward fighting climate change, ended up having a place on the board of Exxon Mobile. A record of 12 environmental proposals were filed at US companies in 2021 and they were passed with the support of the majority of shareholders. Following an established connection between ESG criteria and financial health, organizational health and risk-mitigation, investor activists are finding acceptability and more space on corporate boards.
Now in addition to investor activitists, there exist the ‘non-investor activists’. They differ from the former in their approach; however, the results are congruent. Shareholder ESG activism takes into account the interests of the investors while trying to steer a change in the businesses’ conduct in alignment with ESG norms. While these active and aware attitudes are fuelling the sustainability process pretty well, the flip side of activism cannot be ignored. The line of useful activism and power trip can get blurred very easily for they are not uniquely defined. Over rigid and forceful activism, even in favour of ESG can spiral into politicized or polarised corporate functions. Such tendencies can push companies towards hasty unweighted decisions to ward off activist pressure. They can further put the company in a controversial or divisive situation, which otherwise and normally would require a nuanced strategy.
Therefore, even with noble and fair intent, ESG needs should not to be taken forward recklessly. As the harbingers of growth and development, companies will have to find a balanced middle path where ESG activism is duly acknowledged and incorporated without allowing activist forces to spiral uncontrollably.
(The Author is an ESG Expert and author of “Greater Common Good. She works and writes on Sustainability Practise, Tech, Policy, Finance & Social Impact. Views expressed are personal and do not reflect the official position or policy of the Financial Express Online.)