ESG Campaigns Seen Falling Out of Favor With Activist Investors (2024)

FAQs

Is ESG falling out of favor? ›

Activist investors are expected to carry out fewer environmental and social campaigns this year after the strategy proved less lucrative than other shareholder agendas, according to business consulting firm Alvarez & Marsal Inc.

An ESG controversy case is defined as either an event or an ongoing situation in which company operations and/or products allegedly have a negative environmental, social and/or governance impact.

A wave of discontent over sustainability policies is sweeping across the Atlantic, making green growth harder and putting the leaders and financiers who are fighting to implement environmental, social, and governance (ESG) policies under pressure.

Disadvantages of Individual Activist Investors

Individual activist shareholders may not share the same interests or goals as other shareholders and, therefore, may destroy shareholder value. For example, an activist shareholder may only prefer a short-term holding time horizon;.

Political backlash against ESG in the US, the relabeling of ESG products, and the underperformance of sustainable funds (inextricably tied to the underperformance of growth funds) since early 2022 have contributed to these outflows.

Many companies no longer utter these three letters: E-S-G. Following years of simmering investor backlash, political pressure and legal threats over environmental, social and governance efforts, a number of business leaders are now making a conscious effort to avoid the once widely used acronym for such initiatives.

However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.

Firms with ESG controversies will likely suffer from higher financing costs and inadequate investment capability, leading to investment inefficiency.

The term ESG first came to prominence in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations (UN).

Critics of ESG — such as a group of Republican states that banned Blackrock and other “ESG friendly” asset managers from their state pension plans — argue that considering environmental and social factors violates the fiduciary duty that asset managers have towards their clients.

Is ESG greenwashing? ›

In its basic form, greenwashing uses manipulation and misinformation to garner consumer confidence around a company's environmental, social or governance (ESG) claims.

ESG controversies score consists of 23 ESG controversy topics, including anti-competition, business ethics, intellectual property, tax fraud privacy, environmental issues, diversity & opportunity, etc. The default value of all controversy measures is 0, meaning companies with no controversies will get a score of 100%.

Many perceive activists as being smarter than the average investor. They have extensive experience, important industry contacts, and access to solid research. However, activists aren't always right. Their timing can be off, and they can and do sometimes lose money.

However, although median excess returns are negative, average long-term excess returns are positive. analyzed more than 100studies and concluded that shareholder activism may have a positive, negative, or insignificant effect on a targeted firm's fundamental and price performance.

The reasons for the shareholders' activism may be financial or non-financial. Financial goals include cost-cutting, changes in the corporate or financial structure, or a spin-off or merger.

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

Many companies and shareholders often overlook the full implications of not adhering to Environmental, Social, and Governance (ESG) standards. Even if you might not place much value on ESG, those who support your business do—and they won't hesitate to make their feelings known.

In the run-up to the pandemic and through 2022, ESG as an acronym became widely used. But until 2023, this use was largely unchecked. The term evolved to mean everything to every company, which in turn led to it meaning very little to those trying to isolate the signal from the noise.