In a huge victory for sustainability, ExxonMobil shareholders have just backed an activist investor that said the supermajor faced existential risk because of its enduring focus on fossil fuels. Defying the company’s management, Exxon shareholders elected new board members proposed by Engine No 1, a tiny hedge fund that launched an activist campaign in December, blaming the energy giant’s poor performance on its failure to begin to transition to a green economy and arguing that the company needs to commit to carbon neutrality by 2050.
Two of Exxon’s second largest shareholder, BlackRock (which owns a 6.7% stake in the company) and Legal & General reportedly sided with the activist investor due to frustration with the company’s refusal to take climate concerns seriously.
The same paradigm shift is taking place at other oil groups too. A majority of Chevron shareholders have rebelled against the company’s board by voting 61% in favour of an activist proposal to force the group to cut its carbon emissions. Meanwhile in the Netherlands, green campaigners won a court battle in the Hague to compel Shell to cut its carbon emissions by 45% in the next ten years.
Recent events show the big shift in the importance investors attach to sustainability. Yet a victory for activist, sustainability-minded investors at oil majors follows activist investors appearing to campaign against sustainability at French food group Danone. Last March, management change at Danone underlined the difficulties some companies face in trying to become more sustainable businesses. The CEO-chairman, who had made a powerful statement of intent by formally turning Danone into a purpose-driven company, was ousted by activist investors.
Navigating the right balance between the needs of shareholders and the environment, treasury and finance teams must consider the needs of all their stakeholders, advises Nicholette MacDonald-Brown, fund manager at Schroders. “As a sustainable investor, what I’m looking for is companies that consider the needs of all their stakeholders. These are employees, suppliers, customers, regulators, shareholders, local communities and the environment,” she says.
“These stakeholders aren’t all equally important to every company; regulators are more important to some industries than others, like banking, for example. And at different times a company may need to prioritise one set of stakeholders over another. But what is important that this isn’t to the detriment of other stakeholders.”
Indeed, Schroders active strategy plays an important role in ensuring companies consider all their stakeholders, she explains. “Stockpickers like ourselves choose which companies we allocate clients’ capital to, in contrast to a passive fund that simply buys holdings to reflect a particular index. As investors who can choose whether or not to invest in a company, we can play a powerful role in engaging with companies on behalf of all stakeholders.”
Every company has its own complexities and challenges, meaning there is no one size fits all approach for management to take with regard to considering the needs of stakeholders. Moreover, investors also need to consider the challenges facing a business and weigh up when to press for change.
“An example of a company prioritising certain stakeholders without harming others is French supermarket group Carrefour,” said Nicholette. Schroders recently engaged with the company on behalf of shareholders, arguing that the company should combine its ongoing operational improvements with cash returns to shareholders. Convinced the company could afford to increase shareholder returns without jeopardising its commitments to other stakeholders the investor wrote to Carrefour to communicate its view.
“Given the ongoing global pandemic, the present moment isn’t optimal for many companies to improve their shareholder returns,” Nicholette said. “But supermarkets have been among the ‘pandemic winners’ and we felt that asking for a plan around future returns was appropriate.”
In March Carrefour announced that it would start paying its dividend in cash rather than in shares and aims to increase the dividend regularly. The dividend had been paid in shares (known as a ‘scrip dividend’) for almost ten years. Then, in April, Carrefour announced it would buy back €500m of its own shares.
“Every company is different and so every engagement and investment decision is different. But fundamentally we don’t think there has to be a trade-off between investing sustainably and generating above-benchmark returns. Considering a company’s impact of all its stakeholders is crucial to our analysis of any potential investment, she concluded.