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May 28, 2021

The rAge of ESG

Much has been said and written this week about events in the energy sector, especially the unprecedented proxy fight at ExxonMobil’s annual meeting of shareholders. Some are declaring outright “war” between companies and investors who prioritize environmental, social, and governance (ESG) issues, and are planning for an adversarial future with more ESG-themed proxy battles. We have said in the past that public companies have entered the Age of ESG; many are now preparing for the “rage of ESG”.

While we wholeheartedly agree that ESG is more important now than ever, we see better outcomes for companies who build bridges rather than declare war. Bridges between shareholders and stakeholders, and bridges between EPS and ESG. Integrating ESG into corporate strategy, and meeting investors’ evolving expectations, is “winning” in the Age of ESG.

How to win:

  • Think about Board Composition holistically, with an eye toward ESG fluency and activism readiness. While in the past we have seen hedge fund activists use ESG as the “tip of the spear” in a campaign, it is clear from this week’s events that the institutional investor audience is more receptive to ESG-oriented attacks than ever before. Investors expect the board to be ESG competent, but also to have the requisite industry expertise to both challenge and support management decisions around risk and strategy – in other words, to serve as the company’s ‘internal activist’.

  • Approach ESG with a long-term mindset. Investors have broadened the lens on investment risk, and it now encompasses systemic risks, such as climate change, as well as items that exist outside financial statements, such as culture. Over the long-term, these risks – and related opportunities – may impact the bottom line.

  • Develop an ESG strategy that addresses the material ESG issues at your company and integrates with your corporate strategy. Approach materiality as the crossroads of business impact and stakeholder impact, considering that stakeholders (including employees, customers, and communities) can drive or diminish intrinsic value. This can manifest in your company’s brand value, its ability to attract and retain talent, and in its social license to operate.

  • Provide decision-useful disclosure, in alignment with the ESG disclosure frameworks investors prefer. Investors are using ESG disclosure, data, ratings, and index inclusion/exclusion to inform their views on ESG risks and quality. It is incumbent on issuers to provide transparency on ESG oversight and performance.

  • Engage proactively with your long-term shareholders. Ask questions about their principles and priorities. Listen, and take their feedback to the board. Demonstrate follow-through and responsiveness on the issues that matter. In casting their votes against ExxonMobil’s incumbent directors, many investors noted a history of feeling ignored by the company; partnering with your shareholders will only increase in importance.

The board, management, and your largest shareholders are ultimately focused on the same goal: building long-term value. While it can be difficult to reconcile different opinions on how to do so, companies have an opportunity to meet this challenge by building bridges rather than declaring war. SGP is here to help you build those bridges.