Podcast: Where ESG Fits Into Shareholder Activism

The Real Deal Podcast

How ESG fits into the corporate agenda and how that's recently changed over the years.

Activistmonitor's Claudia De Meulemeester joins Dealcast host Julie-Anna Needham to discuss how ESG fits into shareholder activism. Together, they discuss the focus on climate change, reporting and disclosure and shareholder/stakeholder dynamics. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this podcast, you’ll hear about:

  • How ESG factors are no longer a "nice to have" for corporate boards.
  • New developments in the ESG space.
  • How ESG has gained momentum during the COVID-19 pandemic and is now a prime driver in M&A dealmaking.


[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. In this episode, we're talking about ESG and where it fits into shareholder activism. I'm joined by Claudia De Meulemeester, a reporter for Activistmonitor. Hi Claudia.

CLAUDIA DE MEULEMEESTER: Hi, Julie-Anna. Thanks for having me.

JULIE-ANNA NEEDHAM: Thank you for being here. So to begin with, can you give us an idea of how ESG fits into the corporate agenda and how that's changed in recent years?

CLAUDIA DE MEULEMEESTER: Sure. Perhaps to start with, we can give a short definition of what ESG is about. So those are environmental, social, and governance factors that are relevant to a business operational model and overall strategy.

So whereas perhaps until a few years ago ESG factors were a nice to have for corporate boards, I would say that today they have become actual drivers of business performance. So that's the main development that we are seeing happening. These ESG factors can go from climate change adaptation to gender equality to remuneration. So they can be quite broad, but definitely something that investors and corporates alike are looking at these days.

JULIE-ANNA NEEDHAM: And there have been a number of ESG focused activist hedge funds launched, can you tell us a bit more about those and what impact they're currently having?

CLAUDIA DE MEULEMEESTER: It's interesting to see how activist hedge funds have entered this space. So one prominent example is Inclusive Capital Partners which was founded by Jeff Ubben. Jeff Ubben launched actually a ValueAct, an American activist hedge fund a while back, but has decided to break away from that and start its own ESG activist hedge fund. So that will be definitely one to follow closely.

Another new player, brand new is Clearway Capital. That is a fund that was created by a former portfolio manager at Shareholder Value Management, Gianluca Ferrari. So he's just in the process of setting it up. So that will be a very interesting case to look forward to as well.

JULIE-ANNA NEEDHAM: Can we talk about the British billionaire, Chris Hohn, the founder of the Children's Investment Fund. He's really active in this space as well, isn't he? What's he up to?

CLAUDIA DE MEULEMEESTER: Yes. Chris Hohn is probably the most clear example of how ESG has been used within activists hedge funds. This year, in particular, he has launched a climate resolution at all of his investee companies. Basically forcing all corporates to prove how they're being impacted by climate change, disclosing proper greenhouse gas emissions. So that's the main topic that has definitely gained attention.

He's also famously one of the major donors to Extinction Rebellion. So he's been very, very active in the space. It remains, however, to be seen how institutional investors and let's say more pure responsible investors are reacting to this rise of ESG hedge fund activism.

So one of the examples we're looking at now for example is Danone, the French consumer company, who has received quite some criticism and has been forced to divide the roles of CEO and chairman. This was pushed by a number of activist hedge funds and the stock. But this was actually a long-lasting demand from responsible investors and ESG pure-play investors in the stock.

So it's interesting how they might have the same eventual outcome namely, the splitting of these roles. But it remains to be seen whether the activist hedge funds have more than just that as a demand. So we might see more demands coming forward from these players and we'll see how the institutional investors will react to that.

JULIE-ANNA NEEDHAM: So a big focus on climate change and corporate governance, what else are we seeing in the ESG space?

CLAUDIA DE MEULEMEESTER: There is a big focus on climate. That's true also because the Task Force on Climate-Related Disclosure has become mandatory in many countries, including the UK. So this is a way for companies to be really encouraged to disclose the risks and opportunities related to climate change and especially to bring forward their mitigation strategies. In case temperatures will rise two degrees above pre-industrial levels for example, they need to justify how their business will be resilient to that and how viable it will be to that as well. So that's one major example about how climate is gaining momentum.

However, this not only about climate. I would say that just because of the pandemic, a lot of other ESG topics have gained prominence as well. One of them is definitely the ongoing tension between the shareholder and stakeholder models and how these discussions will be let further.

JULIE-ANNA NEEDHAM: And on climate change, what are the new climate-related reporting measures that companies will have to include in their accounts from this year?

CLAUDIA DE MEULEMEESTER: So it's really interesting to see how governments are forcing companies to really properly disclose their climate change adaptation strategies. So one major element is the Task Force on Climate-Related Disclosure, which is a coherent system to disclose the risks and opportunities related to climate change. So that will help corporates to properly present publicly how their business will be resilient and viable if temperatures rise let's say about, above 2 degrees Celsius pre-industrial levels. So those are very specific climate change scenarios where companies need to disclose how their businesses will be viable or not in those kinds of environments. So that's one way in which the government is pushing public companies to disclose these risks and opportunities.

JULIE-ANNA NEEDHAM: So the big focus on climate change and corporate governance, what else are we seeing alongside those in the ESG space? What other issues are being raised?

CLAUDIA DE MEULEMEESTER: Yeah. So I would say that ESG has definitely gained momentum during the pandemic just because everybody is sitting at home and there is way more scrutiny on how work will develop going forward. So onto E, we've discussed climate change, onto G, there is quite a large consensus that there will be more scrutiny on directors' fiduciary duties on the board.

So it will be likely that we will see more campaigns targeting directors in terms of remuneration committees, specific committees that address social and governance factors. So that will be one to watch out on. On us, that is perhaps the one that has gained the most momentum. So in that discussion, there is also the shareholder and stakeholder model. So basically, for a number of years now and the Business Roundtable in the US has also contributed to that.

There is a feeling that companies' purpose should not only be focusing on shareholder returns but should also include the wider stakeholder community. And ESG is really a central theme to that. So that could mean that companies going forward could disclose a statement of corporate purpose, they will have to work on diversity in the workforce, but also across the office.

So especially now that working from home will become the new normal, there might be less business travel just because it can be done over a video call. Luckily and a quite successful attempt has been made to have more women on the board, there will be more discussions around pay, ethnic diversity on the board, but also the skill set of the board itself. So members might be joining boards with a more diverse background than before especially thinking about all the developments happening in data-driven solutions and artificial intelligence.

JULIE-ANNA NEEDHAM: And why does ESG fit into M&A? Is it becoming one of the main drivers in dealmaking?

CLAUDIA DE MEULEMEESTER: I'm not sure about the main drivers but it has the potential to become one of the main drivers. Predominantly ESG in M&A is seen in due diligence packages which focus on elements that also go beyond climate. As you might have noticed, governments have made bold statements about decarbonization of the economy. So that will definitely require ESG investments.

So it could become a driver for M&A especially in those sectors like commodities where there might be a lot of value opportunities. Some sources spoken to us might also see ESG metrics becoming an equivalent of credit ratings within M&A deals. So definitely loads to come.

I'd also like to stress that because everybody has been working from home, a lot of deals from the past year have also been happening from home and online. So that might be a trend going forward as well, where especially smaller and medium-sized deal might just be happening over a video call instead of overflying continents and a number of in-person meetings. So that's one of the main factors I'd see also appearing going forward.

JULIE-ANNA NEEDHAM: Looking ahead to the AGM season, which is nearly upon us, will we see more scrutiny on ESG during what I'm guessing will be mainly remote rather than in-person meetings this year?

CLAUDIA DE MEULEMEESTER: Yes. Definitely. So the AGM season will be particularly interesting because now hybrid and online AGM have become the norm. They will likely also continue to exist once the world has turned back to normal.

There are some concerns around how investor voices might be equally heard in hybrid and virtual AGMs. But the kind of feedback we're hearing is that if investors were perhaps a bit more lenient last year so that companies could primarily focus on survival and on the immediate crisis of the pandemic, this year we expect a lot more shareholder resolutions and potential opposition to remuneration plans. So I'd say the main topics to look out for will be CEO compensation, climate-related disclosure and any social topics that might be relevant to particular businesses. So those will be the main drivers of conversation in the going AGM season.

JULIE-ANNA NEEDHAM: Great. Claudia, thank you very much.

CLAUDIA DE MEULEMEESTER: Thank you for having me.

JULIE-ANNA NEEDHAM: That was Claudia De Meulemeester speaking to me Julie-Anna Needham. Thank you for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review and subscribe to the podcast.

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