Q&A: Responding to ESG activism


Financier Worldwide Magazine

May 2019 Issue

FW moderates a discussion on responding to ESG activism between Alex Heath at Edelman and Peter Montagnon at the Institute of Business Ethics (IBE).

FW: What do you consider to be main trends in environmental, social and governance (ESG) activism in the last 12 months or so? To what extent are you seeing greater activity in this space?

Heath: Environmental, social and governance (ESG) activism is absolutely on the rise. It is becoming increasingly difficult to find an institutional investor without an active ESG policy and engagement approach – without one, they risk losing opportunities with some of the world’s largest clients. In the past 12 months we have also seen a greater embrace of the ‘E’ and ‘S’ in ESG. Investors have long seen ‘G’ as a place to find alpha, but there is increasing comfort in engaging on environmental and social issues as well. In 2017, environmental and social resolution filings surpassed governance filings for the first time. That trend continued in 2018 and appears to be carrying into 2019.

Montagnon: There is no doubt that activity has increased as investors and companies respond to public and political pressure. One important development is the formation of investor coalitions to persuade companies to consider the long-term impact of their activities. An example is the pressure successfully applied to Glencore to cap its coal production.

FW: Why are investors becoming increasingly interested in ESG issues? In terms of ESG narratives, what are the core areas of concern for investors?

Montagnon: A good reason why investors are interested in ESG issues is that they have realised that respect for the environment and society helps companies secure long-term value. For example, the problems around Boeing’s 737 Max have had a large impact on the value of the company and raise questions about the company’s approach to lobbying and certification. A bad reason is when investors and companies simply give in to unelected single issue lobby groups. We are wary of activism where this is the motive.

Heath: At this stage, interest seems to be driven by two forces. The first is a strong business case. Studies have circulated for decades on the ability of ESG to contribute to long-term growth and value, but the volume of evidence around financial returns is becoming increasingly irrefutable. The second force is peer pressure. In the past two years, major financial figures, such as Larry Fink, CEO of BlackRock, have come forward to endorse the importance of ESG as a tenet of mainstream investing. For institutional investors, it is starting to be perceived as risky not to integrate ESG. The concept of materiality has also broken through for investors. We are now seeing investors assessing the ESG issues most material to their portfolio companies and making investment decisions based on those factors. Companies need to have a clear approach on material issues and to actively communicate that approach to investors.

Good governance requires boards to consider and shape what drives behaviour in their companies. Activists may have a role when this is not working, but it is not the only way of making companies function better.
— Peter Montagnon

FW: In your opinion, how prepared are companies and their boards to respond to rising ESG activism? What more should be done in this regard?

Heath: The boards of many large cap high-profile companies have already started to work towards advancing and disclosing their ESG approaches. Smaller companies with lower public profiles and tighter resource constraints are less likely to have made ESG a priority and therefore are generally less prepared to withstand scrutiny of their practices. As larger corporates improve their efforts, the smaller companies with less evolved ESG approaches will appear progressively more out of step with best practices and be subject to criticism. The first step for these smaller companies is to ensure they have an articulated purpose statement, true to their values and core principles, that clearly defines the company’s role in society and why it matters. Once that positioning is in place, the next step is a materiality assessment. Companies should determine the most material ESG issues and take action on those issues, prior to an activist resolution.

Montagnon: Companies are increasingly aware of their impact on society and the consequences of this for their business, though there is some way to go. Boards now face new disclosure regulations whereby they will be obliged to state how directors have taken account of Companies Act requirements on them to take account of employees, customers, suppliers and other stakeholders in their decision making. This should help the process. It is much better when companies adopt a considered approach because they realise it is good for their business than when they are simply reacting to pressure from lobby groups without any sense of long-term strategy.

FW: What constitutes a typical ESG strategy? To what extent does substandard corporate governance at a company make an activist approach more likely?

Montagnon: The starting point for us is determination of values and a consensus around the company’s purpose based on those values. That is what drives behaviour. Where a company is applying ethical values, it is likely to take its broader responsibilities seriously. Good governance requires boards to consider and shape what drives behaviour in their companies. Activists may have a role when this is not working, but it is not the only way of making companies function better. Indeed, overreliance on activism which leads to a knee-jerk response by boards may lead to distorted priorities. Boards should have thought through their priorities in advance and be able to defend them.

Heath: An effective ESG strategy should help companies capitalise on opportunities and mitigate risks that are most material to their business. Although every company is unique, ESG does have a common overarching theme. ‘Environmental’ means ensuring sustainable development, addressing climate change, and minimising waste and pollution. ‘Social’ means improving working conditions, enhancing employee relations, increasing diversity, upholding human rights and supporting communities. ‘Governance’ covers executive pay, tax strategy, board diversity, ethics, compliance and structure. The evidence clearly demonstrates that poor corporate governance, including excessive executive pay, will attract activists, especially while the company has underperformed financially. Corporate malfeasance, such as misuse of company assets, will almost assuredly bring demands for the removal of the offending executive or board member. Structural board entrenchment, such as staggered boards or bylaws that limit removal of directors, is out of synch with acceptable governance standards and will be attacked by activists.

FW: At what point in the activism process should a company’s board prepare to meet with activists? What should both sides be looking to obtain from such a meeting?

Heath: Presuming that the activist presents a reasoned, well-articulated proposal, companies should engage with the activist as soon as the board has formulated a thorough response, inclusive of scenario planning for multiple eventualities. The activist will use the first meeting as a gauge of the company’s sincerity to commit to change. It is easy for a company to issue a press release citing its commitment to a particular issue; the activist will be looking for verifiable steps with a committed time frame for action. The company will be assessing the ‘true ask’ of the activist. Management will want to determine the actual risk/reward of yielding to or rejecting the activist’s demands. The company will need to consider the tangible costs of compliance and the reputational impact, along with the distraction of dealing with an ongoing activist campaign.

Montagnon: On a day-to-day basis, the executive should have lead responsibility for stakeholder relations, but boards need to be sure that the process is working properly and that the executive is dealing appropriately with issues as they arise. They need to have monitoring and oversight processes in place. This may sometimes involve non-executive directors meeting stakeholder representatives, but they should not seek to usurp the executive role.

When handling ESG activism, companies should ensure their actions are guided by their own corporate responsibility strategy. If the policies put in place are not aligned with the company’s core strategy, they are bound to fail.
— Alex Heath

FW: What key steps should companies and their boards take to handle ESG activism? How important is it to promote good corporate governance and recognise the merits of an activist approach?

Montagnon: Boards need to take a forward-looking approach, be properly aware of the risks and opportunities that arise from environmental and social issues and make sure they are addressed in a timely way. Another important challenge is good communications, including social media skills. It is no good doing the right thing if nobody knows about it. Activists will not usually target companies with a considered and consequential approach.

Heath: An organisation’s corporate responsibility matters more than ever to its customers, employees and investors. When handling ESG activism, companies should ensure their actions are guided by their own corporate responsibility strategy. If the policies put in place are not aligned with the company’s core strategy, they are bound to fail. The board and senior management should review the existing company policies, programmes and partnerships versus best practice and address outmoded policies or outright gaps to fortify defences and advance differentiation. Boards need to be aware of which ESG activists have been most effective and how prior campaigns have played out. Creating an ESG activist defence scenario analysis is the proven method of improving readiness and reducing response time. If corporate leadership ignores the merits of an ESG activist’s arguments, they do so at great risk to their organisation.

FW: What are your predictions for ESG activism over the coming months? What issues do you expect to shape activist activity – and the corporate response?

Heath: In the coming months, all signs point to several current trends continuing and deepening. We expect to see an increasing focus on materiality, greater scrutiny on environmental and social issues, and engagement by investors not just in the form of shareholder resolutions but through direct conversations. From an environmental and social perspective, climate change is likely to continue to lead the way as top of mind for investors. Within governance, we will see increased calls for diversity at the board level, the leadership level and across the general employee population. However, the drive to materiality will also dictate other lines of inquiries, such as technology companies facing serious questions on data privacy and responsible marketing, and food companies on farmers’ rights. Companies must respond to these trends with more and better ESG disclosure, a greater focus on materiality in order to meet investors’ decision-making needs, and real commitments backed by action to deliver value for investors and for society.

Montagnon: Given the employment implications of a weaker outlook for the world economy, rising protectionism, possible Brexit disruption in the UK and the growing use of artificial intelligence (AI), the treatment of employees will remain important. Related to that is executive remuneration with specific reference to pensions and the gender pay gap. We believe that climate change will also be high on the governance agenda, as will the taxation of multinationals, especially the internet giants. Rightly or wrongly, there appears currently to be somewhat less focus on supply-chain issues.


Alex Heath leads the social purpose practice for Edelman in New York. His team works closely with clients to define, articulate, implement and activate purpose programming, including ESG strategy and communications. Prior to Edelman, Mr Heath was at MTV International’s global anti-human trafficking behaviour change campaign, handling partnerships with non-government organisations (NGOs) and government agencies. He can be contacted on +1 (646) 246 0297 or by email:

Peter Montagnon has been associate director at the Institute of Business Ethics (IBE) since September 2013, with responsibility for developing boardroom level discussion of corporate ethics and values. Previously, he was a senior journalist at the Financial Times for 20 years, before becoming director of investment affairs at the Association of British Insurers. In 2010, he joined the Financial Reporting Council as Senior Investment Adviser, with responsibility for corporate governance policy and investor community relations. He can be contacted on +44 (0)20 7798 6040 or by email:

© Financier Worldwide

©2001-2019 Financier Worldwide Ltd. All rights reserved.