The role of business is to make money for its investors. Or, at least it was until recently. Now, investors want more. Corporations face growing pressure from their shareholders to resolve issues of inequality, environmental crisis, and human rights abuse.
A couple of weeks ago, Exxon was unable to resist the appointment of two new pro-climate board members nominated by a minority investor. This is not an isolated event. Danish organization Follow This is behind the so-called revolutions at BP and Shell. The activist’s position convinced 21% of BP’s investors and twice as many at Shell, that the oil producers must drastically reduce their carbon emission production. And while the votes were not enough to tip the balance in favour of climate activists, both companies will have to account for why they did not accept the proposals. Similar developments are taking place in Norway’s Equinor and France’s Total.
Nowadays, in addition to climate action, investors expect the business to be proactive about racial inequality, discrimination and human rights. In 2019, Apple had to explain its decision to ban an application allowing fast people gathering during Hong Kong protests. Some business titans were named responsible for human rights and environmental violations: Airbus for selling arms to Saudi Arabia and Yemen that led to civilian casualties, Coca-Cola for water pollution in India, Daewoo for children labour, Nestle for animal testing and the breach of labour rights.
Do you think some business won’t be affected by this trend? I doubt it. A survey published by a leading Swiss bank shows that 90% of wealthy investors would like to align a financial portfolio with their moral values. The research points that since the early 2000s, the volume of investor activism has increased nearly five-fold. Along with the US, investor activism is gaining momentum in Latin America, Europe, and Asia. It touches every industry: technology, pharmaceutical, financial, and consumer sectors.
The activists can also count on regulators tightening their grip. Latest example is the Dutch court that ordered Shell to cut its carbon emissions by 45 per cent by 2030 from 2019 levels. More than two times faster than Shell initially aimed.
It would be wrong to think that all of a sudden investors have become Samaritans. They are, of course, interested in getting a return on their investment. Engine # 1, the hedge fund that provoked a coup d’état in ExxonMobile describes its rational in the first place in economic terms, arguing that the company was stalling on the need to move away from fossil fuels, which would lead to investor capital losses. Yet their second objective is to make environmentally friendly investments. Leading investing firms like Blackrock and Vanguard, are also actively pushing forward these politics, along with 87 asset managers who signed Net Zero Asset Managers initiative. Their goal is to back efforts to limit global warming to 1.5 degrees Celsius by targeting net-zero emissions by 2050 across all their holdings.
To respond to attacks on underperformance, value losing investments, and non-transparent decision-making processes, some companies introduced environmental, social, and governance (ESG) indicators. However, this performance matrix cannot shield the private business from current accusations of nurturing society’s existential problems. For that they need to rethink the very nature of the way they run the business.
Withdraw from dirty business.
Get your skeleton out of the closet before others do. Sooner or later, under the pressure of public opinion, investor activists, and stricter government measures, companies must withdraw from projects stained with human rights abuse, exploitation, corruption, and environmental destruction. Any delay cleaning the investment portfolio risks damaging the company’s image and, naturally, its market price. Blackrock was right when it decided to divest from Nevsun company due to alleged use of forced labour in its Eritrean mines. Even if, in the short run, that might translate into a financial loss, in the long run it saved the trouble of explaining itself in the court and repairing its name.
Be open.
The company must demonstrate its progress toward the resolution of existential threats. It will no longer be enough to show a couple of pet, good-sounding PR projects to buy necessary credits. Instead, the company must prove that it understands the urgency of social and environmental threats and show what it does to fight them from within and across its investment holdings.
Empower the Board.
The more diversified the Board is, the better. Members with active social stances will be able to suggest investment solutions that are both respectful of society’s pressing issues and of the company’s profit.
Don’t underestimate minority investors.
The example of Engine # 1, which orchestrated Exxon Mobil havoc, proved that the visibility and market weight of an investor activist doesn’t impede his success. Individual shareholders are not negligible. Today, they can raise their voices through digital systems developed by fund platforms. A number of organisations stand ready to provide research, training, or representation in AGMs, such as ShareAction in the UK, Ethos in Switzerland, or As you Sow in the US.
The power of investor activism that can stir the wheel of corporation, is neither possible to stop nor ignore. The business should be prepared that its work will be under critical scrutiny all the time. Making a profit at any cost, without regard to how it affects society and the world at large, is simply not possible.
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