A new report on ESG activism in 2022 from Insightia notes that, in the space of a year, support for ESG activism proposals has begun to dip. Separately, the aviation and airlines industry has jumped to the top of the list as the industry most vulnerable to activism in Q2 2022, according to new research from FTI Consulting.
‘The second edition of our special report on ESG activism arrives in a surprisingly different environment from the first, even though just over a year has passed,’ Josh Black, editor-in-chief at Insightia, writes in the introduction to the report. He notes that although there has been a ‘sharp rise in ESG-themed proxy fights this year, and in other forms of ESG and remuneration-led activism… the success of these demands has been mixed.’
Black adds that although ‘it would be easy to dismiss the dip in support for ESG topics as a byproduct of rising energy prices and inflation [and that] a tougher economic climate may sharpen the trade-offs required for meaningful ESG improvements… investors are demanding greater disclosures and board changes in extreme cases, while also being more discerning. Investors are looking at ESG with a fresh eye keenly focused on materiality.’
Black points to a number of ‘unwinnable’ or ‘failed’ campaigns by activists, such as:
- Legion Partners Asset Management against Guess, despite what he calls ‘a compelling link between ESG and financial performance’
- Carl Icahn’s argument about animal welfare, described by Black as ‘a peripheral issue, even in the ESG world’ at McDonald’s and Kroger
- Starboard Value’s campaign against Huntsman, where Black notes the activist ‘was arguing with a stock price that was already on the up.’
But Black warns companies not to use such ‘poor target selection’ as a reason to become complacent about ESG. New regulations in the US, including the new universal proxy and SEC requirements of greater disclosure on compensation metrics as well as expected mandates around environmental disclosures, in addition to the EU’s Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive set to come into force in 2024 and 2025, respectively, are likely to fuel campaigns.
‘Anytime there is a new regulation, a crop of shareholders will rise up, looking for companies to make foot-fault errors or, even worse, develop policies with which they subsequently fail to comply,’ law firm Vinson & Elkins notes in the Insightia report.
MOST VULNERABLE INDUSTRIES
‘Though the demand for air travel has returned as serious worries about the pandemic are subsiding, airlines have not been able to scale up operations accordingly,’ FTI Consulting says in a statement accompanying its report. ‘As a result, network fluidity has struggled and per-unit costs remain elevated relative to airlines’ previous guidance, making the aviation and airlines industry more vulnerable this quarter.’
The industry climbed 13 spots in Q2 2022 to be named most vulnerable to an attack from a shareholder activist.
The insurance industry also jumped 13 places, to enter the FTI top 10. ‘While share price performance has been solid over the past year, insurers have noted multiple pain points stemming from inflationary pressure, such as increased costs related to claims and wage inflation required to retain and recruit talent,’ the firm notes.
Another sector at risk is real estate, according to FTI’s research. The industry climbed 11 places in Q2 2022 ‘as increasing mortgage rates and concerns of a housing market crash [are] undermining investor confidence in the industry.’
Researchers add, however, that ‘despite its increase in activism vulnerability in 2Q22, high demand for housing combined with underproduction keeps the real estate industry in the middle of our list of 36 industries.’
Not all sectors saw an increase in activism vulnerability, of course. One notable easing was for the construction industry, which saw its vulnerability fall 10 places over the quarter ‘as the industry continued to post strong profits, likely driven by strong residential and commercial demand and US President Joe Biden’s 2021 Infrastructure Bill,’ according to FTI.
But the firm adds that ‘these results may be difficult to replicate in the coming quarters as inflationary pressures bring higher materials costs and higher rates, which could compress margins and dampen demand.’