ESG and shareholder activism a tsunami is coming to Silicon Valley

With the increased focus on environmental, social, and governance (ESG) issues in recent years, it is easy for businesses to believe that the ESG tsunami has crested. However, we are simply at the beginning of an ESG tsunami that is sweeping Silicon Valley. ESG concerns have gotten a lot more attention than they have in the past few years, and it is not only in the technology sector. This has mostly been influenced by broader societal changes, such as the increased emphasis on climate change. However, demands from various investor groups (including pension funds and a younger generation of individual investors) to spend greater attention on such concerns are speeding up the ESG wave at corporations, particularly public companies.

As a result, institutions attempting to attract capital from these investors, such as mutual funds, venture capital funds, and hedge funds, must focus more on the ESG dimension in order to remain competitive.

While the growth in focus on ESG has been slow over the past few years, successful campaigns by shareholder activists at energy corporations in the spring of 2021, most notably a notable proxy challenge headed by Engine No. 1, boosted investor influence on ESG problems. For the first time, investor pressure over an ESG problem (in this case, climate change) resulted in a significant shift in a public company’s board of directors. Activist shareholders are using new and powerful ESG themes to change control and strategy at public businesses as an advantage in their activist campaigns.

Investor pressure on governance concerns (the “G” in ESG) in public firms has traditionally followed a pattern of tackling issue after issue, winning on one and then moving on to the next. The shift of public businesses to annual elections for all directors for a one-year term rather than staggered elections of a subset of the directors for a three-year term — a so-called “classified board” — is an excellent example of this.

In 2007, a classified board found in 55% of the S&P 1500s incorporated public corporations. After years of shareholder activism, this reduced to 26% of S&P 1500 businesses by 2021, with the categorized board nearly dead at the largest public companies, which account for a bigger part of investors’ portfolios. As a result, the investor push for annually elected boards is nearly complete, and the investor spotlight shifts to other topics. We expect the same thing to happen here. Aeisha Mastagni, a portfolio manager at CalSTRS and one of the architects of Engine No. 1’s proxy contest this spring, indicated at a recent conference that she hopes the contest would act as a wake-up call for all firms, not just energy companies. Therefore, if tackling climate change in the energy industry was a no-brainer, the issue now is, “who’s next?”