Hedge Fund Activists Pivot to ESG

A handful of “name-brand” activists, including Trian Partners and ValueAct, have started taking on environmental and social issues at public companies, according to Cerulli.

Waldo Swiegers / Bloomberg

Waldo Swiegers / Bloomberg

Early last year, alumni of Blue Harbour Group launched a new activist hedge fund, Impactive Capital, with a $250 million anchor investment from the California State Teachers Retirement System. Its strategy: environmental, social, and governance advocacy.

Impactive is part of what a new Cerulli Associates report describes as a “small, but noticeable trend in hedge fund activists adopting ESG-related issues as a focus for activism.” Environmental, social, and governance concerns have been taken up in recent years by “name-brand” activists including Jana Partners, Trian Partners, and ValueAct Capital, according to Cerulli.

Jana Partners, for example, partnered with CalSTRS in 2018 to pressure Apple’s board to address the potential negative effects of iPhone use on children. Meanwhile, Trian Partners has pushed companies including GE, DuPont, and Danone to promote workplace diversity, adopt supplier codes of conduct, and reduce emissions and waste, according to the report. Last November, London activist hedge fund firm TCI Fund Management warned public company directors it will vote against them if they do not disclose their carbon dioxide emissions.

The uptake of ESG issues by known hedge fund activists comes as more institutional investors incorporate environmental, social, and governance factors into their investment processes. A Callan survey of 89 U.S. institutional investors found that 42 percent had included ESG in their investment decision-making processes — almost double the proportion of investors who reported using ESG factors in 2013.

[II Deep Dive: There Are 2,698 Signatories to the United Nations’ ESG Code. Has It Changed Anyone’s Behavior?]

Cerulli, meanwhile, found that asset managers are anticipating high demand for ESG strategies from institutional clients over the next two to three years, with 98 percent expecting moderate-to-high ESG demand from endowments and foundations. Around four out of five asset managers expected similar levels of demand from public pension funds and hospital systems.

“Hedge fund activists are likely to play a particularly important role for large asset managers and institutional investors that invest broadly across companies and thus may not be positioned to engage, actively monitor, or have their voices heard at every company,” Cerulli director Michele Giuditta said in a statement. “In the case of some corporate issues such as sustainability, the relationship between hedge fund activists and asset managers could become highly complementary.”

Although the Cerulli report described ESG activism by hedge funds as a currently “niche” strategy, Giuditta suggested that capital and shareholder support are “likely to gravitate to these existing players,” which could encourage other hedge funds and asset managers to take on ESG issues.

Still, “the need for new activists to create a track record of success and a credible activist playbook may act as meaningful barriers to entry,” she added.