ACTIVIST INVESTORS have menacing tools of the trade. First comes the phone call, informing a boss of the arrival of a new one in the share register. Then there is the set of slides, listing all the failings for which the boss is supposed to be responsible. Sometimes body language when predator and prey first meet can be the most unsettling. In 2015, when Trian Partners, one of the world’s largest activist funds, took a $ 2.5 billion stake in GE, an American conglomerate, its founders, Nelson Peltz and Ed Garden, wore bespoke suits – with sneakers – when they first met Jeff Immelt, then GEis the boss. “This note of informality amplified their power”, two the Wall Street newspaper reporters wrote in a recent book, “Lights Out”. “In the midst of the fine arts on display [at GE’s headquarters], the sneakers were a reminder of their sovereignty.

It’s easy to be cynical about such displays of calculated power. Some ridicule shareholder activism as a game of smoke and mirrors, in which the hedge fund bombings loudly call on executives to do what they were going to do anyway, and executives use activists as a cover for unpopular measures such as asset sales and job cuts.

It is too hard. Admittedly, not all the campaigns work (that of Trian has not yet GE). But often a little nastiness helps shake up lazy charts and ensure that cash flow is better spent. Although the covid-19 pandemic has reduced the number of campaigning activists, two major global trends mean they are sure to rebound. One is the growth of funds that track stock indexes. Such passive investments can allow managers to extricate themselves from poor performance; corporate activists are helping to rectify this. The second is climate change, which is forcing companies to rethink their long-term strategies with potentially huge consequences for returns. These two trends are reflected in the rapid growth of the environment, social and governance (ESG) invest — and with it ESG activism.

Of this new breed, none caused a greater sensation than Engine No.1, an activist fund from San Francisco. It was only founded last year but has just successfully installed three directors on the board of ExxonMobil, arguing that the US oil giant is not preparing for a clean energy future. It was an impressive feat (“supercool” as one veteran gadfly put it). It also raised serious questions. Have shareholder activists turned into climate activists? Will the uncompromising emphasis on returns be replaced by soft checkboxes? Will the boardroom buddies now be seated in the midst of awakened eco-warriors? Encouragingly, even ESG activists themselves bicker over which of their tactics is more shareholder or climate friendly.

If anything, big activist hedge funds get nicer just as newcomers get nasty. Former bullies like Elliott Investment Management, whose founder, Paul Singer, has been described by Bloomberg reporters as “the world’s most feared investor,” seem to have softened. Elliott recently made peace with two personalities CEOs, Jack Dorsey at Twitter, a social media company, and John Stankey at AT&T, a telecoms giant, although it had previously called for their removal. He took a big stake in Dropbox, a software company, but has so far refrained from launching a public campaign against him. The older he gets, and the bigger his targets, the more he tries to take a “statesman” approach, including softening his language. Although he began to deploy ESG criteria in his campaigns, as have other veterans such as The Children’s Investment Fund, a London-based $ 30 billion hedge fund, he still focuses primarily on increasing financial returns and sometimes moves quickly in and out of positions.

the ESGConcentrated newbies say their horizons are longer, as do companies that have topics like climate change high on their agenda. But if you expect them to be more cuddly than their ancestors, think again. Because they lack the capital to buy large stakes, their attacks must resonate with investors large and small to have an impact. Engine No. 1, which held just 0.02% of ExxonMobil shares, achieved this by focusing on the lack of energy experience on the supermajor’s board, which he blamed for the underperformance of the company compared to its peers. The appointed directors of the fund have all held senior positions in energy. This makes them better guides for deploying capital during the fossil fuel transition, he argued. It has helped ExxonMobil boss Darren Woods have so little credibility in this area that investors have ignored his calls to dismiss the rebels.

The ardor of the new militants extends to each other. Engine No.1 criticized the ExxonMobil board of directors for its lack of “a successful and transformative energy experience”. This likely includes Jeff Ubben, a seasoned activist who recently created Inclusive Capital Partners, a ESGand won a spot on the ExxonMobil board earlier this year. Mr Ubben, former boss of ValueAct, a 21-year-old fund that believes more in negotiation than confrontation, welcomes the changes on the board. But he regrets that Engine No.1 launched its proxy campaign before consulting the board of directors and management. He notes that he left it to the board of directors to develop a plan to turn the business around.

Bluebells and black eyes

Criticisms aside, both insist they focus on shareholder performance. One insider describes Engine # 1 as “a shareholder advocate for long-term value, not a climate advocate.” Mr Ubben fears focus on returns will wane as index funds hunt ESG investors, influencing proxy contests. A new activist firm, Bluebell Capital Partners, went so far as to target Danone because its focus on sustainability was not matched with adequate financial returns. He helped oust the former boss of the French dairy giant, Emmanuel Faber, earlier this year. “ESG cannot be an excuse for a company to underperform, ”says Giuseppe Bivona, one of the co-founders of Bluebell. Milton Friedman, the late Nobel Prize winning economist and shareholder value advocate, whose knee activists have always bent, would be smiling. â– 

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This article appeared in the Business section of the print edition under the headline “Horseflies in the Conference Room”