Demanding Charity: ESG Activism Campaigns On the Rise

Remember the Golden Rule: “Do unto others as you would have them do unto you.” Or is the Golden Rule “Whoever has the gold, makes the rules”? As we move further into the twenty-first century and our world becomes more interconnected, it seems these two golden rules are coming together as one. Over the past century philanthropic giving has increased dramatically. For every foundation that existed in 1930 there are now five hundred. The growth in foundation assets in that time has gone from less than a billion dollars to more than eight hundred billion dollars. Those who have the gold seemingly also want to make the world a better place.

In finance, the effects of this increased benevolence can be seen in the uptick of ESG investing. In 2017, Morgan Stanley polled investors and found that 86% of millennials were interested in sustainable investing. According to a McKinsey study, sustainable investments have increased to 26% of professionally managed assets in 2016. As their clients begin to care more about the world around them, so must asset managers. For most institutions, ESG investing comes in the form of investing only in companies that are environmentally and socially responsible. However, some investors take this a step further by launching activist campaigns to force companies to comply with these ideals.

Social, Environmental, and Political Governance Demands Are on the Rise

Over the past five years, campaigns with a social, environmental, or political governance demand have risen steadily. Since 2014 there have been 253 campaigns in the United States spanning multiple industries, driven by a record number of exempt solicitation filings encouraging shareholders to vote in favor of ESG-related shareholder proposals.

What meaningful impact could these campaigns have on the market and how likely are these campaigns to make a difference?

Green Century Targets Darden Restaurants

Let’s look at one specific example: Darden Restaurants and Green Century Capital Management. Green Century is an investment advisory firm that manages environmentally responsible mutual funds and is wholly owned by a consortium of non-profit advocacy organizations. In August, Green Century urged shareholders to vote for its proposal which demanded that Darden Restaurants issue a report on the feasibility of adopting a policy to eliminate the use of medically important antibiotics for disease prevention in its supply chain.

Green Century’s rationale for this measure included reputational risk, consumer preference, and public health. Additionally, they pointed out that major competitors to Darden have already moved beyond current federal guidelines in this area, including Panera, Chipotle, and Cheesecake Factory. If Darden were seen as an industry laggard, Green Century argued that they would lose customers based on shifting preferences to socially and environmentally sound business practices.

Darden’s main food suppliers can be seen below. Public companies themselves, the shareholders of these companies have a vested interest in the result of Green Century’s campaign against Darden.

Suppliers to Darden Restaurants

Looking deeper into these individual suppliers, we find that Sanderson Farms had a similar proposal brought against it by activist As You Sow in February 2018. The proposals brought by both Green Century and As You Sow failed to pass, so the companies continue their antibiotic practices for the time being.

Historically, these proposals have garnered relatively low support with minimal pass rates, but should companies and stockholders alike expect a change in the future? At Darden, Green Century has made this proposal at the past three shareholder meetings, and it has been steadily gaining support. In 2016, the proposal only garnered support from 8.6% of total votes cast; in 2018, the measure received 37.5% support. The proposal by As You Sow against Sanderson Farms had 31.5% support from shareholders in 2017, but this rose to 43.1% in 2018.

So far in 2018, there have been eight proposals on social/environment issues that have passed. This may not sound like a lot, but this is the highest annual number on record, and the year isn't over yet. While support for proposals on environmental and social issues is lower than for other categories, the numbers are rising. For both categories, year-to-date support in 2018 is the highest on record.

Average of For Votes as %Yes/No

These numbers seem to indicate a rising likelihood of successful ESG activist campaigns in the future, which may also be accelerated by increasing levels of investable income held by millennials and the shifting tides of shareholder preferences.

Citizens and shareholders are more concerned than ever about the environmental and social impact of our actions and our investment decisions. While some companies go above and beyond government-mandated regulations on their own, presumably for the good of their stockholders, others are waiting to be forced into action by investors who claim to be looking out for the good of all.

Mike Coronato, Senior Content Manager, Corporate Transactions Development, also contributed to this article.