What different types of actions can activists take?

In the US, shareholder activists that are focused on Environmental, Social, and Governance (ESG) issues most commonly seek to put non-binding proposals to a shareholder vote at annual shareholder meetings. These non-binding proposals have recently focused on civil rights, human rights and racial justice, workforce diversity, political spending and lobbying, climate-related targets and goals, and sustainability issues. Shareholder activists may also use ESG as a wedge issue in order to appeal to a broader audience when seeking to change the composition of the board of directors by proposing activist-nominated directors for election at annual shareholder meetings.

In the UK, activities are similar to those in the US, although sometimes proposals put to the Annual General Meeting (AGM) vote are binding (such as resolutions to remove directors). We also see private engagement with boards in advance of AGMs to seek to persuade a company to put forward an ESG resolution, failing which the minority shareholders take steps to require resolutions to be put at the AGM (which a shareholder can do if they hold more than 5%).

Shareholders in the UK are also mounting public campaigns against companies to demand change. For example, we have seen campaigns waged by institutional shareholders announcing that they will vote against boards that are not diverse. This trend towards making demands public can also be seen in the increasing number of open letters sent by institutional shareholders to company boards, particularly on climate-related matters.

In the UK, the first court cases on ESG issues are now emerging – a recent claim (which was unsuccessful) was brought by a non-governmental agency (NGO) against the Listing Authority of the Financial Conduct Authority for failing to ensure that a prospectus contained adequate disclosure on climate risks. There have been also claims brought against directors for a failure to exercise their duties as directors by not considering environmental matters appropriately. To date, no decisions have been rendered in these cases.

What is the situation in different regions and what can be expected to be transferred to other regions?

In the US, recent and prospective regulatory developments (e.g., the SEC’s proposed climate change disclosure rules, prospective human capital disclosure rules and enforcement prioritization of greenwashing claims) may provide shareholder activists with additional information with which to criticize companies.

There has not yet been a major wave of ESG-related investor litigation in the US, although most companies are concerned about ESG risks. However, some early trends can be observed:

• The most common ESG-related litigation is based on alleged false disclosures in securities filings. Recent lawsuits have alleged that statements in proxy materials about companies’ commitment to diversity were false and misleading because there was a lack of diversity and/or the companies failed to follow through on promises to increase diversity. The SEC reached a US$35 million settlement with a gaming company in February 2023 after the company failed to maintain disclosure controls related to workplace misconduct. This settlement came after a wave of shareholders advocated for leadership changes within the company and its board.
• Because statements do not have to be made in a securities filing to be actionable, plaintiffs can sue based on alleged misstatements in press releases, earnings calls or ESG reports.
• However, the defenses to such claims are well established, for example, these claims may be dismissed if the statements are mere “puffery” or statements of aspirations, opinion or belief.

Derivative lawsuits have been threatened or brought against boards of U.S. companies alleging breaches of fiduciary duties. For example, the board of a large technology company was sued for breaching its fiduciary duties in connection with a lack of diversity. However, the claims were dismissed.

On the other side of the divide, anti-ESG activists have threatened litigation if a company adopts ESG initiatives. There are broader anti-ESG political efforts in the US that are heightening such actions. For example, former Labor Secretary under President Trump—Eugene Scalia—is representing plaintiffs suing three New York Public Pension Funds over claims the funds breached their fiduciary duty by divesting in fossil-fuels. Furthermore, Republican Attorneys General have been exploring consumer protection, antitrust and non-profit claims against certain companies over their ESG practices. Time will tell whether these claims have legal merit.

In addition to potential shareholder class and securities derivative actions, there are other examples of ESG-related claims being filed in the US, including false and deceptive practices claims related to product marketing and alleged “greenwashing”, employment discrimination claims, and violations of human rights and related statutes.

The situation in the EU/UK is not as tense, as carbon emissions and other ESG issues are increasingly regulated by the EU and some member states. There is a general consensus, that companies need to adapt their business models to fight against climate change. The discussion is thus not as politicized.

So far, there have been some notable successful investor driven ESG campaigns especially in the UK. For example, ShareAction, a non-profit organization, has lobbied one company there to ensure employees receive a minimum wage and a food company to stop selling unhealthy foods, and we are also seeing institutional shareholders get behind these demands as part of the consortium led by the NGO.

Australia has seen a significant increase in shareholder activism for non-financial reasons. In particular, climate change advocates have managed to garner the support of proxy advisors and institutional investors, including both global fund managers and local industry superannuation (pension) funds in Australia, which control the lion’s share of the registers of Australian companies.

In one case a well-funded venture purchased a block of shares of a company and was able to successfully stop the proposed demerger of the company to accelerate the closure of coal-fired power plants by a decade, and propose and support the nomination of 4 candidates to be elected to the company's board on a decarbonization ticket.

In Asia, specifically in Hong Kong, Greater China and Singapore, we see significantly less shareholder activism. This is due to the fact that the composition of the share register of listed companies in Hong Kong and Singapore is often concentrated amongst a small number of family offices, and there is also a greater cultural reluctance towards protesting and activism.

Anti-ESG Activism as a US Development?

In the US, backlash against ESG agendas saw an increase in 2022. Anti-ESG activists emerged, targeting several large-cap companies for their human capital policies (primarily diversity), engagement with political issues, and purported failure to focus on maximizing shareholder value. While the volume of anti-ESG proposals has more than doubled in the last three years, support levels among shareholders voting on such proposals remain very low at generally less than 5%.

Some might argue that Republican-led anti-ESG efforts in the US are a response to leftist activists’ efforts and their relative success. This may lead ESG activists to increase their efforts to push for a transition to sustainable energy, pay equity, and diversity.

To avoid controversy, some companies have responded to anti-ESG pressure by reducing the frequency with which they disclose or mention their ESG goals. However, increased ESG activism in the form of shareholder proposals or otherwise may make that strategy less effective as companies may be forced to articulate their positions on ESG. Companies should consider articulating their position consistent with the actions that they are actually taking, and making the case for why doing so is tied to enhancing shareholder value over the long-term.

In Europe, anti-ESG campaigns have not yet gained any traction. In APAC, however, more than half of investors expect to see increased political pressure against ESG investing in their own markets, according to a recent survey.

Is there a lull or a rise in ESG based global shareholder activism and, if so, what could be the reason?

In the US:

• When comparing 2023 to 2022, shareholder proposals focused on environmental issues increased by 8%, and shareholder proposals focused on social/political issues increased 5% (and remained the largest category of submissions). Growth has declined compared to the previous year, when the respective numbers were 38% and 17%. Also, governance proposals continued to decline, down 11% this year. This reinforces the shift we have seen over the last few years in the focus of shareholder proposals from governance topics to environmental and social/political topics.

In the EU and the UK:

• The number of “Say on Climate” resolutions for UK companies has dropped from 16 in 2022 to 8 in 2023, a 50% decrease – it is not yet clear why this is happening, but it is certainly an indication that there has been less of an incentive for companies to put forward a Say on Climate proposal in the 2023 AGM season. Whether this is because investors have not been putting pressure on companies to hold such a vote, or because companies are hesitant to put forward a voluntary Say on Climate vote due to increased public scrutiny by investors, is up for debate. However, it should be noted that there are companies that have previously put forward a Say on Climate resolution, but only plan to put such a proposal to a shareholder vote every three years, which may be one of several factors that helps explain the drop in the amount of proposals.
• However, support for the Say on Climate resolutions remains at a steady level – 91% in 2022 compared to 91.6% in 2023. For the third year in a row, the utilities sector continued to be the sector with the most Say on Climate votes.
• Across Europe, the number of campaigns remained largely stable. However, 12% of all activist campaigns so far in 2023 were focused on environmental goals, compared to just 4% in 2019.

Australia appears to be an exception at the moment with fewer demands made compared with the same period last year.

What can companies do to prepare and mitigate risks?

Analyze potential areas of weakness. It is important to have an understanding of vulnerabilities and risks in key areas of compliance such as environmental, product safety and human rights. Any violation of key legal protections may attract attention from an activist or other adversary and expose the company to legal liability and/or reputational damage. Many companies have undertaken a multi-jurisdictional compliance review of key compliance areas to ensure that the company’s conduct not only complies with the relevant laws, but is also consistent with its values and public statements. Our investigation and regulatory specialists assist companies in these reviews.

Be accurate and transparent: Companies may be more vulnerable to ESG activism when their ESG goals are not sufficiently transparent and measurable. Activists or other adversaries may target companies they suspect of greenwashing. Disclosures (on ESG and other issues) should be accurate and aspirational statements should be based on achievable plans and presented with appropriate cautionary language.

Authored by Olaf Gaertner, Marinus Hamberger, Antonia Croke, Nicola Evans, Karl Racine, Allison Wuertz, and William (Bill) Regan.