Shareholders to CEOs: "Act on Climate or Else!"

Will The New (Green) Corporate Raiders Accelerate Progress?

Say you’re the CEO of a publicly-traded company in the Fortune 500. Chances are you’ve already made a net-zero commitment with a 2050 deadline. Thank you. Your company has also likely taken some real action. You’ve told your team to pursue all of the low-cost, obvious climate friendly moves. Good for you.

You’re not naive. You know your company has a very long way to go to zero out all of its carbon emissions. But you feel that you’re off to a good start. 

"We've got time," you think. 

Your focus shifts back to today’s seemingly more pressing challenges like supply chain problems that threaten your top-line growth.

But how much time do you really have?

A Quick History Lesson: Barbarians at the Gate

I started out as a rookie investment banker back in 1984. At the same time, the world of corporate finance began to change dramatically. "Corporate raiders" like Carl Icahn, T. Boone Pickens, Sir James Goldsmith, Nelson Peltz et al emerged seemingly from nowhere.  

The raiders bought big ownership positions in public companies. Seeking immediate stock price gains above all else, they insisted that boards throw out management teams, sell off under-valued divisions, slash staffing levels, buy back stock, and lever up (using a brand new and game-changing corporate finance instrument: junk bonds from investment banking upstart Drexel Burnham). 

Plenty of traditional businesspeople decried this activity (and, indeed, there were many excesses). But to no avail. Their protests didn't slow anything down.  

Almost immediately, rather than leave the action — and all of the quick profits — to these so-called "activist” hedge funds, “leveraged buyout’’ shops emerged. (Over subsequent years, in a smart PR move, these firms managed to get their sector renamed as “private equity.”)  These firms used the same tactics as the raiders but went even further, taking target companies private.  

One thing quickly led to another. It was all very messy — and exciting for a young banker like me. Some folks went much too far. Some even went to jail. But, net/net, corporate finance was changed forever. Today most public companies are organized to be much leaner and to operate with more highly leveraged balance sheets. Management teams are awarded big stock option packages to incentivize a sharp focus on the bottom line. The private equity industry is now huge. No public company can afford to ignore the interests of aggressive institutional investors.

Why do I bring all of this up now? And what does it have to do with climate change?  

I think history may be about to repeat itself. 

Here We Go Again 

I’ve been arguing for a long time that:  

  1. For most companies, decarbonization is the biggest business opportunity (and/or risk) they will ever face.

  1. But, many management teams are pursuing such opportunities too timidly. 

If I’m right, this is an invitation for a new kind of intervention by aggressive investors. But this time — in sharp contrast to the checkered history of past corporate raiders — it can be done with society's best interests in mind.  

Believe it or not, activist investors can be champions of climate progress.

Furthermore, while all of this is happening, long-term investors (i.e., pension funds, family offices, individuals) are clamoring for their investment managers to put their dollars to good use, particularly on the climate front. See the surge in capital flowing to climate and ESG funds. Such ESG investment capital can be harnessed to support climate-positive interventions.

So, let's consider the evidence that aggressive investors will take action and push for climate strategies:  

Some Very Recent History 

A few years back, one of the best of all-time activist investors, Jeff Ubben, founder of ValueAct, surprised the investment world by announcing he was leaving the extraordinarily successful firm he had founded to focus 100% of his investment activity on sustainability and other ESG themes. 

He founded the socially and environmentally conscious Spring Fund (disclosure: I'm an investor). In an interview at the time, Ubben observed that in a world awash with capital, traditional dealmaking would not succeed as in the past. Returns don’t flow to abundant resources. According to Ubben, “The scarce resource is human/social and natural capital. And so those companies that can… better address and think more deeply about environmental and social goals and needs, . . . that’s going to be where the breakout returns are over the next 20 years.” 

A few months ago, a new hedge fund, Engine #1, gained some notoriety by leading a campaign to add three climate-oriented directors to Exxon Mobil’s board. They followed Ubben who had quietly –  in a move right out of his playbook – already made an investment in the much criticized oil giant and bargained for a position on the Exxon board so that he could push management hard for a meaningful climate strategy. 

Engine #1’s success benefited from institutional shareholders like Blackrock voting in favor of replacing the old directors. ​​​This is another trend that seems likely to grow – huge money managers voting in favor of environmental proposals.  

As I write this, Dan Loeb’s hedge fund Third Point has launched a campaign to break up Shell, even though they are one of the oil and gas companies that has done the most to pivot and address the climate challenge.

Finally, billionaire hedge fund investor Chris Hohn, head of TCI Fund Management, is throwing his weight around too. He is now pushing hard for companies to be more transparent about their carbon dioxide emissions.  

And, just like in my corporate finance history lesson above, private equity is also on the move. In my view, PE firms are behind schedule but it’s beginning to change. Most now have stand-alone climate funds and they’re building teams with ESG expertise. They’ll be ready to pounce on companies not fully pursuing climate opportunities.

CEOs – Don't Let This Happen 

Your Chief of Staff comes rushing into your office. "Boss,” he says, “We just got a letter from XYZ hedgefund. They’ve got a 4.9% ownership stake in our company. They say they’ll buy more shares and launch proxies against us unless we make big changes. They want seats on the board, a sale of our carbon-intensive divisions, much more climate disclosure and a clear plan to cut emissions by half over the next three years. 

“And Jim Cramer from CNBC is on the phone. He's doing a story about this tonight and wants your response." 

What Should You Do?

CEOs – don't panic. We’re all in this together and we’ve come a long way. The financial sector is getting its act together and many of its participants are ready to be a force for good. Companies will increasingly be rewarded for doing the right thing. 

But this is a journey. Everybody involved – companies, investors, customers, policymakers – has room for improvement. Let's get that improvement underway.

My advice to companies – put into practice what we’ve been discussing in these blogs

  • Formulate and disclose a near-term strategy to lower your emissions over the next three to five years.  

  • Let your investors (and your critics) and other stakeholders know exactly what you plan to do, what it will cost, and what will be difficult. Welcome their feedback.  

  • Encourage your green-minded customers to ”walk their talk” by favoring your products.  

  • Let elected officials and the public know precisely what policies and regs will help you take your emission reductions further.  

  • Do everything you can to shift the dialogue on corporate climate initiatives to one that is focused on the near term and is based on the nuts and bolts of doing business in a commercially sound and environmentally sustainable way.

Game on!

The Index

  • The Wall Street Journal agrees with The Instigator. See  “Climate promises by businesses face new scrutiny” (including by activists).

  • Who is doing what exactly? Standardization of corporate climate disclosures will help all stakeholders with their scorecards. Smart CEOs and institutional investors should get behind this effort. Good report here by Just Capital’s Laura Thonton.

  • Nobody said any of this would be easy. Another challenge: how best to manage downward and ultimately zero out emissions from supply chains. It costs suppliers real money to do so. Who pays? We need more discussion and clear disclosure. Good to see the NYTimes take this on (here).

  • I recorded a podcast last week with Super Powers for Good. We discuss how to use the Wall Street playbook to save the natural world. Ideas like "leveraged buyouts for nature," and "water investment funds" to save money and save nature at the same time. We also chat about lessons in teamwork and collaboration from Goldman Sachs, and more. Give it a listen here and let me know what you think! 

One Last Thing

I hope you liked our brief history lesson on corporate raiding. We left out a lot of the details in the interest of brevity. It was a crazy period of time –  full of excesses and misdeeds that led to fundamental changes (good and bad) in how the business world operates today. Connie Bruck’s The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of Junk Bond Raiders is the book that best captures this colorful story. Read it and maybe weep. Or be amazed at how finance can be a catalyst for change. And of course think hard about how we can do better this time around. 

Onward,