BP. Bp Plc

By Corrie Driebusch 

The biggest activist hedge funds are jumping on the wave of socially responsible investing.

Elliott Management Corp., known for waging campaigns for share buybacks and executive change, suggested in its recent public letter to Evergy Inc. that the utility consider reducing its carbon footprint. In its February letter to management at Prudential PLC, Third Point LLC highlighted the excessive carbon footprint it says is created by having a London headquarters for the British insurer's American and Asian businesses. And Jeff Ubben, an activist known for nudging companies to focus on what they are best at, has bought into BP PLC as a vote of confidence in the British oil giant's plan to eliminate most of its carbon emissions.

In the latest trend in shareholder activism, the firms are adding to their standard list of demands improvements in companies' environmental, social and governance, or ESG, practices.

ESG represents a big opportunity -- and challenge -- for investors.

Individual investors have moved billions of dollars into funds that prioritize issues like sustainability and diversity, and the activists are hoping to tap into that stream of cash.

Meanwhile, the largest institutional investors, including BlackRock Inc. and Vanguard Group, have emphasized their commitment to these issues. Earlier this year, BlackRock, which manages about $7 trillion, said it is divesting itself of thermal coal producers held in actively managed portfolios, adding that it will likely vote against management and boards of companies that don't disclose how climate change could hurt their businesses.

Highlighting ESG could help activists win the support of the big funds that is crucial to their success -- and ignoring the issues could make their backing harder to win. BlackRock, Vanguard and State Street Corp. collectively hold roughly a fifth of the S&P 500 through funds they run for investors, so their influence is essential in most activism campaigns.

The activists who are emphasizing ESG say it is an extension of their focus on corporate governance. In the past decade, the investors largely shifted away from demanding capital redistribution, positioning themselves instead as advocates of improving governance shortcomings.

"ESG is so top-of-mind right now throughout the investment world, but with the exception of board diversity, we have yet to really see the E and S be the center of an activism campaign," said Andrew Freedman, a lawyer at Olshan Frome Wolosky LLP who works with activists. "In the next year, we believe we'll see campaigns where those factors are front and center."

Critics say the firms aren't pivoting out of a desire to save the world, and to be sure, their ultimate goals remain the same: higher stock prices and, in many cases, bigger payouts to shareholders.

"Activists will try to co-opt what index funds care about," said Avinash Mehrotra, global head of activism defense at Goldman Sachs Group Inc.

It is far from guaranteed that the efforts will yield more assets or better returns for a group that has struggled to keep up with the surging stock market in recent years.

Jana Partners LLC has delayed its goal of launching a new vehicle focused on ESG after it found more demand for case-by-case partnership investments with an ESG thrust, according to a person familiar with the matter. Jana was an early mover in activist ESG, pushing Apple Inc. to address concerns about teenage iPhone addiction in 2018 in partnership with the giant union California State Teachers' Retirement System, or Calstrs.

Other activists haven't gone out of their way to talk about environmental or social failings at the companies they target, with some saying it is not their place to do so. Carl Icahn and Jeff Smith of Starboard Value LP rarely incorporate such complaints in their campaigns. Mr. Icahn hasn't managed outside money for years and much of Starboard's capital comes from investors who likely aren't pressing for such moves.

That contrasts with the likes of Elliott and Third Point. Elliott made Christine O'Brien, a former research analyst at the fund, head of investment stewardship last year, while Third Point carved out a similar role for firm veteran Elissa Doyle.

And earlier this year, Mr. Ubben, a founder of ValueAct Capital Management LP, officially stepped down from his role as chief executive to focus on managing the firm's $1 billion socially responsible Spring Fund.

Other funds that have taken into consideration environmental and social issues, include Barington Capital Group LP, which has a formal ESG policy. Its campaign at L Brands Inc. centered on pushing the Victoria's Secret parent to break up, and it criticized the fashion icon as "tone deaf," given women's current views of beauty, diversity and inclusion. Ultimately, in a nod to such criticism, L Brands added two new female directors, and in February embattled founder Leslie Wexner agreed to step down as chairman and CEO.

Write to Corrie Driebusch at corrie.driebusch@wsj.com

(END) Dow Jones Newswires

March 08, 2020 10:14 ET (14:14 GMT)

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