“ESG” stands for Environment, Social and Governance and describes a handful of criteria used by both issuers and investors to focus on a corporation's impact and activity regarding topics like environmental protection, climate change, support for the local and global community, diversity in hiring and advancement, and employee compensation.
This investment methodology, once considered novel, has moved into the mainstream. Institutional investors in particular have been vocal in expressing their belief that maximizing returns to shareholders can no longer be a corporation's only goal, and are increasingly focused on evaluating company performance against ESG key performance indicators in order to determine the sustainability and future financial performance of issuers. Securities regulators are also following this trend and are beginning to implement disclosure requirements for issuers based on ESG factors and aimed at increasing transparency into ESG performance for investors.
In recent years, activist shareholder groups focused on ESG matters have been gaining attention as they have demonstrated that, with the help of the institutional investment community, they are able to replace directors and elect board members with experience that caters to their ESG agenda.
When shareholder dissatisfaction rises to the point of activism, the defence process can be expensive and in some cases, harmful to a company's reputation. As it becomes clear that Canadian companies can no longer afford to ignore ESG concerns, it is worth asking the question, how do these companies prevent, prepare for and respond to ESG activism? In considering this, companies may wish to consider the following:
Although being truly prepared for ESG activism will require company-specific analysis as well as the meaningful involvement of the board and management, it will be important to both stay on top of trends in shareholder activism and trends in corporate governance.
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