“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:

Preventing Preparing Responding
  • Identifying risks.
    Paying attention to the guidance published by proxy advisory firms can be a useful starting point to help companies identify ESG trends that are coming into focus and allow issuers to pro-actively address these matters in their public disclosure.
  • Establishing ESG-savvy board and management.
    Companies can prioritize establishing a board/ management team with ESG relevant experience, or can work to develop the expertise of the existing leadership team  in these areas.
  • Following best-practices in corporate governance.
    Companies can choose to follow voluntary frameworks for ESG governance and disclosure. In addition, companies should be paying attention to the disclosure of their peers on ESG matters to ensure they do not fall behind the pack.
  • Implementing advance-notice rules.
    Advance-notice provisions in an issuer's bylaws require shareholders to warn companies of their proposals to nominate new board members. Such procedures can help companies to avoid being “ambushed” by shareholder proposals at meetings.
  • Preparing a proxy fight plan.  Companies may also choose to form a team to respond to activism activities. This team may include outside counsel, public relations consultants, and financial advisors, among others.
  • Communicating openly with shareholders.
    Clear and consistent messaging to shareholders in the face of shareholders activism can help to ensure that investors do not feel that they are being kept in the dark and may help minimize reputational damage.
  • Specifically addressing concerns.
    When shareholders express dissatisfaction with the companies they are invested in, management and the board should work to address those specific concerns. Public relations campaigns that only vaguely respond to shareholder concerns may not have the intended effect.

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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