Stakeholder activism takes on a new flavour, and things are getting spicy

  • Anything you say, can and will be used against you
  • Former Petronas CEO Wan Zulkiflee a casualty of tiny Exxon shareholder

An Exxon plant in the US. ESG activism by Engine No. 1, a small hedge fund with 0.02% stake in Exxon resulted in 3 board members to be pushed out, including ex-Petronas CEO, Wan Zulkiflee.

97% of Malaysia’s top 100 companies include sustainability data in their annual reports. This is per KPMG’s Survey of Sustainability Reporting 2022 which analysed the annual reports of the top 100 companies in 58 countries.

97% sounds encouraging, seeing that Bursa Malaysia’s reporting requirements for all Main Market listed issuers won’t come into full effect until 2025. Quantity however is not the same as quality. KPMG’s Head of Sustainability Advisory in Malaysia, Phang Oy Cheng observed that “while there has been marked improvements in companies reporting carbon reduction targets, plans remain vague, and actions are too slow to show real results.”

Several corporations in Malaysia have been announcing ‘net-zero’ targets. Petronas declared its intention to achieve net-zero carbon emissions by 2050. So too with Sunway and Tenaga Nasional.

Sustainability Matters will delve deeper into the respective pathways put forth by some of our corporations in the weeks to come. It is of special interest to us as any target will have to consider new investments in technology and digitalisation if it is to be realised. A more immediate challenge however is the exposure to new forms of activism that many of these companies may not be prepared for.

Now everyone can crash the party

The corporate doctrine for the greater part of the 20th century was simply to safeguard ‘shareholder value’, where only those who paid for the privilege of owning shares had a say. But even then, the share of voice was not always equal due to the increasing popularity of the dual-class structure. 32% of all US IPOs in 2021 featured a dual-class structure. Bursa Malaysia does not allow dual-class structure as it stands, but Indonesia has just recently adopted multiple voting shares (MVS) to ‘spur tech-IPOs'. The Singapore Exchange (SGX) introduced it in 2018.

ESG reporting requirements will however push corporations closer toward stakeholder engagement whether they like it or not. A shareholder has to pay to join the party, even if they are shoved to the back of the room. Stakeholders on the other hand can choose to crash the party and force management to dance to a new tune. We offer three trends driving this:

  1. The stakeholder circle is getting larger
  2. The changing of the guard
  3. ESG activism

Firstly, it is getting harder to define who exactly your stakeholders are. HSBC came under pressure for backing fossil fuel investments even as it claimed to back net-zero efforts. And who exerted this pressure? Not investors or shareholders, but a non-profit called ShareAction based in the UK.

Their argument was that HSBC provided $8.7bn in financing for fossil fuel projects in 2021. The complaint was raised in February 2022. By December 2022 HSBC issued a statement saying that the bank will no longer fund new oil and gas fields.

How much of this policy change can be attributed to the pressure campaign by ShareAction? They were unlikely to be the sole reason, but a series of public pressure campaigns surely played a significant part.

Everything that a company puts out into the public domain can now be scrutinised by an increasing pool of known and unknown stakeholders who traditionally may not have been of concern to management, but in the age of sustainability, everyone can claim to be a stakeholder and there is little that corporations can do about that.

Even what you advertise can be used against you, as evident from the advertising ban imposed on HSBC (again!) for misleading claims about its climate campaign. Let us underscore the point in case anyone missed it: none of the parties in both cases were regulatory bodies. One is a registered charity, and the other is an industry watchdog, and yet the effect was damaging to the bank’s traditional line of business.

Maturing of Gen X into mid and upper management

The second trend driving increasing exposure for corporations is the maturing of the Gen X cohort into middle and upper management. Even the youngest among them (born in 1980) are now in their early 40s and grew up just as climate change became mainstream (cue Al Gore’s An Inconvenient Truth, Kevin Costner’s Waterworld, and Roland Emmerich’s The Day After Tomorrow).

This workforce can exert pressure internally and externally, either by demanding their upper management to be more proactive or by making investment decisions themselves. The cohort coming up behind them is even more invested in the cause and comes loaded with dry powder.

42% of global wealth is concentrated in the Asia Pacific region, and inter-generational wealth transfer will provide the next generation with serious money to back their convictions. Every Environment, Social and Governance (ESG) report published by corporations provides historical data for stakeholders to judge against real action. Corporations that do not consider this as a materiality do so at their peril.

Finally, ESG activism is on the rise. These are shareholder activists who pressure corporations on their ESG performance through voting rights. There is a brilliant story about Engine No. 1, a small hedge fund with just 0.02% of shares in Exxon and yet was able to push out 3 members of Exxon’s board with ties to the fossil fuel industry. One of the casualties was none other than Wan Zulkiflee, former Petronas CEO.

He probably didn’t know what hit him, and neither will any of our corporations if their boards don’t take ESG reporting seriously.

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