Shareholder activism and ESG: from locust to green knight? A perspective from the Netherlands

In our article "Shareholder activism and ESG: from locust to green knight? A perspective from the Netherlands" we address the questions (i) what the role is and what the rights are of activist shareholders under Dutch law, (ii) how these rights relate to ESG developments, and (iii) whether the associated changes in shareholder activism will affect the existing negative image of activist shareholders and their limited rights. We examine all of this against the backdrop of recent developments around ESG and the broad public support for it. In other words: will the pendulum that in recent years has placed the power in the company in the hands of the management board and the supervisory board swing back a bit toward the shareholders? We discuss these matters from the Dutch perspective and focus on the rights of shareholders according to Dutch law.

Shareholder activism is an undefined concept. In our view, it includes every shareholder in a listed company exercising their shareholder rights to force change in relation to that company and its affiliated business. So broadly speaking, these are "active" shareholders, as distinguished from their non-active fellow shareholders. In recent years, we have seen a trend of civil society organisations and institutional investors using the same tactics previously reserved for classically activist hedge funds. Those civil society organisations might include, for example, initiatives such as Follow This. Follow This is a Dutch association that takes an active stance as a shareholder at general meetings of companies operating in the oil and gas sector. In particular, it does this by proposing a resolution that calls for Paris-aligned targets for so-called ‘Scope 3’ emissions reported by those companies. Other organisations such as Fossil Free, Milieudefensie, ClientEarth, and Extinction Rebellion are also increasingly active at general meetings.

The trend that also institutional investors, such as large pension funds and asset managers, are taking – especially on ESG issues – a more active stance in general meetings than before, has been emerging for some time. However, over the past year, an opposing dynamic has arisen in this arena, particularly in the US, where certain Republican politicians actually believe that ESG should not play a role at all in investment choices by asset managers such as BlackRock, Vanguard, and State Street. Perhaps partly because of this, Larry Fink's Annual Chairman's Letter to Investors was in 2023 considerably more cautious. Not only was the letter this time addressed only to investors, but it also no longer mentioned ESG as a term and it emphasized that there are multiple perspectives.

Besides civil society organisations and institutional investors, there are also hedge funds that focus specifically on ESG activism. A well-known example of such an ESG-focused hedge fund is Engine No. 1. Its perhaps most notable victory was the appointment at ExxonMobil of three directors with experience in renewable energy and the energy transition. Incidentally, the success of this campaign was partly due to the support of major institutional investors such as BlackRock, State Street, and Vanguard.

As investment bank Lazard signaled a few years ago, ESG is no longer the exclusive domain of civil society organisations, institutional investors, or ESG-focused hedge funds. A recent development is that traditional activists are also increasingly including ESG aspects in their campaigns. One example was Third Point's (unsuccessful) campaign to break Shell into an oil and gas arm and a renewables and LNG arm. It explicitly mentioned that such a split – besides increasing shareholder value – could lead to lower CO2 emissions. Another well-known initiative is the Say on Climate movement (along the lines of Say on Pay) by hedge fund manager Chris Hohn of The Children's Investment Fund (TCI). The initiative actively campaigns for shareholders to have an annual advisory vote on corporate climate plans, such as a net-zero transition plan.

So what exactly are the motives of activist shareholders to run ESG campaigns? This will vary for each activist shareholder. Some campaigns are so-called ‘trojan horse campaigns’, in which hedge funds combine a traditional activist approach with an ESG initiative. Institutional investors, on the other hand, seek to maximise the long-term value of their entire portfolio. This means mitigating risks or negative externalities of the portfolio, such as climate change, and this can be done by requiring companies to adopt stricter ESG policies. For institutional investors, this therefore provides an incentive to adopt a (more) activist stance. This incentive is additionally linked to changing societal attitudes, the corresponding expectations of investors, and concomitantly the image of the institutional investor in question. In short, just as activist shareholders differ in shapes and sizes, their motives will always differ too.

The ESG developments that we discuss in our article present opportunities both for activist shareholders and other shareholders who care about the company's strategy. In the ESG domain, an avalanche of new laws and regulations is coming. These laws and regulations, we believe, will help shareholders exercise their rights more often and more effectively. ESG shareholder activism will thus gain new momentum. The image of the classic activist shareholder tends to be rather negative (‘the locust’). But what will the picture be when that classic locust starts taking on ESG-related causes (the good cause)? Will the image of the activist shareholder then remain as negative as before, or will the ‘locust’ suddenly become a ‘green knight’? In reality, of course, it is all a lot more nuanced than these two caricatured extremes. Activist shareholders come in many shapes and sizes and most are somewhere on the spectrum between the two extremes just mentioned. For us, at least, there is no doubt that ESG shareholder activism is not a temporary trend that will blow over in the short term. In our perception, this is a structural phenomenon that will permanently change our corporate law landscape. As to how and to what extent it will change, we can only speculate at this point.

The authors’ complete article can be accessed here.

Dirk-Jan Duynstee and Tiemen Drenth are lawyers at Clifford Chance LLP.

Arnoud Pijls is an adviser at Clifford LLP and an Associate Professor at Erasmus School of Law.