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Investors' ESG skirmishes are just the start

It’s been a good start to the year for the upper echelons of UK plc. As our companies coverage this week underlines, results season is showing that many of the country’s listed giants have reaped the rewards of a bumper 2021. Their share prices have also been having a better time of it, relatively speaking – although this has less to do with fundamentals and more with the market-wide move away from growth stocks. In any case, the FTSE 100 is in the black year to date, no mean feat given the troubles encountered in other parts of the market. Miners and oil majors are among the big beneficiaries of this renewed interest in large-cap value shares.

Yet our biggest businesses aren’t having things all their own way. Glencore announced soaring profits this week, but it also saw activist investor Bluebell renew an attempt to have the company spin off its coal division. Indeed, activism is all the rage across UK large-cap shareholder bases at the moment: years of underperformance are coming home to roost just as returns start to improve.

This isn’t just about returns, however. Unrest on certain companies’ share registers does have another distinct flavour. Inevitably, it’s all to do with environmental, social and governance (ESG) preferences.

Increasingly, we are seeing activists call on polluters to divest their most ESG-unfriendly business arms. And make no mistake, these demands are significant. Not so much because they might succeed – the odds of doing so look relatively slim in most cases – but because of what they tell us about investors’ future priorities.

This is a battle that is only now beginning to rage. Another UK example, at Unilever, indicates what we can expect: large shareholders who appear almost entirely at odds with one another. The consumer group’s ESG push attracted criticism from Terry Smith in January, but Unilever isn’t moving in that direction out of the goodness of its heart. It is doing so because many of its largest shareholders want it. Big institutions are fully signed up to ESG goals; other investors perhaps less so.

These disagreements are more fundamental than whether or not a company is pursuing the right path to profitability. Where ESG is concerned, some long-term holders have stretched their time horizons out further than ever before: moving away from unsustainable business practices is the desired outcome, no matter how long it may take.

For those who cannot simply rebrand or reposition their core business lines, the question is how they reach a climate-friendly endpoint as much as when. As we note elsewhere on these pages, simply divesting coal or oil assets does not solve the problem from a societal perspective, even if it provides a short-term solution for companies. Indeed the ultimate outcome may be worse, were these assets to be sold to private owners who, free from shareholder demands, sweat them harder and for longer. Large asset managers recognise this, to some degree or another. But their differing ESG frameworks mean they don’t always agree on how these transitions should be managed.

The debate is branching out beyond stock markets, too. Earlier this month the European Union – long an advocate for sustainable investing initiatives, as our cover story discusses – endorsed gas as a “transition” fuel rather than a no-go area. That attracted outcry from some quarters, but it is the kind of compromise that we are going to see more of in the months ahead.

In the meantime, partnerships between new and old energy will continue to increase, as Glencore’s latest investment in the company building the UK’s first battery Gigafactory, Britishvolt, makes clear. Private investors may be shut out of the tussles between big shareholders, but they will recognise the impact they could have on the future of listed UK companies, and the country as a whole.