Activist investors more likely to target poor ESG performers

Flagging environmental, social and governance factors are attracting the attentions of activist investors to a growing UK companies, a new report has found. While European markets are also seeing heightened investor activism, the UK remains the leading hub, with over 50 firms currently considered ‘at risk’ from activist investors.

In recent years, environmental, social and governance (ESG) has become increasingly important to the investment community, particularly large national pensions, sovereign wealth funds and concerned ultra-high-net-worth individuals. A survey from EY previously found that 92% of investors agree that over the long-term, ESG issues such as climate change and executive diversity have quantifiable impacts on businesses, while 89% said returns were increasingly tied to environmental and social factors.

The issue is that while it is hard to find an executive or investor who would be unwilling to pay lip-service to these factors, real change on the matter of ESG remains slow. That means a large number of firms are failing to benefit from improved performance linked to ESG changes. As a result, a rising portion of activist investors – who use an equity stake in a corporation to put pressure on its management – have been targeting companies with poor ESG metrics, driven by the idea that improving ESG at these firms can produce a rapid return on investment.

According to new research from management advisory firm Alvarez & Marsal (A&M), the European market for activism is set to grow next year. At present, it is anticipated that 158 European companies are at risk, up from 150 in April 2019.

The analysis focuses on 1,597 corporates with a market capitalization of US$200 million or more, listed and headquartered in the UK, Germany, France, Scandinavia, Switzerland, Benelux, Italy and Spain. The study meanwhile revealed that companies which find themselves in the bottom 50% of ESG rankings are on average 24% more likely to face an activist campaign – so the fact that activist investment across Europe is exponentially rising illustrates just how slowly many firms have been to turn positive talk on ESG into practical policy.

The UK remains the largest market for activism, with 54 companies estimated to be at risk as of September 2019. While the UK’s dominance has eroded somewhat, as other key European markets such as France and Germany have accelerated this year, the impending culmination of Brexit is expected to engulf British markets in disruption, which in turn will lead to greater opportunities for activists in the UK over the next year. This, coupled with a weakening of sterling will likely prompt greater interest in buyouts and public-to-private deals by activists.

Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, commented, “As activism gathers momentum across Europe, activist investors are increasingly pushing the boundaries of what constitutes a ‘traditional’ target. No longer are tech firms or tightly held dynasties out of scope. As activist pioneers start to prove their worth in new markets, we can expect many more attacks on historical ‘safe havens’ going into 2020.”

To this end, A&M also found that technology is one of the fastest growing sectors vulnerable to activism, while the consumer sector is falling out of favour amid the challenging retail environment. Once the top sector for activists, the number consumer companies at risk of activist investment fell to 32 down from 35 in April 2019. Meanwhile, the number of technology firms at risk rose by 3 to 24, and the researchers asserted that high profile campaigns against companies like Just Eat will encourage more sector scrutiny to impact the sector through investment.

Last December, Just Eat came under attack from a US activist investor, which called on the online takeaways giant to sell parts of the business and shake up management pay. Hedge fund Cat Rock Capital Management, which had a 2% stake in Just Eat worth around £80 million, claimed the firm has “become the worst-performing public equity in online food delivery globally.” The activist investor’s founder Alex Captain then wrote a letter to the Just Eat board, claiming there was “shareholder frustration with management’s lack of accountability” for delivering on “significant growth potential.”