• Activist investors are now demanding that companies they hold shares in commit to sustainability.
  • More than 90% of millennial investors aim to customize where they put their money, in part based on sustainability, Zacks reports
  • Moves by Elliott Management and Third Point follows pledge by largest institutional investors, including BlackRock, creating momentum for activists regarding sustainability

Activist investors have a new demand heading into proxy season this year: sustainability.

Hedge funds including Elliott Management and Third Point have long focused on things like share buybacks and executive changes at their investments, but now they’re adding environmental, social and governance practices to the checklist, according to The Wall Street Journal.

The move, which follows recent commitments to sustainability measures by the world’s largest institutional investors, shows that social responsibility has turned mainstream. It’s a big switch for investors better known for shareholder activism, such as Elliott’s attempt to oust Twitter CEO Jack Dorsey and Third Point’s call for the breakup of Prudential.

“A sea change in the way investors evaluate companies is under way,” according to a Harvard Business Review study by Robert G. Eccles, a visiting professor of management practice at Saïd Business School at the University of Oxford, and Svetlana Klimenko, a lead financial-management specialist in the Operations Policy and Country Services vice presidency of the World Bank. All companies “should seize the opportunity to partner with investors willing to reward them for creating long-term value for society as a whole.”

The Harvard study reported that ESG “was almost universally top of mind” for executives at the world’s three biggest asset managers — BlackRock, Vanguard and State Street — and big asset holders such as the California Public Employees’ Retirement System (CalPERS) and pension funds from Japan, Sweden and the Netherlands. BlackRock announced it was joining the Climate Action 100+ initiative in January as part of a commitment to push companies it invested in to combat climate risk.

Critics say the focus on ESG by activist investors is nothing new — just part of their goal to push stock prices higher and to increase shareholders’ returns, according to the Journal. That’s not much of a stretch from the way the activists see things, with the moves on ESG an extension of their emphasis on corporate governance.

And the focus on ESG makes sense as the ranks of millennial investors grow.

Zacks Equity Research reported Monday that 90% of millennial investors “aim to customize investment bases on their set values, especially ESG.” It also cited a 2018 survey showing that 87% of high-net-worth millennials want to go through a company’s ESG disclosures before deciding to invest: “Millennials show greater integration of money and values by investing in sustainable and impactful business models.”

And interest in the Climate Action 100+ initiative, whose members pledge to support efforts to reduce greenhouse-gas emissions across the value chain, implement a strong governance framework and provide enhanced corporate disclosure, is booming. The initiative has more than $40 trillion in members’ assets under management from more than 450 participants.

“Climate-change risk is relevant for financial and economic decision making and there’s a need to take better account of these issues,” said Yoon Kim, director of client services for Four Twenty Seven, which provides data, market intelligence and analysis related to physical climate risks, told Karma in December.

About 42% of 89 institutional investors surveyed by Callan said they incorporated ESG factors into picking investments in 2019, according to a study released in October. The figure was up 91% from 2013.

It’s “clear to us that corporate leaders will soon be held accountable by shareholders for ESG performance — if they aren’t already,” the Harvard Business Review study said.