13. Finance and Accounting

...businesses must dramatically reduce their carbon footprint to stave off the worst effects of climate change. Companies with compelling strategies will attract capital on attractive terms.
— Shawn Cole

As we delve into the chapter on sustainable finance and accounting, our attention turns to a pivotal facet of our modern world - money. Finance and accounting are intertwined disciplines that encompass securing, growing, counting, and reporting on money within an organization, guiding its financial decisions and ensuring transparent management of financial resources.

Often, the mere mention of finance evokes memories of the great recession, stock declines, unemployment, foreclosures and uncertainty. Our entire population was impacted through our bank accounts, jobs, and homes. Regardless of your age during those moments, they marked an awakening for Americans, highlighting the immense power and far-reaching consequences wielded by the finance industry.

Similarly, within the confines of an organization, the finance department holds a unique capability. It possesses the potential to guide and facilitate strategic endeavors by marshaling funds for projects, adeptly handling forecasts and budgets, and augmenting the company's coffers through prudent investments. Every action undertaken reverberates, potentially propelling the company, its workforce, its clientele, and society as a whole towards either constructive or perilous trajectories.

Finance professionals remain attuned to the horizon, acutely aware of the external landscape encompassing factors such as the cost of capital, regulatory frameworks, and the ever-shifting economic milieu. The indispensable role of finance departments becomes strikingly apparent. They serve as the linchpin for operational continuity and expansion.

Today, as the imperative for sustainable practices gains unassailable momentum, the finance realm assumes a profound responsibility. This calls for investment in renewables and electrification, a holistic comprehension of both the direct and indirect values emanating from initiatives, and a rigorous assessment of the long-term implications. Tangible and intangible rewards materialize, echoing beyond the balance sheet, while the judicious avoidance of risks takes center stage through well-considered sustainability measures. In this chapter, we will navigate the intricate landscape of sustainable finance, exploring how financial decisions intertwine with ecological and societal well-being, ultimately shaping the course of our shared future.


Learning Objectives

  1. Understand the intersection of finance and sustainability, and how financial decision-making processes can be aligned with long-term sustainable development goals.

  2. Comprehend the concept of fiduciary duty and its evolving role in considering environmental, social, and governance (ESG) factors in investment decisions and corporate oversight.

  3. Comprehend the integration of sustainability into accounting and reporting, and recognize the evolving trends and frameworks shaping sustainability reporting for public companies.

  4. Understand the evolving landscape of sustainability reporting for publicly traded companies, including emerging trends, frameworks, and regulations, as well as the significance of the Task Force on Climate-related Financial Disclosures (TCFD) framework.

  5. Recognize the importance of understanding sustainability-related risks and opportunities for organizations, and how effective risk management and capitalizing on opportunities can enhance financial performance and long-term sustainability.

  6. Understand the concept of capital investments in the context of sustainability, and how organizations evaluate potential investments using environmental, social, and governance (ESG) criteria.

  7. Grasp the concept of responsible investment and how companies align their investment decisions with ethical, environmental, and social considerations, while exploring different responsible investment strategies.

  8. Understand the concept of shareholder activism and its various forms, explore its motivations, impact, and notable examples, and recognize how companies can proactively address emerging concerns to mitigate potential activism risks.


Finance and Fiduciary Duty

The realms of finance and sustainability are becoming increasingly intertwined as sustainability considerations are integrated into financial decision-making processes. The role of finance in a company involves managing financial resources, making strategic decisions about investments and funding, assessing risks, ensuring compliance with regulations, and providing data-driven insights for overall business planning and growth. Finance is crucial for allocating funds, optimizing cash flow, and supporting informed strategic choices that drive the company's success and financial health. In regard to sustainability, finance assess the financial feasibility of sustainability initiatives, allocate funds to support green projects, manage risks related to environmental and social factors, and ensure transparent reporting of sustainability-related financial information. By aligning financial decisions with sustainability goals, the finance department contributes to the company's overall environmental and social responsibility efforts.

Here are several ways finance intersects with sustainability:

  • Sustainable Investing: Sustainable finance involves incorporating environmental, social, and governance (ESG) factors into investment decisions. Investors are increasingly considering not only financial returns but also the impact of their investments on sustainability outcomes. This includes investing in companies with strong ESG performance, green bonds, renewable energy projects, and socially responsible investment funds. Sustainable finance aims to allocate capital towards activities that promote long-term sustainable development and address environmental and social challenges.

  • Risk Management: Sustainability-related risks have financial implications for organizations. Climate change, resource scarcity, regulatory changes, and reputational risks are examples of risks that can impact financial performance. Integrating sustainability into risk management processes helps organizations identify and assess these risks, develop appropriate mitigation strategies, and protect their financial stability.

  • Cost Efficiency and Resource Optimization: Sustainable practices often result in cost savings and efficiency gains. For example, energy-efficient technologies and waste reduction initiatives can reduce operational costs over time. By integrating sustainability considerations into financial analysis, organizations can identify opportunities for resource optimization, waste reduction, and energy efficiency, leading to improved financial performance.

  • Disclosure and Reporting: Financial reporting is evolving to incorporate sustainability information. Organizations are increasingly expected to disclose their sustainability performance and impacts, including environmental footprints, social initiatives, and governance practices. Integrated reporting frameworks aim to provide a holistic view of an organization's financial and non-financial performance, allowing stakeholders to assess the organization's value creation and sustainability efforts.

  • Stakeholder Engagement and Reputation: Sustainability plays a significant role in stakeholder engagement and reputation management. Investors, customers, employees, and communities increasingly expect organizations to demonstrate their commitment to sustainability. Strong sustainability practices can enhance brand reputation, attract and retain talent, and foster positive relationships with stakeholders, ultimately contributing to long-term financial success.

  • Regulatory Environment: Governments and regulatory bodies are increasingly focusing on sustainability and setting standards and regulations related to ESG factors. This includes mandatory reporting requirements, tax incentives for sustainable activities, and regulatory frameworks to address climate-related risks. Organizations need to understand and comply with these regulations to mitigate legal and financial risks.

Integrating sustainability into financial decision-making processes helps organizations align their financial goals with long-term sustainable development, manage risks effectively, optimize resource utilization, enhance reputation, and meet evolving stakeholder expectations. By considering sustainability factors, organizations can create value not only financially but also environmentally and socially.

Fiduciary duty refers to the legal obligation that individuals or entities have to act in the best interests of others when entrusted with managing their assets or making decisions on their behalf. It typically applies to fiduciaries such as trustees, financial advisors, or corporate directors who have a duty of loyalty and care towards their beneficiaries or stakeholders.

When it comes to sustainability, the concept of fiduciary duty has evolved to include consideration of environmental, social, and governance (ESG) factors. Fiduciaries are increasingly recognizing that sustainability issues can have significant financial implications and may impact the long-term value of investments or the overall success of an organization. As a result, there is a growing expectation that fiduciaries should take into account ESG factors when making investment decisions or managing assets.

In the context of investing, fiduciaries are expected to evaluate not only the financial performance of potential investments but also their sustainability performance. This includes considering the environmental impact, social practices, and governance structure of companies in the investment portfolio. By integrating ESG factors into their investment analysis, fiduciaries can assess risks and opportunities more comprehensively and make informed decisions that align with the long-term interests of their beneficiaries.

Furthermore, fiduciaries may also have a role in promoting sustainability within the organizations they oversee. Corporate directors, for example, have a fiduciary duty to act in the best interests of the company and its shareholders. As sustainability issues gain prominence, directors are increasingly expected to consider and address environmental and social risks and opportunities that could impact the company's long-term success.

Considering ESG factors is consistent with fiduciary duty, as it aligns with the goal of maximizing long-term value for beneficiaries or stakeholders. Moreover, as sustainability practices become more closely linked to financial performance and risk management, integrating sustainability into fiduciary duty can be seen as a prudent approach to managing assets and making responsible decisions.

Accounting and Reporting

Accounting is the systematic process of recording, summarizing, analyzing, and reporting financial transactions and information within an organization. It provides a structured framework for tracking financial activities, producing financial statements, and ensuring transparency and accuracy in financial reporting. When it comes to sustainability, accounting extends beyond traditional financial reporting to incorporate environmental, social, and governance (ESG) factors.

Publicly traded companies must submit filings to the Securities and Exchange Commission (SEC), including annual reports that offer comprehensive insights into their financial performance and operations. This empowers investors to make well-informed decisions. Recently, the SEC has proposed more specific climate-related disclosures. This potential change would increase transparency and create more reporting standards so companies can be evaluated apples to apples. Many multinational corporations are already familiar with the concepts being proposed in the US. Globally, there has been a significant increase in mandated climate-related disclosures in recent years. The markets mandating climate-related disclosures by 2025 represent 56% of the global gross domestic product (GDP).

While financial reporting requirements related to sustainability for public companies vary by jurisdiction and are subject to evolving regulations, some common requirements and trends include:

  • Non-Financial Disclosure: Many jurisdictions have introduced or are considering regulations that require public companies to disclose non-financial information, including sustainability-related data. This may include reporting on environmental impact, social and labor practices, diversity and inclusion, human rights, and other sustainability-related topics.

  • Integrated Reporting: Integrated reporting is an approach that combines financial and non-financial information in a single report to provide a more holistic view of a company's value creation and performance. While not yet mandatory in most jurisdictions, integrated reporting is gaining traction, and some companies voluntarily adopt this practice to provide a comprehensive picture of their sustainability efforts.

  • Climate-Related Financial Disclosures: There is increasing focus on climate-related financial disclosures, particularly in relation to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). These recommendations encourage companies to disclose information about the financial risks and opportunities associated with climate change, including the assessment of climate-related risks, scenario analysis, and the resilience of business strategies.

    The Task Force on Climate-related Financial Disclosures (TCFD) is a highly recognized and influential framework for disclosing climate-related financial information, garnering support from organizations, investors, regulators, and stakeholders worldwide. Many companies, including Microsoft, Unilever, and Royal Dutch Shell, have voluntarily adopted TCFD-aligned reporting to demonstrate commitment to addressing climate-related risks and opportunities. Investor expectations, regulatory actions, industry initiatives, company adoption, and standardization efforts drive the increasing focus on TCFD-aligned disclosures. Notably, investors demand such reporting to assess climate impacts on financial performance, regulators are considering TCFD-aligned requirements, and industry collaborations mandate this reporting. Standard-setting bodies like SASB and GRI align with TCFD recommendations, enabling consistent, comparable disclosures. This traction emphasizes companies' need to assess and disclose climate-related risks and opportunities in their financial reporting, aligning with stakeholder expectations and enhancing transparency on climate change impacts.

  • ESG Reporting Frameworks: Public companies may be expected or encouraged to report using specific Environmental, Social, and Governance (ESG) reporting frameworks, such as the Global Reporting Initiative (GRI) Standards, Sustainability Accounting Standards Board (SASB) Standards, or the International Integrated Reporting Council (IIRC) Framework. These frameworks provide guidance on reporting sustainability-related information and are increasingly adopted by organizations globally.

    The Global Reporting Initiative (GRI) Standards, Sustainability Accounting Standards Board (SASB) Standards, and the International Integrated Reporting Council (IIRC) Framework are all significant frameworks that guide organizations in disclosing sustainability and financial information. While they share the goal of promoting transparency and accountability, they have distinct approaches and focuses. GRI Standards offer a comprehensive approach by covering a wide array of economic, environmental, and social topics, enabling organizations to provide a holistic view of their sustainability performance and impacts. In contrast, SASB Standards concentrate on industry-specific material issues, emphasizing topics most relevant to a company's long-term value in its particular sector. On the other hand, the IIRC Framework highlights integrated reporting, encouraging organizations to communicate their strategy, governance, performance, and future prospects in a manner that demonstrates the interconnectedness of financial and non-financial aspects. While GRI and SASB emphasize specific content, the IIRC framework emphasizes the interconnected narrative between various aspects of an organization. These frameworks collectively contribute to more comprehensive, tailored, and transparent reporting, catering to diverse stakeholder needs and promoting responsible business practices.

Specific requirements and regulations related to sustainability reporting for public companies can vary by country and are subject to change. It is advisable for organizations to stay informed about the regulations applicable in their jurisdiction and follow emerging reporting standards to meet their disclosure obligations.

Risk and Stranded Assets

As sustainability increases as a critical factor in business decision-making, understanding the finance risks and opportunities related to sustainability is essential for organizations. By identifying and managing these risks effectively and capitalizing on emerging opportunities, companies can enhance their financial performance, reputation, and long-term sustainability.

There are several risks associated with sustainability that can impact the financial performance and stability of companies:

  • Climate-Related Risks: The increasing frequency and severity of extreme weather events, such as hurricanes or droughts, pose physical risks to assets, supply chains, and operations. For instance, insurance companies face increased claims due to property damage caused by climate-related events.

  • Regulatory and Legal Risks: Evolving environmental and social regulations may impose compliance costs and penalties on companies that do not meet sustainability standards. For example, companies in heavily regulated industries, like energy or manufacturing, may face fines for non-compliance with emissions standards.

  • Reputational Risks: Negative publicity and reputation damage can have significant financial consequences. Companies involved in controversies related to environmental harm, labor rights violations, or unethical practices may experience consumer boycotts, decreased sales, and loss of brand value. Volkswagen's emission scandal serves as an example of reputational risk resulting in substantial financial and reputational damage.

Accounting and evaluating risk is a crucial aspect of financial management and decision-making within organizations. It involves the identification, measurement, analysis, and mitigation of risks that could impact the achievement of business objectives.

Accounting for risk involves recognizing and quantifying potential risks in financial statements and reports. This includes identifying and assessing risks related to financial instruments, such as credit risk, market risk, liquidity risk, and operational risk. Accountants play a key role in measuring and disclosing these risks in financial statements, ensuring that they are accurately reflected in the organization's financial performance and position. By accounting for risk, organizations provide stakeholders with a comprehensive view of potential challenges and uncertainties that may impact the organization's financial health.

Evaluating risk goes beyond accounting and involves assessing the potential impact and likelihood of risks occurring and their potential consequences. This process often includes risk assessment techniques, such as risk registers, risk matrices, and scenario analysis. By evaluating risk, organizations can prioritize and allocate resources effectively, implement risk mitigation strategies, and make informed decisions to manage and control potential threats.

Risk evaluation also involves considering the effectiveness of existing risk management strategies and internal controls. Accountants play a role in evaluating the adequacy and efficiency of internal control systems in identifying and managing risks. This helps organizations improve risk management practices and enhance the reliability and integrity of financial reporting.

Furthermore, accounting and evaluating risk support organizations in complying with regulatory requirements. Various accounting standards and frameworks, such as the COSO Internal Control Framework or the Committee of Sponsoring Organizations of the Treadway Commission, provide guidance on effectively managing risk and internal control systems.

Stranded assets are closely linked to risk in the context of both financial and operational aspects. A stranded asset refers to an asset that loses its economic value well before the end of its expected useful life. This loss of value is typically due to a combination of factors, including changes in technology, market conditions, regulations, or societal preferences. Stranded assets are often no longer profitable or productive, and their value becomes "stranded" because they cannot generate the returns initially anticipated.

Stranded assets are particularly relevant in the context of the transition to a more sustainable and low-carbon economy. As the world shifts towards cleaner energy sources and stricter environmental regulations, certain assets tied to high-carbon industries or technologies may lose value rapidly. This can impact a wide range of industries, including fossil fuels, power generation, transportation, and more.

Stranded assets carry significant implications. Investors holding assets that become stranded are exposed to financial risk as these assets can turn obsolete or unprofitable due to technological advancements or shifting market dynamics. This can result in diminished returns, write-downs, or even financial losses. Furthermore, stranded assets can trigger substantial devaluation of a company's assets, impacting its balance sheet and overall valuation. This devaluation can influence borrowing capacity, credit ratings, and investor confidence. Additionally, businesses heavily invested in stranded assets might encounter credit risk, facing challenges in securing financing as lenders become cautious about the long-term viability of such assets. Proper financial reporting becomes crucial as companies must assess the potential for stranded assets and address possible impairments, impacting profitability, equity, and financial ratios. Effective long-term planning and investment strategies are vital to account for the risk of stranded assets, considering future technological, regulatory, and market changes. Companies in high-risk sectors may need to develop transition strategies, either diversifying into more sustainable areas or phasing out high-risk assets. Eroding shareholder value is another concern, underlining the significance of transparent disclosure about the associated risks for investors. Despite the risks, stranded assets also present opportunities for innovation and investment in sustainable technologies and industries. By proactively transitioning away from high-risk assets, companies can position themselves as leaders in the move toward a low-carbon economy.

In recent years, discussions about stranded assets have gained prominence as governments, businesses, and investors increasingly focus on mitigating climate change and pursuing sustainable development. Investors and financial institutions are becoming more attentive to the potential financial impacts of stranded assets and are incorporating these considerations into their decision-making processes. As a result, understanding and managing the risks associated with stranded assets has become a crucial aspect of financial management in a rapidly changing economic and environmental landscape.

Capital Investments

A capital investment involves allocating funds for long-term assets to generate future benefits. In a sustainability context, these investments aim to create positive environmental, social, and economic impacts. Examples include renewable energy projects, energy-efficient technologies, green building construction, sustainable agriculture practices, waste reduction facilities, water conservation initiatives, improved public transportation, and social impact projects. Such investments promote a sustainable future while often yielding long-term cost savings and enhancing brand reputation.

Capital investment criteria refer to the set of factors and metrics used to evaluate potential investment opportunities. These criteria are employed to determine whether an investment is financially viable and aligns with the organization's strategic goals. In the context of sustainability, capital investment criteria are expanded to incorporate environmental, social, and governance (ESG) considerations alongside financial factors. When evaluating investment opportunities from a sustainability perspective, organizations may consider the following criteria:

  • Environmental Impact: Organizations assess the potential environmental effects of an investment. This includes evaluating the project's carbon footprint, energy efficiency, water usage, waste generation, and overall sustainability performance. Investments that minimize negative environmental impacts or contribute to environmental preservation are given favorable consideration.

  • Social Impact: The social impact of an investment is also assessed. This involves evaluating how the investment might affect communities, stakeholders, and society at large. Considerations may include job creation, employee well-being, diversity and inclusion, human rights, and the impact on local communities. Investments that have positive social outcomes or contribute to sustainable development goals are prioritized.

  • Governance and Ethical Considerations: The governance structure of an investment opportunity is evaluated to ensure transparency, accountability, and ethical practices. This includes assessing the organization's corporate governance practices, compliance with regulations and industry standards, and ethical conduct. Investments in companies with strong governance practices and a commitment to responsible business conduct are preferred.

  • Long-Term Financial Viability: While incorporating sustainability considerations, investments must still meet traditional financial viability criteria. Factors such as projected cash flows, return on investment (ROI), payback period, and net present value (NPV) are evaluated to ensure the investment generates positive financial returns and aligns with the organization's financial goals.

By incorporating sustainability criteria into capital investment decisions, organizations can identify investments that not only deliver financial returns but also align with their environmental, social, and governance objectives. This approach helps organizations align their investment portfolio with sustainability principles, mitigate risks associated with ESG factors, and contribute to a more sustainable and responsible economy. Additionally, considering sustainability factors can lead to improved stakeholder relationships, reputation enhancement, and increased long-term value creation.

Here are some examples of positive capital investment for sustainability:

  • Investing in a large-scale solar or wind energy project that replaces fossil fuel-based energy sources is a favorable capital investment for sustainability. It aligns with environmental goals by reducing greenhouse gas emissions and promoting renewable energy generation, contributing to the transition to a low-carbon economy.

  • Investing in energy-efficient building upgrades, such as LED lighting systems, insulation improvements, and HVAC upgrades, is a commendable capital investment for sustainability. It reduces energy consumption, lowers greenhouse gas emissions, and decreases operating costs while creating a more comfortable and environmentally friendly building environment.

  • Investing in sustainable agriculture practices, such as precision farming techniques or regenerative agriculture, is a worthwhile capital investment for sustainability. It promotes soil health, reduces chemical use, and enhances biodiversity, thereby supporting sustainable food production and environmental preservation.

Here are some examples of negative capital investment for sustainability:

  • Investing in the expansion of a coal-fired power plant or a new oil refinery is an unfavorable capital investment for sustainability. These projects contribute to greenhouse gas emissions, air pollution, and climate change, which have adverse environmental and public health impacts.

  • Investing in industries associated with deforestation, such as logging operations or palm oil production without sustainable practices, is a detrimental capital investment for sustainability. These activities contribute to habitat destruction, biodiversity loss, and carbon emissions, undermining long-term environmental and social well-being.

  • Investing in manufacturing processes that generate high levels of waste without proper waste management and recycling systems is an unsound capital investment for sustainability. Such investments can lead to environmental pollution, resource depletion, and contribute to the growing problem of waste disposal.

Here are some company examples of major capital investments:

  • Tesla's Gigafactories: Tesla has made significant capital investments in building Gigafactories dedicated to the production of electric vehicle batteries and energy storage products. For example, the construction of the Gigafactory in Nevada involved an estimated investment of over $5 billion. These investments have allowed Tesla to increase manufacturing capacity and drive down battery costs.

  • Apple's Data Centers: Apple has made substantial capital investments in data centers to support its digital services and cloud-based operations. The company has committed to investing $10 billion in data centers across the United States over five years. These data centers are designed to be energy-efficient and powered by renewable energy sources, furthering Apple's commitment to reducing its environmental impact.

  • Ørsted's Offshore Wind Farms: Ørsted, a leading renewable energy company, has made substantial capital investments in developing offshore wind farms. For example, the construction of the Hornsea One offshore wind farm off the coast of England involved an estimated investment of around $4.5 billion. Ørsted's investments in offshore wind farms have significantly contributed to the growth of renewable energy generation and reducing reliance on fossil fuels.

  • Google's Data Center Infrastructure: Google has made significant capital investments in its data center infrastructure to support its cloud services and internet-based operations. While specific investment amounts are not publicly disclosed, Google has committed to investing billions of dollars in renewable energy projects to power its data centers worldwide. These investments align with Google's goal of powering its operations with 100% renewable energy.

These investments demonstrate the importance of strategic capital allocation to drive growth, sustainability, and innovation within organizations.

Responsible Investment

Much like individuals who invest their money across various avenues to create wealth, companies also direct their financial resources into a diverse array of investment options. These investments serve as vehicles for companies to amplify their capital, bolster their financial standing, and advance their overarching business objectives. In a manner akin to individuals diversifying their investments to balance risk and optimize returns, companies tactically distribute funds among different projects, assets, and ventures. This strategy is designed to harmonize with their specific goals and values, enabling companies to harness their financial potential while maneuvering through the dynamic terrain of business prospects.

Moreover, companies, like individuals, are increasingly recognizing the significance of responsible investing. This involves aligning investment decisions with ethical, environmental, and social considerations. In this context, companies may favor investments that not only promise financial gains but also contribute to sustainable practices, social well-being, and positive environmental impact. Responsible investment, also known as sustainable or socially responsible investment (SRI), refers to an investment approach that considers environmental, social, and governance (ESG) factors alongside financial considerations. Responsible investors aim to generate financial returns while also seeking to make positive contributions to society and the environment.

Examples of responsible investment strategies include:

  • ESG Integration: Investment managers integrate ESG factors into their investment analysis and decision-making process. For instance, they may evaluate a company's environmental impact, labor practices, corporate governance, and other sustainability-related criteria alongside financial indicators. This approach helps identify companies with strong ESG performance and potentially mitigate investment risks. Examples of investment firms that practice ESG integration include BlackRock, Vanguard, and State Street Global Advisors.

  • Impact Investing: Impact investors intentionally invest in companies, organizations, or projects that generate positive social or environmental outcomes alongside financial returns. They actively seek investments that align with specific goals, such as renewable energy, affordable housing, education, or healthcare. For example, Triodos Investment Management focuses on impact investing by financing renewable energy projects, sustainable agriculture initiatives, and social housing developments.

  • Shareholder Engagement: Responsible investors engage with companies as shareholders to influence their behavior, practices, and ESG performance. They use their ownership rights to advocate for positive change. For instance, Calvert Investments, a leader in responsible investing, engages with companies through dialogues and proxy voting to address sustainability challenges and promote responsible business practices.

  • Exclusionary Screening: Some responsible investors use negative screening to exclude certain industries or companies that do not meet specific ethical or sustainability criteria from their investment portfolios. They may avoid investing in industries such as tobacco, weapons, or fossil fuels. For instance, the Norwegian Government Pension Fund Global, one of the world's largest sovereign wealth funds, has divested from companies involved in activities like tobacco production and certain types of coal mining.

A growing divestment movement urges institutions to halt investments in fossil fuels—like coal, oil, and gas firms—due to concerns about climate change, environmental harm, and finite resources. A total of $40.51 trillion has been divested by 1,593 institutions. These divestments are distributed across various sectors and types of organizations with the largest portion of divestment from faith-based organizations (35.8%) and educational institutions (15.6%) with for-profit corporations representing 8.4%. Divestment reflects an ethical stance, considers long-term financial sustainability by avoiding potential losses associated with a carbon-constrained economy and redirects funds to renewables and clean technologies. This change supports a greener economy and emphasizes urgency in addressing climate issues, signaling a departure from traditional investments to prioritize both the environment and financial health.

Shareholder Activism

Companies interact with shareholders by providing financial reports, hosting investor meetings, and participating in annual general meetings. They handle inquiries, disclose material information, manage dividends and share buybacks, and engage in sustainability reporting. This communication fosters transparency, trust, and informed decision-making between the company and its investors.

Shareholder activism is a phenomenon where shareholders, often institutional investors or asset managers, use their influence to advocate for changes within a company. This can encompass a range of issues, from corporate governance and executive compensation to environmental and social concerns. Activist shareholders seek to shape a company's behavior, strategies, and policies to align with their expectations and broader societal trends.

Shareholder activism can take various forms, including:

Proxy Voting: Activist shareholders may use their voting rights to support or oppose specific resolutions or proposals at a company's annual general meeting (AGM) or extraordinary general meeting (EGM). They may vote against executive compensation packages, push for changes in board composition, or support resolutions related to environmental or social issues.

Proposal Submissions: Shareholders can submit proposals on specific topics for consideration at the AGM or EGM. These proposals may cover a wide range of issues, such as climate change, human rights, diversity and inclusion, or corporate governance practices. While not all proposals are binding, they serve as a way to raise awareness and encourage discussion on important matters.

Engagements and Dialogues: Activist shareholders engage in direct discussions with company management and board members to express their concerns, share perspectives, and advocate for specific changes. These engagements may involve private meetings, letters, or public statements to address issues related to strategy, governance, or sustainability performance.

Shareholder Resolutions: In some cases, activist shareholders may propose resolutions to be voted on by shareholders outside the context of the company's AGM or EGM. These resolutions can focus on specific issues, such as divestment from certain industries, adoption of sustainable practices, or disclosure of political contributions.

AGM stands for Annual General Meeting, while EGM stands for Extraordinary General Meeting. AGMs are held once a year and provide shareholders with updates on the company's performance and allow them to vote on key matters such as director appointments and dividend payments. EGMs, on the other hand, are called outside of the regular AGM schedule to address specific urgent or exceptional matters that require shareholder approval, such as mergers or changes to the company's capital structure. Both meetings serve as important platforms for shareholder engagement and decision-making.

The motivations behind shareholder activism vary. Some activist shareholders seek to maximize shareholder value by pushing for changes that they believe will enhance the company's financial performance. Others may focus on environmental, social, or governance (ESG) considerations and advocate for sustainable practices, transparency, or improved risk management. Shareholder activism can also be driven by ethical concerns, stakeholder expectations, or a desire to align corporate behavior with broader societal goals.

The impact of shareholder activism can be significant. It can bring attention to critical issues, influence corporate decision-making, and prompt companies to adopt more sustainable or responsible practices. Successful activist campaigns have resulted in changes to board composition, adoption of environmental and social policies, increased transparency, and improved corporate governance practices. Companies may respond to activism by engaging in dialogue, making concessions, or defending their current practices, depending on the circumstances and the views of other shareholders.

Overall, shareholder activism serves as a mechanism for shareholders to voice their concerns, push for change, and promote more responsible and sustainable corporate behavior. It contributes to the ongoing dialogue on corporate governance, accountability, and the role of corporations in society.

Notable examples of shareholder activism include:

  • ExxonMobil and Engine No. 1: In 2021, activist investment firm Engine No. 1 successfully led a shareholder campaign urging ExxonMobil to address climate change risks and transition to a low-carbon future. A leading oil company, Exxon knew about climate change since 1977 and actively denied science and promoted misinformation. Despite facing resistance from the company, Engine No. 1's campaign gained support from other institutional investors and led to the election of three new board members with expertise in renewable energy and sustainability. This outcome showcased the influence of shareholder activism in pushing for greater focus on sustainability within a major energy corporation.

  • Nestlé and Third Point: In 2018, activist hedge fund Third Point acquired a significant stake in Nestlé, criticizing the company's capital structure, performance, and environmental impact. Third Point called for changes in strategy, including divestments, share buybacks, and increased investments in high-growth areas. As a result, Nestlé made several strategic adjustments, including selling its U.S. candy business and increasing its focus on health and wellness products. This example demonstrates how activist shareholders can drive changes in corporate strategy to align with their vision and address sustainability concerns.

  • JPMorgan Chase and Proxy Voting: Shareholder activism is not limited to specific industries. In 2020, a coalition of institutional investors, including shareholder advocacy group As You Sow, filed a shareholder resolution urging JPMorgan Chase to report on how its lending aligns with climate goals. JP Morgan Chase is the world’s largest financier of fossil fuels globally providing $434.1 billion from 2016 to 2022 per the Banking on Climate Chaos report. Although the resolution did not receive majority support, it garnered significant attention and increased awareness of the financial industry's role in addressing climate change. It likely influenced future activist campaigns such as Third Act’s National Day of Action to Stop Dirty Banks.

These examples illustrate the impact of shareholder activism in driving change and influencing corporate and consumer behavior. Shareholder activism can bring attention to environmental, social, and governance (ESG) issues, promote sustainable practices, and push for greater transparency and accountability. It showcases the power of shareholders to shape the trajectory of companies by advocating for responsible and sustainable actions. However, it is important to note that the outcomes of shareholder activism campaigns vary and depend on factors such as the specific circumstances, shareholder support, and the willingness of companies to engage in dialogue and make changes.

Companies should proactively align with market trends and stakeholder expectations to prevent potential shareholder activism campaigns that could harm their reputation. By staying ahead of emerging concerns and adapting to changing values, companies showcase their commitment to responsible practices and sustainable growth. Neglecting these factors can expose companies to activist shareholder challenges on issues like governance, environmental impact, and diversity. To avert this, companies should engage stakeholders transparently, address concerns collaboratively, and prioritize ethical considerations. This proactive approach not only minimizes activism risks but also highlights companies as responsible, forward-looking entities focused on long-term value and positive societal contributions.


Critical Thinking Questions

  1. How can integrating sustainability into financial decision-making enhance a company's competitive advantage and long-term resilience in an increasingly environmentally and socially conscious market?

  2. How might integrating ESG considerations into fiduciary duty impact the investment landscape, corporate governance, and the long-term financial performance of organizations?

  3. How does the adoption of sustainability reporting frameworks like TCFD benefit both companies and stakeholders, and what challenges might organizations encounter in aligning their reporting with these frameworks across different industries and regions?

  4. How do the GRI Standards, SASB Standards, and IIRC Framework contribute to transparent sustainability reporting, and what are the unique characteristics of each framework? How can organizations utilize these frameworks to effectively communicate their sustainability performance while meeting stakeholder demands for comprehensive and responsible reporting?

  5. How can organizations strike a balance between short term financial returns and longer term sustainability considerations when evaluating capital investment opportunities, and what strategies can they employ to ensure that their investments align with both financial goals and sustainability objectives?

  6. How can responsible investing contribute to a more sustainable and socially responsible global economy, and what challenges might companies face when implementing responsible investment strategies across various industries and sectors?

  7. What are the potential benefits and drawbacks of shareholder activism for both companies and investors? How can companies strike a balance between addressing shareholder concerns and maintaining their strategic direction while ensuring responsible and sustainable practices?

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Appendix I. Industries and Sustainability