ANALYSIS: Potential Activist Targets Score Low in ESG

The last time investor activists met their environmental or social objectives was in H1 2022. This recent lull raises the question: Are activists taking a step back from ESG?

To answer this question, I looked to the Bloomberg Activism Screener and Bloomberg ESG Scores, and found that two-thirds of the top 15 companies that might pique an activist’s interest are falling behind their industry peers on at least one ESG performance and disclosure indicator.

And of these potential activist targets, over half are scoring low on social issues in particular. These low scores may indicate that this year investors are more likely to engage in social activism—such as seeking changes to diversity and labor and employment policies—to improve company performance.

Potential Activist Targets Score Low in ESG

The Bloomberg Activism Screener identifies companies that may be at risk of becoming an activist target based on five factors: (1) governance; (2) operations; (3) ownership; (4) returns; and (5) valuation. Companies that receive a high activism score on a scale of 0–100 are more likely to draw the attention of activists. Bloomberg ESG scores aren’t part of the activism screener methodology.

Bloomberg ESG scores range from 0 to 10 (10 is the best) for each pillar—environmental, social, and governance. Each pillar is comprised of a core set of ESG-related issues, which receive their own 0–10 scores. Both pillars and issues scores summarize company performance and disclosures within a given pillar or issue.

Of the 15 companies with the highest activism scores on the Russel 3000 Index and for which ESG pillar scores are available, 10 had “E,” “S,” or “G” scores below the median for their industry (denoted on the graphic below as a low score). And the top six companies most likely to be targeted by activists lag behind their peers on social issues.

Although the companies in the graphic above are all likely to draw activist attention based on their high activism scores, none are currently facing an active activist campaign, according to Bloomberg data.

A New Dawn for Social Activism

Most of the potential activist targets are falling behind industry peers in at least one ESG pillar. A few companies were behind their peers on environmental (four) and governance (three) issues, but over half (eight) fell behind peers on social performance and disclosure indicators—making them particularly vulnerable to activists launching social objectives against them.

Three social objectives types activists are likely to address based on past campaigns and the specific issues these potential targets are falling behind on are:

• Labor & Employment Practices. Following up on Elliot Investment’s successful Q2 2022 campaign against Suncor (and the last successful social objective to date), many of the ESG scores of the companies in my analysis are lagging behind industry peers with regard to worker safety.
• Diversity. Another key area investors may be looking at to launch social objectives is diversity—inside and outside of the boardroom. Diversity-related objectives—including Ides Capital Management’s campaign against AstroNova Inc.—have succeeded in the past, and activists have launched at least one DEI-related objective against a company every year since 2019.
• Product Concerns. Several potential target companies are falling behind in the marketing and life-cycle management aspect of their products, and while investors have launched these types of social objectives in past, none have been successful, according to Bloomberg data.

Social Activism Likely to Push 2023 ESG Activism

In three of the past five years, activists launched more environmental objectives than social objectives. However, so far this year activists have launched one social objective—Hibiki Path Advisors Pte Ltd‘s campaign against Japan Pure Chemical Co. Ltd. for board diversity—and no environmental objectives.

This type of Q1 inactivity isn’t uncommon: Activists launched only six social objectives and five environmental objectives in the past five Q1s combined.

So are activists taking a step back from ESG? Based on my analysis, it’s unlikely. The number of potential activist targets falling behind in social issues will likely spur activists to engage in ESG activism—which could ultimately push social objective counts above environmental counts by the year’s end.

Bloomberg Law subscribers can find related content on our ESG Practice page, as well as our Practical Guidance: Shareholders page. Data accessible on the Bloomberg Terminal at BI ACT <GO>, EQS <GO>, and BI ESG <GO>.

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