Through the first seven months of this year, U.S. investors launched 607 ESG and executive pay campaigns, up 25% compared to the first seven months of 2021. Just over half the campaigns (310) focused on environmental and social issues, almost double the 168 similar campaigns launched in all of last year.

The data was included in a new report on environmental, social, and governance activism by Insightia, a company offering coverage of shareholder activism, investor voting, and corporate governance issues.

In all of 2021, 62% of similar campaigns could claim to have had some success. In the first seven months of this year, just 55% of global activist campaigns involving corporate board representation and ESG-related resolutions could claim any success. The average success rate in the four years from 2018 through 2021 was 67%. Insightia notes that an even lower 33% of 2022’s activist campaigns addressing environmental and social (the E and S components of ESG) campaigns could claim even partial success.

Do these numbers suggest that we have seen the peak of ESG investing and related activism? Or is ESG simply changing in response to several issues and criticism?

After Russia invaded Ukraine in February, ESG activists were among the first to demand that the supermajor oil producers withdraw from Russia. Exxon, BP, Shell, and Equinor quickly announced their departures. It took pressure from institutional investors to persuade France’s TotalEnergies to pull out.

Withdrawing from Russia, however, is not the same thing as getting out of the fossil fuel business. Soaring oil prices have driven oil companies’ share prices through the roof. Asset management firms and proxy advisors have taken a lot of heat for leaving investor money on the table.

ESG activism, Insightia reported, now confronts a crisis of confidence due to declining support from investors, valuation issues, and a conservative backlash. A growing concern is the perceived contradiction between being a green company and making money for investors. Proxy advisory firms have become increasingly wary of supporting ESG proposals:

“Glass Lewis’ support for environmental and social proposals stood at just 37% at the end of the first half of 2022, down from around 59% on average throughout both 2020 and 2021. Institutional Shareholder Services (ISS) saw a smaller decline to 74% average support, down from 85% one year prior.”

There is less unanimity now on how to deal with oil companies, the poster children for environmental unfriendliness. Some investors argue that oil companies should continue to pump crude but direct the profits toward building a renewables business. Others argue that the companies divest their high carbon-emitting business and focus on clean energy.

Guiseppe Bivona, a co-founder and partner at Bluebell Capital Partners, told Insightia:

“If you separate the fossil fuel assets from the clean assets, then nothing fundamentally changes for the environment. The assets will be surviving, just in a new order. A good way to push energy companies to agree to the transition is to keep making sure that they have separated the future from the past.”

Another change is institutional investors’ attitudes toward shareholder climate proposals. Bivona continued:

“Generally, investors are moving from a place of blank approval to these climate requests, to an environment which is more selective and offers a higher degree of knowledge that enables them to make a much more informed decision. As such, the level of scrutiny and attention is higher and therefore investors are more selective in which issue they support.”

Of particular note, according to shareholder activists attorneys Lawrence Elbaum, Patrick Gadson, and Margaret Peloso of Vinson & Elkins, is the sharper focus on how ESG-oriented proposals create shareholder value. The attorneys believe that ESG activists will begin thinking harder about their proposals’ economic arguments, “crafting them to ensure that the sustainability reforms they advance don’t lose all sight of the bottom line.”

Insightia’s Josh Black summarized the need for activists to make stronger economic arguments for next year’s proxy season by citing a statement from asset management giant BlackRock. Climate proposals this year were “more prescriptive or constraining on companies and may not promote long-term shareholder value,” the company said. That led BlackRock to drop its level of support for shareholder ESG proposals.

According to The Corporate Citizenship Project, a think-tank focused on corporate governance, the bear market makes more far-reaching ESG proposals a tough sell.

“Investors will overlook a lot in a hot market. But when the market is down, the last thing many investors want to see is the company sacrificing shareholder returns in favor of some undefined ESG goal,” said Bryan Junus, Chief Analyst for The Corporate Citizenship Project.

Investors are not stampeding out of the ESG corral yet. But those investors are getting smarter, and that may force proxy advisors like ISS and Glass Lewis as well as ESG rating agencies to become more transparent about how they arrive at their ratings.

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