Sustainability under attack: Lessons from Danone

Activist hedge funds target corporate social responsibility [PDF] – Mark Desjardine, Academy of Management Insights, 2020

Disentangling the effects of hedge fund activism [PDF] – Mark Desjardine, Strategy Management Journal, February 2020

Volans website

Green Swans: The Coming Boom in Regenerative Capitalism – John Elkington, Fast Company Press April 2020

It’s really clear that the time of the leader who is certain of how to do things and will do things his own way. Let’s be honest, um, is coming to an end because if any leader says, Oh, I know what’s going to happen in two years, we know that they’re lying. We’ve just been through a year of deep uncertainty on all fronts. We’re still in the middle of an environmental crisis and that will feed a societal crisis.

Denise: Joining me to make sense of the recent dramatic exit of Emmanuel Faber from Danone following a hedge fund attack, are two leading lights of the sustainable business space.

Louise Kjellerup Roper is CEO of UK-based Volans, which advises companies that are transitioning to sustainability. Mark Desjardine is a researcher at Penn State University specialized in hedge fund activism.

So, was Danone the story of the limits to sustainability?

Or is this the opening shot in a new chapter for sustainable business?

One that moves beyond the myth of the Sustainability Superhero CEO who acts very much alone to drive the transition, to sell it to the media, and to defend that vision against enemy attacks, both from within and from without.

I love this interview because Louise and Mark basically interview each other, putting together the latest research findings on hedge fund activism, and the signals from companies that are breaking new ground in sustainable business.

What emerges is an analysis of the Danone case that goes well beyond the Good vs Evil narrative, and a primer on the risks and opportunities of this new phase of the sustainability revolution.

Denise: So today’s episode is about, uh, Danone, and what we can learn from the Danone case for the future of stakeholder capitalism and purpose-driven business. Uh, I am delighted to welcome two fantastic guests. I have Louise Kellerup Roper and she is the CEO of Volans, which is, um, they are strategic consultants on sustainability and innovation based in the UK.

In the US coming to us from Pennsylvania is Mark Desjardins . He is assistant professor of strategy and sustainability at Penn State university, and he has a special focus on shareholder activism. Uh, so welcome to the two of you.

Louise: Thank you. 

Mark: Thanks for having us.

Denise: The Danone case has been variously portrayed in the media as a trial of purpose versus profit in which, uh, purpose is the loser.

Uh, but I’m really excited to talk to the two of you about this because you come from different backgrounds, but I think you both bring a very interesting nuanced perspective to the case. And so, um, I’d like to turn to you first Louise Um, could you just take us through what happened at Danone?

I mean, it’s quite recent, but just give us your version of what happened and perhaps a quick analysis.

Louise: So I guess the short version is that Danone’s board decided to replace Emmanuel Faber as their CEO and chair, which he has held since 2017, um, and kind of over rode a compromise that. Was a plan to keep him on as chairman, while he retired as CEO.

And really that pressure came from, um, from hedge funds, from activist investors, um, Blue Bell, which again has really only, I think, less than 20 million euros of assets in Danone, um, and they called for his resignation and that was then leaked to the French press, um, and kind of blew up and accelerated the situation with other investors joining the push for him to, to leave.

Um, the reasons they gave were that Danone has underperformed compared to competitors like Nestle and, um, and then poor governance, which is interesting. I think that would be my very short summary of what happened. 

Denise: So, um, Mark, when we talked earlier, you actually pointed out to me, um, and I didn’t know this, that this was not the first hedge fund attack on Danone.

Mark: Yeah, so this, uh, I mean, you’re, you’re right. This isn’t the first case for Danone. Trion came in in 2012, Corvex management came in in 2017 and now we’re in 2021 again.

I come from a background in investor relations, so I’m a CFA charter holder and I bring finance to sustainability. Um, and so what I look are investor pressures on companies and how that affects, uh, CSR and more broadly short-term versus long-term trade-offs.

Um, how. Uh, companies have to navigate those intertemporal tensions when they’re under short-term pressures from investors, which, um, clearly is the case. When activist investors come in, like we’re seeing with Danone. I’ve multiple published papers about how activist hedge funds affect the sustainability of the companies they target and the types of companies that they go after when they target.

Um, and how that speaks to the Danone case is that, uh, what I find in a quick nutshell is that, um, companies that do more CSR and have higher CSR performance and spending, um, they are disproportionately more likely to be targeted by activist hedge funds. When we look across, you know, the past 20 years of data, um, and so they kind of stick out as you know, uh, and we, through that research, I’ve done a lot of interviews with different hedge fund managers and it comes down to that.

Or these companies can get distracted from maximizing short-term share prices, um, shareholder wealth in short term. And so they stick out. Um, and, but after being targeted, what that research also, um, shows is that, uh, the CSR performance of those companies goes down. Um, and so does other types of long-term initiatives like R and D spending, employees get laid off, capital expenditures go down.

Um, but on the flip side, what happens is a short-term stock price, and this is backed by 20 years of finance studies too. They immediately go up. And so there’s this spike. You almost expect that when you see a hedge fund activist, declare, uh, ownership in a company, um, and, you know, share repurchases go up.

And so we’re seeing that at Danone, I think they were divesting in a dairy company, and then they promised to return that through a share repurchase. Um, and so that’s, those are the types of findings. I find it’s sort of classic hedge fund activism that you go in, you cut, long-term spending, you use those resources from divesting assets, from getting rid of CSR, getting rid of employees, getting rid of R and D and then you buy back shares and you do dividends.

And then the hedge fund activists gets out and then longer term, we see the consequences of that in lower stock prices, lower long-term performance.

Louise: I think that’s so interesting that you know, that it really is. It seems to be at, at its core, a problem of, of time horizons, right. That you can probably have profit and purposeful companies in the medium and longer term, but, but it’s when that pressure comes in to maximize short-term profits, um, You know, then, then you’re in trouble. Um, yeah, one of the, you know, we’ve started looking at some, some sort of, how do you look at long-termism and how do you create a strategic argument, um, for that to happen.

But I wonder whether in your research, Mark, do you think that just will never happe if you have hedge fund investors, is it a different type of investors we need in order to, to take that longer term view?

Mark: I am a hundred percent in agreement with that, Louise, that you need long-term investors to bring the triple bottom line together where it actually makes sense because the social and the environmental, they take time and it costs the financial in the short term.

Right. And only then in the long-term do you see financial and environmental and social working together in harmony. But when you have activist hedge funds come in and then, you know, you have to get that financial up quickly and that costs a long-term environmental social. So it’s totally this tension.

Louise: Yeah, because one of the companies we work with is Neste, which was the Finnish state-owned oil refinery company. And they really started their transformation from fossil fuel base to renewables. And now they’re leading in renewables, but they started in the 1990s. 

I don’t think they could have done that. Had they not had, uh, you know, large scale state ownership and that long-term view because it has been a, you know, having followed them on quite a lot of that innovation journey really up and down on how do you transform?

My view is that all companies right now are in a position where they have to transform, not just because they want to be nice with CSR, but that the pressures that climate and social crisis are putting on them, there will be a need to shift. So how does that affect, how does that affect how activist investors think and hedge funds think?

Denise: Louise, if I could jump in there and just ask you to talk about the triple bottom line, because you, um, directly you are a legacy holder of that concept. Uh, and, um, you’ve done a lot of work recently on that. Um, when we spoke earlier, you said there was actually a recall of it in 2018.

And so I think that’s very interesting from a narrative point of view as well, because I think the Danone and case has been, um, very much portrayed in the media as, Oh, it didn’t work or it doesn’t work, uh, or we can’t do it or profit, you know, trumps everything else. So I wondered if you’d like to just maybe quickly revisit triple bottom line and where we’re at now.

Louise: Sure I can do. Yes. And so I’m lucky enough to work with, um, John Elkington who I guess 27 odd years ago came up with this idea of a triple bottom line and the people planet and profit should be equally important to companies. And, um, we launched in 2018 this idea of  Tomorrow’s capitalism inquiry, where we were looking at how companies could have a role to play in systems change for the better.

And, um, one of the unusual things we did at that time was to issue this kind of recall of the triple bottom line in the Harvard business review, um, which they said was very unusual for a management concept to undergo product recall. It wasn’t because John or the rest of us don’t believe that people planet and profit matter of course, but it was just that it was so painfully obvious that they haven’t been given equal respect, um, in, in boardrooms and in leadership in corporates around the world that you’ve got this, you know, CEO’s routinely getting fired for missing financial target and sometimes rightly so, but.

You know, how many times has anybody heard of a CEO getting kicked out by the board for missing their social environmental targets? Not ever. So we spent quite a lot of time over the last few years, just looking at that problem. And then in particular, the relationship between listed companies and their financial markets, um, Um, and that systemic kind of problem there is between, between those two actors.

And I guess my own conclusion on that is that there’s not a single group of people who can pull a lever and sort it, but there’s a lot to be done, both from financials and from corporates and governments actually as well.

Denise: Um, so, so Mark, maybe, um, we could talk a little bit more about your research on hedge fund activism.

I mean, um, if, uh, you know, on the one hand ESG and the sustainability revolution is, is, you know, gaining more and more traction on the other hand, as I understand it, hedge fund activism is, um, increasing exponentially. Could you talk a little bit about sort of why and what the implications are for sustainability generally?

Mark: Yeah. I mean, you’re right. So hedge fund activism is on the rise. I mean, we look, we had a little blip with the pandemic, but it really became a big thing in the late nineties when hedge funds activists came on the scene. And then we look over the past 20 years and it’s consistently bumped up. We had a little dip after the global financial crisis by now, you know, it’s record levels each, each year.

And what that means for sustainability is that, uh, you know, we have to figure these things out. As we talk about these long-term tensions with, uh, short-term investors that we’re in, what we’re seeing at Danone is like, there’s this huge potential cost of hedge fund activists going in and being able to use, you know, lulls in share prices to get rid of individuals and like, like Faber and others that are trying to do more with business that have a different view of what the purpose of business is. Um, and you just wonder, like, why, where I get really concerned is what are the peer effects of that? You have a bunch of younger CEOs coming up that maybe look up to Faber and want to do more with their business, and then you’re looking well, look, I don’t, I don’t want my head on the slate.

Louise: Do you, do you see any signs that we get positive activism at all? Because when I think about it, I think, yeah, they should, you know, CEOs should be accountable, but would be nice if they are accountable to not just the short term investors and activists, but those who will hold them accountable for their societal and environmental performance.

Are we really far from that view?

Mark: We will only be able to tell years from now. I think whether this is actually gonna work, but right now you have. We’re starting to see the in, you know, the research I’m doing that, these costs that hedge funds are posing.

And so now you’re starting to see hedge funds use this ESG slant, and as it’s become so popular in mainstream investing to get investors that yeah, they actually are caring about these things. Um, and so we see that in a big way with Exxon right now, right? Like. Uh, Engine Number One and they’re this ESG style activism of hedge funds, but-

Denise: Could you explain for people who don’t know what that means, what that actually looks like? ESG style activism.

Mark: Yeah. I think these are select hedge funds. A lot of them are still traditional, but, um, these ones that are using more of an ESG style of activism, they are going in and they’re proposing changes that broadly will set the company up to be more sustainable, um, with different transformations of the business model with different innovation improvements with different, uh, changes that will hopefully return value to shareholders.

And so they’re using this, uh, uh, sustainability transformation as a way to get shareholders on board with what they’re, uh, proposing. But this is very new.

Denise: I mean, is it a positive or negative development?

Mark: There’s not enough cases yet to tell. I mean, I’m really, uh, it, to be honest, I’m hesitant to speak about that because we don’t, you only know what the long-term consequences, right. What actually happens. And this is just happening within the last year or two.

But where I start to ask questions about this as like, you know, we know companies greenwash, it’s no surprise that like hedge funds would greenwash. You’re trying to convince more ESG investors. Well you need them on board to target some of these companies and as more investors care about ESG.

Well, that creates a predicament for hedge funds that they say, okay, well we need these investors to come on our side, but ultimately hedge funds have short investment horizons, right? For the most part, you know, one year on average seems like that’s where most studies come to conclude that it’s a one-year holding period.

And they’ve really created most of their returns through buybacks and dividends.

And so where I get concerned is, well, do hedge funds really know how to transform a company that it becomes more sustainable or are they using this as a tool to get investors on their side? So then they can do the things that they really do best, which is share buybacks and dividends and asset sales and all these other things that we know go on in traditional hedge fund activism.

Denise: having to fight back these multiple hedge fund attacks seems to be as negative as the hedge fund attack, uh, that succeeds as well, because it gets rid of the visionary CEO.

And so, so you’ve got this sort of, it’s like warfare on multiple fronts. Uh, how, what have we learned from how Unilever dealt with this and compared to how Danone dealt with this?

Mark: Yeah, I don’t, I don’t know the history of Unilever. What happened after Polman sorta got those long term investors.

If they. Um, maybe, maybe Louise knows that better than I do, whether it hedge funds tried to come in. About the cost. I’ve spoken to a lot of CEOs of targeted companies and they’re very clear that, um, there are serious costs of this from a leadership perspective that the attention taking the eye off the ball of managing the company, it’s all consuming.

I mean, I’ve spoken to CEOs where they’re having leadership meetings at four in the morning, every day for a year, leading up to proxy battles with hedge funds about like, and CEOs that have had health consequences after that, just because the, like the emotional, the cognitive, the relational costs of these battles.

It’s immense, right? You’re getting like trashed in the media. Your job is on the line. Like everything you built for your company with Faber, it’s this company that he’s trying to have with a bigger purpose like that, that takes a toll on someone. So there are huge costs there. 

How that compares with Unilever? I mean, one thing I really liked that Polman did is that he came in, I think in what, 2010 don’t quote me 2010, maybe in 2011. I think he said like hedge funds have a place in society, but they have no place in a company like ours. Um, you know, I quoted that like front and center, in my dissertation and built work around that.

Um, and you saw that company’s share price. You saw Unilever share price, take a dip. But then in the years that followed, you know, you transform up to like 80% of long term investors now holding Unilever and it creates this great protection to allow a company to sort of pursue a bigger purpose and bigger investments that are going to cost investors in the short-term or company in the short term.

But they’re going to pay off way bigger on all different fronts, people, planet, profit in the long term. Yeah. And so I think that’s what, that’s that comparison. That’s really important that Polman did really well early on at Unilever.

Louise: Exactly. That, that, that he, if you compare the two, you know, um, Paul Polman put in the foundational work in, in getting the right investors on board really, really early.

And I guess what Faber did in a different way was, you know, he, he got the company governance changed to become, uh, a B Corp. And that will also provide some protection for the mission of the company, um, for, uh, for being focused on sustainability issues. But as we’ve seen, didn’t provide protection for him, so to speak or from the investment front.

I wonder whether he’s now thinking I should have done the investment piece first. Exactly like Polman did at Unilever.

Denise: I wanted to, um, pick up on another, uh, surprising insight from some of the research that you’ve shared, uh, Mark, which is around these, uh, hedge funds are like predators going around, sniffing for signals, which, uh, mean that they can have a good attack. And one of these is apparently female CEO.

So I was wondering if you could, um, explain that and talk a little bit about. What we know about that right now.

Mark: Yeah. So around that, um, so like I said, that, uh, companies that spend more on CSR that do more CSR, uh, they’re more likely to be targeted. And the same finding exists that companies that are led by female CEOs are also more likely to be targeted by activist hedge funds than companies led by male CEOs. 

I mean, obviously as we, um, look for more, uh, gender equality in business, and that creates another tension, right. We can translate everything we just talked about in CSR to, uh, male and female leadership. Um, and so. Well, maybe Louise, do you want to jump in here and talk about how you said it before?

Louise: I wonder whether as we’re seeing, um, a change in the style of leadership, um, both towards sustainability, um, and especially at, actually at this time, and we’ve, we’ve done a little bit of work on, on the leadership needed kind of post Coronavirus pandemic, um, that.

More and more people are looking to, um, what traditionally will be described as as more female style or feminine leadership. So slightly less alpha, um, more collaborative, empathetic, et cetera. And I wonder how that, um, whether, whether those are the pieces that the hedge funds are kind of attacking rather than the female CEO per se.

Mark: I get what you’re saying, Louise. To build on that, Denise, there’s also this research that shows that when you have female directors that companies do more CSR, that they’re more collaborative. That they have better risk mitigation.

There’s all these benefits of having, um, you know, more gender diversity in the boardroom and in the leadership, um, of companies. And so with that, obviously these companies that are doing this that are, uh, led by female CEOs, they’re doing things that are different from sort of the alpha male type CEO.

And so it’s maybe that hedge funds are picking up more on that. And that aligns with. The findings that I’ve had, that they’re targeting on CSR and hedge funds are targeting on CSR, but they’re also targeting on this leadership that is very related to CSR. When companies are led by female CEOs.

Denise: Louise, I wanted to ask you to pick up on something we talked about earlier, which feeds into this, which is that Emmanuel Faber, Paul Polman, um, they belong to very select group of, again, it’s a different type of alpha male, right?

It’s the, uh, the super sustainability CEO hero and it’s a male hero. It’s a male action figure. Um, would you like to comment on that?

Louise: I think that, um, that there has been, and actually, I think it comes with, with the alpha male culture we’ve seen in leadership for, for decades, uh, comes this, um, hero.

Not hero worship, but this idea of picking out one leader and turning them into heroes like Paul Polman, who’s often referred to as Saint Paul, as far as I know, several people have said that to me. And Emmanuel Faber who really became the poster child for B Corp and purposeful, uh, corporations.

I think actually, as hand-in-hand, as we get more, um, a slightly different type of leadership, which again, I’ll come back to is, I think is really needed. That has to be a collaborative leadership that, that we, you know, and we have to shatter the myth that there, that the CEO is, um, obviously CEO leads, um, But can also allow others to lead within the organization.

And there’s something about that style of leadership, which will hopefully make it harder for hedge fund activists to target a person. Um, if the leadership team start collaborating, um, more intently, um, on some of these things. Just to add to that, I think what we are seeing now, um,

 It’s really clear that the time of the leader who is certain of how to do things and will do things his own way. Let’s be honest, um, is coming to an end because if any leader says, Oh, I know what’s going to happen in two years, we know that they’re lying. We’ve just been through a year of, of deep uncertainty on all fronts.

We’re still in the middle of an environmental crisis and that will feed a societal crisis, um, that. Whilst it isn’t quite global yet it’s coming. And most companies that we work with have seen impacts on that either on of migration or of, of, of sort of what is considered freak climate, um, issues that will become more and more frequent.

So you need leaders that are willing to be, to say, I don’t know the answer, but let’s work it out. And who will bring in that diversity of thinking. And, and again, so my hope is that that will all lead to destruction of this idea that we have to have a leadership myth. That’s, we’re picking on one person who’s controlling, uh, you know, a hundred thousand people in a, in a company.

And that, they’re the only reason that the company is what it is. I think that’s really important that that gets shattered.

Denise: Yeah. Um, yes, I agree. I fully agree. Um, I wanted to turn a little bit to the future now and to sort of try and extract some lessons from Danone. 

And you know, if we’re seeing, if we agree more or less somehow what happened to Emmanuel Faber is turning the page on a certain type of, um, leadership, uh, and, and the model for sustainable business going forward. Um, I guess it’s a question for both of you, but for Mark it would be like, what can we do about this, um, uh, this plague of hedge fund activism, um, and, and to Louise, you know, you are working with lots of different companies, which represent the future of sustainable business. What, what does the next wave look like? 

And, you know, as Mark said earlier, like young CEOs or young potential aspiring CEOs are going to be very discouraged by what they’ve seen, um, in Danone and thinking, well, perhaps I don’t even want to bother.

Let’s not even bother let’s go and do something else. Um, so, so what can they be inspired by.

Mark: Yeah. Uh, it’s a great question. Um, one thing is that, like I said earlier, uh, when we were talking is that hedge fund activism is on the rise the last 20 years. And for 20 years it’s been our understanding of the costs and benefits of hedge fund activism have been dominated by finance scholars that have looked at what are called, um, event studies, looking at stock prices around 10 days. You know, 10 weeks, maybe 10 months, if we’re lucky, what happens when a company is targeted by an activist hedge fund and they go up, we know this, they go up.

And so, um, what I’ve tried to do is coming in with, you know, my finance expertise into looking at strategies in sustainability, taking a longer term perspective on this research. Is try to educate, um, you know, obviously far beyond academics, but society, people, investors, policymakers, um, hedge funds themselves, about the long-term consequences.

And so I think that’s what we need to do. Um, I mean a few weeks ago, I was speaking as a panelist at the Council of Institutional Investors, their annual conference about, uh, 70 people. They’re the heads of pension funds, the state treasurers, heads of hedge funds. And they don’t, they don’t know this stuff.

They don’t know those long long-term consequences. And so a lot of it is about educating other investors about if you’re going to be holding this company, if you’re an index investor and you have to hold the index and you’re going to hold the Danone three, four or five years from now, or any other company targeted by an activist hedge fund, do you really want to side with this activist hedge fund that’s proposing these changes, given what the research and the data show that there’s going to be long-term consequences.

And another piece is that, um, a lot of individuals, uh, you know, we pay great attention to, um, and I’m working on a project related to this right now, where we pay great attention to where, uh, we buy our products from.

And we’re starting to pay attention to where we park our money and where we invest. Right. ESG investing is on the rise massively, but we don’t really get that. That’s a much murkier and, and, you know, um, sort of difficult to comprehend channel. And so. What individuals don’t get is that most people are indirectly invested in a hedge fund.

So pension funds have been one of the biggest drivers of hedge fund growth in the past five to 10 years, and most of us are, many of us are invested in a pension fund. Right. And so it’s educating the individuals aware is your money really part, you think it’s just in that pension fund? Well, that pension fund supports that hedge fund.

And are you in support of what that hedge fund is doing? No. Well, then you need to rethink what you’re telling your pension fund, right? So it’s individually, it’s also educating the individual investor. Which I think a lot of people don’t get when we, you know, we frown on activist, hedge funds, and we don’t really know that our money is indirectly supporting what they’re doing.

So those are two, two big things that I’d, uh, I’d want to hit home.

Louise: That’s yeah. What makes me happy? I want to just, if I can add to Mark’s point, is that what at least in the UK we’re seeing is campaigns around that? So the film director, Richard Curtis is putting all his efforts right now into Money Matters campaign for normal people to learn that, that where, where is their pensions going?

And to really get people to become much more activist. And I know that’s a drop in the ocean, but, but it’s that, it’s those kind of seeds of hope that makes me think we can get there. Um, And I guess that leads into the second question you asked me, Denise, this is about the young leaders.

And are they just going to give up. 

We talk about a lot of younger leaders, um, being digitally native, and I think they’re also native to sustainability in a completely different way.We see that from kind of millennials and down the. They feel that this is natural.

So I don’t actually think that they are put off. I think that there is a generation that may be put off, um, um, seeing, um, some CEOs ousted, but I, but I think there is a merging of professional ambition and personal experience that we’re seeing throughout society where, um, people know that, that this is important and they feel sustainability is just a given.

So that they’re not going to disconnect from it in their professional lives in the way we have seen, I want to say my generation do quite frankly and, and older generations do, um, To that point. Um, and then you asked about what we see of the way, the next wave of sustainable business. And, um, and we spoke about this a little when we spoke previously, what we see is that for the last.

30 odd years, there’s been this, um, what we call responsible businesses that have been on the rise that businesses trying to do the right thing, having less harmful effects on the environment or society at large. And actually one of the conclusions from our Tomorrow’s Capitalism inquiry was that the triple bottom line is great, that you should focus on people, planet and profit, but so far, most companies have done it in what we call a responsible way.

So they’re trying to do less bad. They’re not actively trying to do good. 

And so what we talk a little bit about is the, the next “R” from responsibility, there has to be a move through resilience. And that is a huge driver. And we hear a lot about resilience right now.

Which is that we are in a situation where we’ve caused so much damage, that we now need to protect companies against that, you know, against the climate, against the societal issues that we have caused.

But ultimately companies need to move to a different mindset and a different business model, which is creating regenerative conditions so that our financial value creation is inextricably linked with creating environmental and social value. It is not three little things, and this is not really three different bottom lines.

You’ve got to, to have those linked in your business models and that’s where we see the future as we’re building a regenerative, um, economy, um, where the place of organizations be they business or otherwise in nature and in society is much, much, much more integrated.

Denise: Are there any examples of companies who are, I don’t want to say who have achieved that, but who are, um, you know, who are on that journey.

Louise: Yeah. Um, so there are definitely no companies, to my knowledge that have achieved debt. Um, because again, you know, can you be, can you be regenerative and, uh, really degenerative. Um, system or society. We talked a lot about when we’re doing this, that, um, talked about all the fish in the sea have become cleaner as, as their ESG scores and their triple bottom line is improved, but actually they’re still swimming in a very dirty sea.

And so it doesn’t really work. 

The companies though that are doing really interesting things, um, One of the ones that I would point out is a Spanish, uh, privately owned infrastructure company called Acciona, which so they build bridges. They create more sanitation, they do set up renewable energy and they’ve literally taken on this idea of becoming regenerative by design, throughout their business practices.

Lots of much smaller company startups that are starting to look at a new one. That’s called the Good Growth company, which has started to look at creating products, um, that, uh, are based in an ecosystem.

So they’re working interestingly with Mongolian, herders of cashmere, for example, and they’re looking at what can, can that ecosystem, if you create a hundred year plan for that ecosystem, what products then come out? That work and that don’t undermine it. And so again, taking that long term scale and again, small company, um, but how do you start from the other end?

So instead of starting with a consumer, not even need, right, wish something we want to sell, they’re trying to do it from the other way. So that’s an interesting business model they’re playing with and, and most, most companies are now playing with circular business models, which have inherently the potential to become regenerative.

And whilst they’re not. No, definitely they have that potential. and Ikea, I have to mention Ikea just to throw that in there, because what they’re doing is, is setting the bar far beyond what I think Unilever’s doing. Quite frankly, even though Unilever is also doing great stuff. Did you see that they, um, they recently took their climate action plan to their AGM for an advisory vote as the first company in the world?

Denise: Ikea or Univlever? 

Louise: Unilever did. Um, which is like really very, very ambitious targets across that. And it was just a climate, so down to scope three. Um, and it was just advisory, but I know that one of the reasons they did it was because they wanted to drive other companies to do that.

Right. And I think that’s where it gets interesting is that companies start becoming activists and, um, and, and pushing the bar forward and pushing investors too.

Louise: I have a provocative question, I guess, for you. Um, it’s not, uh, and I don’t mean it flippantly, but you know, should, should we just regulate hedge funds out of business now? Have they had their time? 

Denise: Yes. Good question.

Mark: That’s a good question. So a provocative question for sure. Um, I mean, one of the, yeah. Should we regulate them right out of business? The one thing where I think, um, they’re, they’re helpful is that having a governance control mechanism, external control mechanism from a shareholder perspective helps, um, because you do get companies and managers that, uh, get off track and they need that discipline because they, we have great cases of sort of, you know, like insider trading and insight, like using shareholder resources to just line the pockets of managers.

And that’s a whole, that’s just. massively now we can’t trust markets as investors because we don’t trust companies and managers behind them, then that’s a problem. Um, and so  . Like you see that pendulum swinging right from how much do you let shareholders have control versus how much do you protect managers?

Right now  hedge funds have too much control. And so we need tighter regulations. Around that like the SEC’s disclosure regulation is around 5%. So a hedge fund in the S if they only have to disclose their holding, when it reaches 5%. Well there’s discussions now whether that should be lower.

So, you know, you have more of a heads up as management, so you can prepare and, and how many, uh, other hedge funds or investors can you go and solicit support from. as a hedge fund before you disclose your ownership. I mean, I think that’s problematic too, right? Because then you have these wolf packs that come in and basically they already control the company or the bulk of votes.

So the short answer Louise about is like, I see benefits of having them, but they, right now they have too much control and influence where you can take a company like Danone and, and potentially completely transform this company for the worse. Um, because of the freedoms that are afforded to activists, hedge funds.

With the companies and clients that you’re working with do you see. Um, managers and leaders really wrestling with this intertemporal tension from like an investor perspective where they would do things, they want to do things that are good for the long-term, that are good for the environment. They want to transform the company, but they don’t because of that sort of a short-term investor in the back of their mind.

Do you see that tension?

Louise: Yes. Is the short answer. Um, I see that, you know, companies that they can, they might even have a sensible transition plan, um, and transformation plan, but they. There, there is not an easy way to communicate that to their investors. There’s a lot to be done. I think, on, on that, on the relationship side, almost, you know, investors come, they ask questions.

Now they’re asking more ESG questions, but it’s mostly about risk and certifications is what I’m seeing. And, and we’re seeing almost all companies and their VPs of sustainability are suddenly being pulled into these IR meetings to a completely different degree than was the case two years ago.

Like all of them are reporting on that, but, but more problematically. How do you, how do you really communicate a transition plan? So we haven’t seen this. I don’t think maybe it, digital transformation has, has, has some similarities, but the degree to which companies need to transform now and how to communicate that with their investors is not great.

So yeah, I am seeing examples of at least it taking longer. Um, and again, it takes more brave CEOs and leadership teams. Um, and this is, I would argue still unexplored territory for most right there. Um, we still want to put sustainability into neat boxes and KPI and, you know, financial or KPI like, um, spreadsheets where we haven’t quite come to terms with the fact that this is actually about a really complex living system.

Whether we talk nature, a society where there are more dimensions than can be captured in a two by two or in a single metric somewhere. And, and that I think is, is. A fundamental issue that, that there’s yeah, I think it will take some time before we get there. And I think, unfortunately that is, what’s going to slow down some of the, um, some of the transformation, um, that both companies and society at least have an appetite for, and maybe even investors, right. 

Because there’s not the right connection and ways of communicating about this and the right language really. 

Denise: I don’t want to keep you both longer, but I do feel that we’ve only just scratched the surface of this, um, like really interesting discussion.

If listeners want to, uh, you know, learn more about your work, um, read your research, uh, where should they go?

So, um, Mark, why don’t you go first? 

Mark: Sure. Thanks, Denise. Yeah. So, um, so as you said, I’m a professor at Penn state. And so I have a bio page there with an email address, I mean, all my publications are listed there. Um, media mentions, you know, things where Reuters have written about this, New York times.

Um, my sort of projects are there. Um, and I also help, uh, investors and, um, and companies deal with these issues. And so through like, uh, Shepherd Governance Advisors, which I co founded to deal with some of these inter-temporal tensions around investment and activism and pursuing sustainability. Um, but really the short answer there is, uh, that, uh, to find me on, uh, um, Penn state’s website and Mark Desjardine and email me, and then, uh, we’ll get connected.

Denise: Thanks, Louise

Louise: Yep. Sure. Um, so I guess the easiest is by email to louise@volansdotcom website, um, would be the fastest way or LinkedIn. 

Denise: That’s it for this episode, thanks for listening to New Climate Capitalism. If you’d like to learn more about the work that Louise and Mark are involved in, please go to the episode show notes at climate narratives.co. You’ll find their contacts, as well as some articles and background reading.

If you’re enjoying this season of the podcast, I’d like to remind you to sign up for our newsletter, climate narratives annotated. It goes deeper on some of the issues we cover in the podcast, and provides monthly highlights from green and sustainable finance. You can find the link to subscribe in the bio of our Twitter account @NewClimateCap.

A big thanks to Valentine Scherer and Victoria Yates for their help producing this episode, and to Lucas Laufen for the theme music.