ESG and shareholder activism: A tsunami is coming to Silicon Valley

With the increase in attention on environmental, social and governance (ESG) issues over the past few years, it’s easy for companies to assume that we’ve reached the crest of the ESG wave. However, we are only at the early stages — an ESG tsunami is headed toward Silicon Valley.

The increased attention on ESG issues has been across a much broader spectrum than just companies in the technology sector. This has largely been driven by broader societal trends, such as the focus on climate change. However, the ESG wave at companies, particularly public companies, is being accelerated by demands by various investor classes (including pension funds as well as a younger generation of individual investors) to focus more attention on such issues.

As a result, institutions that are trying to attract capital from these investors, such as mutual funds, venture capital funds and hedge funds, must increase their focus on the ESG dimension to stay competitive.

While the increase in focus on ESG has been gradual over the past few years, the level of investor influence on ESG issues took a step function forward with successful campaigns by shareholder activists at energy companies during the spring of 2021, most prominently a prominent proxy contest led by Engine No. 1.

For the first time, investor pressure related to an ESG issue (in this case, climate change), directly led to substantial turnover in the board of a public company. Activist shareholders are tapping into new and powerful ESG themes as leverage in their activist campaigns to change control and strategy at public companies.

Is the technology sector next?

Historically, the pattern of investor pressure on governance issues (the “G” in ESG) in public companies is to successively tackle issue after issue, winning on one issue and then moving on to the next. One good example of this is the migration of public companies to have annual elections for all directors for a one-year term rather than staggered elections of a portion of the directors for a three-year term — a so-called “classified board.”

An institutional investor that overlooks an ESG-themed activism campaign may risk criticism for disregarding client priorities and even lose out on future investment from ESG-focused investors.

In 2007, 55% of the U.S. incorporated public companies in the S&P 1500 had a classified board. By 2021, after years of governance campaigns by shareholders, this was reduced to 26% of S&P 1500 companies, with the classified board almost extinct at the largest public companies that comprise a larger percentage of investors’ portfolio. Thus, from an investor perspective, the push to achieve annually elected boards is almost entirely resolved and the glare of the investor spotlight moves to focus on other issues.

We expect the same scenario to play out here. At a recent conference, Aeisha Mastagni, a portfolio manager at CalSTRS and one of the architects of Engine No. 1’s proxy contest this spring, stated that she hopes the contest would serve as a wake-up call for all companies across all industries, not just for energy companies. So if targeting climate change in the energy sector was an obvious first choice, the question now becomes “Who’s next?”

The climate policies tucked into Congress’ budget package are signals to investors

The climate measures in the budget reconciliation package now before the U.S. Congress could unlock an investment boom in clean energy, zero-carbon transportation and efficient manufacturing that would allow us, as a nation, to reverse the course of rising greenhouse gas emissions that threaten our future.

Simultaneously, ​​these investments will help the U.S. maintain its role as an economic leader in a global economy that prioritizes zero-carbon solutions. Oh, and investment creates jobs, lots of them.

After deadly floods in Louisiana, grid failures in Texas and devastating wildfires in California, who wouldn’t want strong steps to meet the climate crisis with impactful, 21st-century solutions?

For investors, the proposed federal investments for zero-carbon infrastructure, renewable energy, electric vehicles and climate innovations will provide the policy signals we and other investment firms need to confidently fund breakthrough technologies.

Once investors know that the government is serious about taking action to bring the economy into the 21st century and competing with nations already aggressively deploying these technologies, climate and tech investors will increase commitments in these areas.

For example, take transportation electrification. Transportation now emits a greater volume of greenhouse gases than any other U.S. sector, with carbon exhaust from cars, trucks, airlines and shipping adding up to 29% of total U.S. emissions. Despite the temporary reductions in travel-related emissions during the pandemic, transportation emissions were still climbing at last measure and are likely to keep growing. This should alarm us all.

But with the reconciliation bill’s tax incentives for purchasing electric vehicles making these cars much more affordable for Americans — up to a $12,500 credit if you buy an EV made in the U.S. — plus the bill’s incentives for manufacturing and deploying EV charging infrastructure, we’d see rapid adoption of clean electric transportation and a steep drop in transportation emissions.

Couple the transportation incentives with the reconciliation package’s Clean Electricity Performance Program (CEPP), which encourages utilities to hasten their steady transition to clean energy — from a national average of 40% today to 80% by 2030 through incentive payments and penalties — we’d see a precipitous drop in overall emissions.

Transportation and electric power together currently account for more than half of U.S. greenhouse gas emissions. These provisions will spur a broad energy generation transition that can also power the EV cars, trucks and fleets of the future.

As investors, we view the budget reconciliation as a long-term catalyst for sustainable growth, and growth translates to jobs. The Economic Policy Institute estimates that the budget reconciliation provisions, on their own, could create up to 3.2 million new jobs per year. Through our existing investments, we have seen firsthand how infusions of capital, from both public and private sources, can stimulate job creation, from hourly wage positions all the way up to highly skilled engineering roles. The budget reconciliation will create economic opportunities for all.

There’s clearly a market for climate action: The Global Commission on the Economy and Climate found that bold climate action globally could deliver $26 trillion in economic benefits through 2030. We need this funding to go as far and as fast as possible to avoid a global rise in temperatures of 1.5 degrees C, which experts collectively agree is the tipping point into catastrophic, irreversible climate change. Government policy can both signal and pave the way for broader private-sector investments, as it did decades before with pollution legislation.

And what will happen to these investment dollars if Congress does not pass the infrastructure and budget reconciliation packages? The cost of inaction is far higher than the costs outlined in the budget reconciliation legislation. The climate measures in the bill add up to $700 billion over a decade, or $70 billion a year.

Climate change-induced extreme weather disasters in the U.S. alone cost roughly $100 billion each year. If measures are not passed, individual citizens will keep paying higher tax and energy bills. Meanwhile, investors will instead put money into companies and sectors in other geographies that are focused on next-generation renewable energy, EV charging and other technologies supported by policy and will look for clean infrastructure plays on other continents where their investment dollars go farther and create faster returns.

In a no-action scenario, the United States will face long-term negative consequences as its economic leadership fades and its OEMs and supply chains gradually lose their position as global leaders. The U.S., as a nation, will in turn lose the financial capacity to mitigate or respond to the devastating local impacts of climate change.

We have an urgent need to address the climate crisis now, with the public and private sectors each maximizing their tools to ensure long-term economic and environmental sustainability. The federal policy tools and opportunities are clear, and the private sector is ready to respond with investment capital.

We urge Congress to pass a budget reconciliation bill and allow its strong climate measures to reap benefits for all.

MIT spinoff Via Separations scores $38M Series B to decarbonize manufacturing

Via Separations is a startup from a couple of MIT material science engineers who figured out a way to reduce the amount of energy required in a manufacturing process, resulting in lower carbon creation, lower energy usage and lower costs. Today, the company announced a $38 million Series B.

The round was led by NGP ETP, a firm that focuses on investments that lower carbon emissions. In addition, 2040 Foundation participated, along with existing investors The Engine, Safar Partners, Prime Impact Fund, Embark Ventures and Massachusetts Clean Energy Center.

CEO and co-founder Shreya Dave says the company hopes that by reducing carbon in the manufacturing process, they can help consumers make more green buying choices because the things they buy will have resulted in less carbon creation during manufacturing.

“Basically our vision is if we can decarbonize that supply chain infrastructure, then we don’t have to rely on consumers having to make a decision between the thing that they want and how to do good for the planet,” she told me.

The Via solution sits in a shipping container in the middle of the manufacturing process and acts as a filtration system for whatever is being produced. Dave uses a pasta pot analogy to describe how the filtering process works. “Instead of going into a pot where the water gets boiled off using heat, it goes through a strainer, where we [apply] pressure in order to force it through a filter like a pasta strainer,” she explained.

She said that has a couple of advantages. First of all, it reduces the amount of energy required because it’s using electricity instead of heat, which is using 90% less energy than a heat-based process. What’s more, because the process is using electricity, if you can get that from renewable energy, then you’re both electrifying and improving the energy efficiency of the process.

As an early startup building a complex solution, Via has decided to concentrate on the $5 billion pulp paper industry for now, but the technology could be more broadly applicable in other industries like petrochemicals, food and beverages, and pharmaceuticals.

The company has been working on three pilot projects, but the goal is to eventually offer this solution as a service, which reduces overall capital costs for customers and puts the maintenance burden on the company instead of the customer. They are also building a software monitoring solution to keep an eye on their products as they get deployed to help customers maximize impact and catch any maintenance issues early.

Via spun out from MIT in 2017 and today has 23 employees with a goal of reaching 30 by the end of the year. As a diverse founding team, Dave says she and co-founder and CTO Brent Keller want to build a diverse group of employees.

“My philosophy is that there is a diverse candidate for every job opportunity that we’re hiring for, but there’s also a reality of resource constraints. And so we try to allocate our resources to get the widest perspective,” she said. That may mean hiring based on potential, rather than experience. She says they have also implemented rigorous anti-bias training in the hiring process.

The startup idea has its roots in research that Dave and Keller were doing as graduate students at MIT with their professor Jeffrey Grossman, who is chief scientist at the company.

“My co-founder and I were working on water filtration membranes and looking at how to take salt out of the water to make that process cheaper, better, faster. What we learned is that what we had invented didn’t have a lot of application in water, but had a lot of potential for chemical manufacturing for this raw material, for stuff that wasn’t water,” she said.

When they launched the company, they ended up shifting their focus to industrial manufacturing, which is much more impactful from a greenhouse gas perspective, a point that is particularly important to the founders.