A new form of shareholder activism has appeared almost out of the blue. Classic shareholder activism (which I will call “firm specific” activism) depends on an entrepreneur (usually an activist hedge fund) who assembles a 5% (or greater) block of stock, files a Schedule 13D that announces its plans for the target company (which might include changing management, breaking up the company, or increasing its leverage), and then profits on that block when the market responds favorably. But in this new form — “systematic risk activism” — the key actors are index funds and diversified asset managers. Nor do they necessarily expect a positive market reaction in the short-run. Being fully diversified, these investors care little about the specifics of any individual company in their portfolio. For example, State Street Global Advisors holds over 11,000 stocks, all for the long-run.

According to the Capital Asset Pricing Model, the goal of these investors should be to seek to reduce their exposure to “systematic risk” (which is defined as the risk that remains in any portfolio after it is fully diversified). Today, the consensus among investment managers is that the leading systematic risk comes from climate change. I describe the rationale and mechanisms of this new form of activism in an article just posted on SSRN, but its key features are discernible in Engine No. 1’s successful, but problematic, proxy contest this year against ExxonMobil.

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