On May 26th, 2021 ExxonMobil, one of the world’s largest carbon emitters, faced a day of reckoning. Engine No. 1, a small group of investors, successfully replaced three members of Exxon’s 12 member board with climate change conscious directors. They did this by buying Exxon stock, proposing new board members, and lobbying heavy-weight investors, most notably BlackRock, Vanguard, and State Street, to support their proposal. With the help of these three major investment management companies, Engine No. 1 is steering Exxon Mobil towards new energy targets.

One reason this kind of shareholder activism is gaining momentum across the US is because individual investors are growing concerned with the state of global warming and frustrated with a lack of government action. Shareholder activism is the act of using the financial influence of a group of parties to pressure management within companies to adopt climate friendly measures. In Exxon’s case this meant forcing the company to contend with more board members lobbying for reductions in Exxon’s carbon footprint.

Investors must assess climate-related risks in order to adequately protect their money, like retirement funds or college savings. Fossil fuel investments are notoriously volatile, but transitioning to clean investments ensures security, which better protects people’s savings. Activists, people or groups who own a controlling portion of a company, are trying to make this happen by forcing oil-invested banks, through shareholder activism, to switch their stance.

Though this activism sounds promising, it’s still unclear whether it’s successful. Will shareholder proposed policies just become window-dressing: a symbolic gesture to appease the investors.

A recent paper by Tamas Barko, Martijn Cremers, and Luc Renneboog published in the Journal of Business Ethics explores the effectiveness of shareholder activism. The team looked at how companies are targeted for activism, how tactics are chosen to reach the objective, how many separate groups get involved in the action, and what determines if an engagement will be positive.

Their analysis reveals that successful shifts usually include three things: adapting to or mitigating the effects of climate change; stabilizing, expanding, or protecting people’s investments; and improving the company’s well-being. All three are necessary for productive climate action and the longevity and security of any implemented policies.

Using the ExxonMobil takeover as a case study shows how this  restructuring process plays out. First, investors started to worry about investing in a company wracked by major environmental concerns. Climate instability  affects Exxon’s bottom line so, as a shareholder, the investor had an interest in forcing the company to reduce its exposure to climate change. The investors communicated those wishes, but Exxon responded negatively to the efforts. Shareholders then cooperated to build a large enough coalition to forcibly take over seats on the board and install directors who are more sympathetic to the cause.

This example shows the general process of a successful instance of activism. But, the research reveals such cases often have a lot in common.

First, activists tend to target companies with poor sustainability records. Companies that are vehemently anti-sustainable-action (think Exxon) are targeted more often than companies that are passively not sustainable. The more visible the company, both in the market and in the public eye, the higher its chances are of getting attention. The largest and most well recognized firms are also some of the most polluting, which opens a lot of opportunities to create change.

There are two ways action can be taken: by restructuring the company or by increasing transparency into business practices and sustainability standards. Transparency efforts tend to be easier to achieve, but have questionable results. Restructuring is more difficult, but is also more likely to lead to actual changes. In Exxon’s example shareholder activism successfully changed the board, a milder form of restructuring.

When a company is doing worse, they are more likely to comply with demands, and this could be to draw their consumer base back to them. The researchers did conclude that  successful compliance, a company acquiescing to shareholder demands, is due to participation by the activists, and could not be accomplished purely through external drivers.

Companies benefit from responding to investors with sustainable action. Researchers found that after a firm has complied with the activists’ demands they tend to see a significant uptick in sales and economic growth. This is true for even low-level engagement except if the firm is already performing highly in terms of sustainability. Beyond market gains, the researchers found that participation “could lead to improved governance and reduced agency problems” as faith in the company grows with investors. Any level of engagement is likely to be beneficial to the company regardless of if the engagement leads to real changes.

The overarching finding is that these tactics are not just for optics; they actually improve company performance and benefit the environment. They’re also a valuable tool for shareholders who don’t own a large portion of the company. Just as Engine One showed with Exxon, small investors can make a big difference.