Quixotic Activist Was Naive About Modern Capitalism

It sounded quixotic, and so it proved. Activist investor Jeff Ubben is winding down his social and environmental impact funds, a project that sought to harness capitalism for the simultaneous benefit of society and shareholders.

The failure points to some uncomfortable truths about the modern stock market and the staying power of even well-meaning investors.

Ubben came to prominence through ValueAct Capital, an investment firm that takes large, long-term stakes in companies and tries to work alongside management rather than getting into bitter public fights. His most recent venture, Inclusive Capital Partners, took that approach and added an environmental mission. It was born from the conviction that conventional environmental, social and governance (ESG) investing is flawed and requires a new strategy.

The Inclusive portfolio included companies that don’t look very ESG at all — oil major Exxon Mobil Corp. and Bayer AG, the purveyor of pesticides and genetically modified seeds, as well as Dutch chemicals firm OCI NV.

There was a pragmatic ethical and financial thesis underpinning the choices. A growing population will demand more energy, more food and more materials. Rather than pretend this isn’t the case, Ubben focused on companies that could meet the need while also working to reduce the environmental side effects. So Exxon is investing in carbon capture and storage. Genetic engineering can help lower the need for toxic chemicals in agriculture and make farming more efficient. OCI specializes in fertilizers and low-carbon fuel alternatives. And so on.

Where such companies were excluded from ESG funds, the resulting valuation discount just reinforced their appeal. “Canceled” firms might yet command premium stock-market valuations if the market eventually applauds emissions-busting work, so the argument went. Inclusive aimed to push the management teams to invest further and faster and make the inherent value of their assets visible through spinoffs or asset sales.