VICTORIA GEDDES, Executive Director

Until recently Australia was consistently ranked second behind the US in terms of the number of activist campaigns launched each year. Up until 2018 the number of companies subject to activist demands would average around 65, a number that rocketed to just over 80 in 2018 and 2019. Over the past three years, however, activism has been steadily declining with the number of companies targeted in 2022 falling to its lowest level in eight years.

The impact of COVID-19

It is tempting to attribute the downturn in activism over the past three years to COVID-19, in which case, we would expect to see a similar pattern in other countries and regions. However, global statistics suggest the story is more nuanced.

In the US the number of activist campaigns has steadily declined year on year for the past five years, until last year when campaigns experienced a spike. In Europe campaigns have consistently been on the decline since 2018. In Canada, the number of companies subject to activist demands almost halved between 2018 and 2021 but demonstrated a revival similar to the US in 2022.

By contrast, in Asia we see an altogether different story with the number of activist targets having nearly doubled since 2016 with particularly strong growth experienced in 2022. One outcome of this growth was that Japan replaced Australia last year as the second most popular activist target globally, by the number of companies subject to demands. South Korea also took the fifth spot in the rankings, behind Australia and Canada in third and fourth place, respectively.

While the rebound in equity markets globally post-March 2020 may have offered fewer opportunities for the more traditional style of activism, there are evidently other factors at play contributing to the decline of Australian activism.

Regional nuances

There are structural elements to the market in Australia that drive the prevailing style of activism and that differentiate it from other regions. Since 2016, companies in the basic materials and energy sectors have dominated activism, accounting for an average 49% of Australian activist targets. This is followed at some distance behind by financial services companies at 15% prevalence.

In 2022, 52% of Australian-based companies subject to activism had a market capitalisation of less than $50m. A further 18% of targets in 2022 were micro-caps companies with market capitalisations of up to $250m. The 1500 companies in the ASX with a market cap of less than $250m make up around 75% of the market, of which half are basic materials and energy companies. In this context it is not surprising that these sectors are where activism is most prevalent.

Australia discovers ESG activism

In Australia the most noticeable shift in recent years has been the growth in ESG activism, particularly among large-cap companies. Since 2016 when ESG considerations barely rated a mention, they had grown to represent 31% of all Australian activist campaigns in 2022. At the same time the proportion of campaigns at the micro-cap end of the market, which typically focus on demands to change the composition of the board, slipped from a very predictable 64% to 56% over the past 2 years.

ESG activism in Japan and South Korea has been consistently strong, averaging 50% over the past seven years but dominated by governance concerns. What has been noticeable however is the emergence of campaigns focused on E and S demands which have risen from 4% in 2016 to 14% last year, which is close to a quarter of all ESG activity.

By contrast, ESG activism in North America has been an established part of the activist scene for many years. In the US, 66% of all activist campaigns have featured ESG demands of some kind since 2016, while 64% of all demands made of Canada-based companies concerned ESG in 2022, up from 41% two years prior. Perhaps because of Europe’s reputation as a leader in ESG reporting, the focus on ESG activism there is much lower at a consistent average of 31% between 2016 and 2022.

Is there scope for ESG activism in Australia to continue to grow and match the levels experienced in North America and Asia or does Europe provide a better benchmark? ESG activism in Australia is dominated by two groups with a strong climate change agenda and they have chosen to focus their attention on large caps which make up 50 stocks in the ASX. Unless this situation changes it is likely that we will see more of the same in the years to come.

* Data sourced from Insightia