People tend to associate environmental, social and governance investing with stock picking, a way to sort through companies based on their ESG practices. But not every investor can be choosy about the companies they own. Big pension, endowment and sovereign wealth funds oversee tens of billions and even trillions of dollars, which means they have to own practically everything. If they avoid companies that fall short of their ESG standards, they quickly run out of places to park their money.  

Instead, these so-called universal owners are trying to bolster companies’ ESG practices by supporting ESG-related proposals and removing directors who stand in the way. The California State Teachers’ Retirement System, the second-largest pension fund in the U.S. with more than $300 billion in assets, announced recently that beginning with the 2022 proxy season, it will oppose directors who are moving too slowly on diversity and climate change and support shareholder proposals that seek to reduce carbon emissions.

Specifically, Calstrs wants more women on corporate boards and more information about the diversity of board members, which goes to the social pillar, or the “S,” in ESG, and overlaps with the “G.” Calstrs also wants more climate-related disclosures along the lines the Securities and Exchange Commission recently proposed, as well as targets for reducing greenhouse gas emissions, which obviously falls under the “E.”

This ESG activism isn’t entirely new. Activist investors have long sought a say in how companies are run, often related to governance practices thought to affect companies’ performance, such as classified boards, independent directors and takeover defense tactics. What is new is that investors like Calstrs now want a say not just on “G” primarily but on “E” and “S” as well.

Some will accuse Calstrs of using ESG to push a political agenda better left to legislators. But Calstrs is adamant, as is every ESG investor I’ve encountered, that it is merely trying to manage risk and improve the performance of its portfolio. “This is about investment, not politics,” Aeisha Mastagni, a Calstrs portfolio manager, told me. “More diverse companies perform better. Companies that provide adequate disclosure on climate risk will be better prepared for the future. Those things mitigate risk and add value, which is better for Calstrs’s portfolio returns.”

That distinction between ESG as an investing tool and a platform for expressing values or political views is one that ESG critics and many companies and investors either don’t understand or don’t want to accept. The fact that ESG might also align with investors’ values or have an impact beyond their portfolio doesn’t change that the fundamental motivation is about making money.  

It remains to be seen whether more climate disclosure, cleaner energy or greater diversity actually puts more money in shareholders’ pockets. In the meantime, companies should expect ESG investors to get more active. They’ve been emboldened by the success at Exxon Mobil Corp. last year. A group led by activist investor Engine No. 1 that included Calstrs and investment giant BlackRock Inc. managed to replace three of Exxon’s directors on a platform to make the energy behemoth more climate friendly. Exxon shareholders also approved a nonbinding proposal calling for more disclosure about the company’s climate lobbying efforts.

“Last year was a watershed year,” Mastagni said. “Expect this to be a wave. It’s not just Exxon. It was a record year for environmental proposals and support for those proposals. Investors are now holding directors accountable and making sure they have the right people in the boardroom.”

The Exxon saga is also a preview of coming arguments about whether ESG initiatives benefit shareholders and if so, to what extent. Exxon’s stock moved modestly higher after the election of the new board members. Engine No. 1 credited its involvement for the gains while incumbent directors pointed to cost-cutting and savvy capital investments. Disentangling the impact of ESG initiatives from the myriad other variables that move stock prices won’t be easy. 

Even so, big investors are not going away. “The work is to keep working with companies that aren’t receptive to ESG to get them to improve because, as universal owners, we are not going to divest and will own these companies for a long time, longer than their management will be there,” Mastagni said. “We’ll keep coming back.”

Right or wrong, as conviction grows among investors that ESG is as important to shareholders as anything else discussed in the boardroom, they will increasingly call for change. Companies should be prepared to respond with more than tired, misinformed babble about ESG’s political crusade. 

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.