Why investors failed to embrace Jeff Ubben’s Inclusive Capital

Earlier this year the activist Jeff Ubben predicted that the first model of the environmental, social and governance investing movement would eventually disappear.

It was a surprising claim for an investor who just three years before had launched a hedge fund inspired by Rachel Carson’s landmark environmental book, Silent Spring. But Ubben also predicted that firms like his, which typically buy stakes in non-ESG friendly companies in an attempt to drive change from within, would succeed.

“Those of us who look more at the ambiguity of the situation and took on the challenge of fundraising with an ESG fund that owns Exxon, for instance, our returns are going to be better,” he said on a podcast in March. “Over time, everybody is going to invest this way.”

Instead, Ubben last week told investors that his Inclusive Capital Partners would wind down and return cash to investors. Inclusive’s website, which featured a quote from Carson’s book, has become inaccessible.

It marks the demise of an environmental and social investing fund launched with high hopes and publicity in 2020. Ubben founded Inclusive after more than two decades as head of ValueAct Capital, one of Wall Street’s best-known activist funds. Inclusive grew to $2.3bn of regulatory assets this year, according to filings, far short of the $8bn Ubben hoped to raise.

“We acknowledge that many investors have likely lost confidence in the . . . investment strategy and/or our ability to successfully execute that strategy,” Ubben wrote in a letter last week.

Ubben co-founded ValueAct in 2000, mixing value investments in misunderstood midsized public companies with a focus on shareholder activism. But Ubben avoided highly charged public battles waged by activists like Carl Icahn, choosing instead to work behind the scenes to build influence.

ValueAct grew to more than $15bn in assets in the years after the 2008 financial crisis, as low public valuations and institutional investors, frustrated by a stretch of poor stock market returns, piled into funds that sought to hasten corporate change. One of its biggest wins was at Microsoft, where ValueAct gained a seat on the board.

By 2017, Ubben had handed off most of his investments to other ValueAct partners and began to focus on sustainability investments. He spun out Inclusive from ValueAct in 2020.

Inclusive blamed its closure on public markets, saying they had not rewarded its mission.

But several people familiar with the fund’s workings said Ubben had alienated the ESG community by investing in companies that would not traditionally fall into that bracket, including oil supermajor ExxonMobil and German conglomerate Bayer, which has been entwined in litigation over its weedkiller Roundup. Ubben, who this week was attending the UN climate summit in Dubai, declined to comment beyond his letter.

“We were perplexed by their publicly announced ESG investment in Bayer,” said Michael Weinberg, adjunct professor of business at Columbia Business School, who knows the hedge fund well. “To us, that would be akin to calling a sweetened soda, doughnut or potato chip company as ESG friendly.”

The strategy for Inclusive was to push companies to tackle environmental and social issues to create big returns, Ubben said in 2020. Attacking global warming, for example, “that’s like a 10-times-your-money deal” for companies with successful solutions, he said.

He partnered with Lynn Forester de Rothschild, who had previously started the non-profit group Coalition for Inclusive Capitalism, which seeks to value companies on environmental or social measures. But de Rothschild left the fund in May without an announcement and no explanation was given for her departure. She declined to comment.

San Francisco-based Inclusive did not fit neatly into a “clear bucket” for institutional investors, said Robert Eccles, an Oxford university professor. It was not easily classified as a sustainability “impact” fund, which tends to focus on private assets, and it was not an activist hedge fund, he said. This murky space likely made it difficult to raise cash, he added.

Ubben also had a tense relationship with environmentally-conscious investors. He previously told the Financial Times that Inclusive did not have any ESG investors, adding that the movement “is kind of a virtue-signalling exercise for asset owners”. In the same breath he urged those same investors: “Do not cancel me.”

The activist wanted to distinguish between what he referred to as “ESG 1.0”, screening companies that meet certain criteria, and “ESG 2.0”, where an investor works with companies to reduce harm.

“That’s really where Inclusive started,” he said in the podcast this year. “We were unafraid to buy things that were boycotted, also because those stock prices tended to be low, and that’s kind of the currency with which we work.”

But many of the Inclusive’s bets have struggled. Electric-truck maker Nikola, which went public in 2020, later settled fraud charges with the US Securities and Exchange Commission. Company founder Trevor Milton was convicted of three counts of fraud in October 2022.

Ubben has also been a big backer of Enviva, the world’s largest producer of wood pellet fuel.

Inclusive’s first regulatory filing as an independent hedge fund showed a $220mn stake in Enviva, making the company its largest investment at the time. Ubben joined its board in 2020 and stood by the company when a short seller published a report accusing it of “flagrantly greenwashing its wood procurement”.

Enviva’s share price has declined by 98 per cent this year. Inclusive recently sold more than 2mn Enviva shares for just over $1 per share, while Ubben resigned from its board on November 28.

A review of Inclusive’s holdings shows that some of its biggest sustainable investments, such as vertical farming start-up AppHarvest and sustainable fibre company Unifi, lost most of their value after the hedge fund’s initial purchases.

One lawyer who has worked with a group targeted by Inclusive said its environmental and social positioning enabled certain companies to give the fund a board seat and say that they were aligned with ESG values.

Exxon appointed Ubben to its board in 2021 to try and fend off a proxy battle from activist Engine No. 1, which had targeted the oil major over its exposure to the threat of climate change.

Inclusive started selling down its stake in Exxon on the day it announced its closure last week, regulatory filings showed, so far disposing of $216mn worth of shares.

Inclusive’s inability to define itself left it vulnerable amid a broader investor pullback from ESG funds, said people familiar with the firm. “There was this idea that investors were willing to forgo returns in favour of positive impact. That is not the case,” one fellow ESG fund manager said.


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