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Engine No. 1 was founded a year ago this month and since then has been causing a stir in the investment world. Most notably, the ESG-oriented investment firm faced Exxon Mobil in a proxy battle and won. He also launched an ETF and published a white paper, largely favorable to General Motors.
Engine No. 1 CEO Jennifer Grancio sat down with Delivering Alpha to discuss their strategy and what’s next for the company.
(The following has been edited for length and clarity.)
Leslie Picker: You work in many areas: activism, ETFs, constructive research, maybe more that we don’t even know about yet. What do you think is the best way to achieve the means to end ESG?
Jennifer Grancio: We founded Engine No. 1 on the simple idea that you need to understand relevant E, S, and G data, and then just use it to think about the current value of businesses? Are they poorly evaluated? And how do you generate economic value over time? And that data is critical to long-term value. So we start there. And then in everything we do, we also engage very deeply with business. So our point is that if you care about ESG, you want to engage with companies to get them on the right track. And if you’re just investing and looking to build wealth and achieve strong performance during these transformation cycles, you care about ESG data and you need to really engage with business as well. You have to keep them and we don’t believe in divestment. Maybe we can talk about it later. You need to hold businesses and engage with them so you can help them through the transformation cycle.
Picker: I want to focus on that word engagement, because Exxon was more of a critical engagement. You looked at a company, you felt like they were doing potentially bad things with regards to ESG and sustainability, in particular. With GM, you get involved but in a more complementary way. Do these two strategies seem effective to you? Is there one that you are more focused on than the other?
Grancio: In fact, we believe there are many different ways to engage with a business. And so everything we do is based on a total value framework, which is this idea of when you look at the activities of a business and you look at their material impacts, how does that relate to the value of the business. over time. And so when we looked at Exxon, we saw, you know, a problem. It is an outlier. So, from an E&S and G perspective, the company was making choices that resulted in negative results of long-term shareholder value. And so this is a case where the company maybe doesn’t see it that way and as an investor you really need to commit to thinking about how to do things differently.
In GM’s case, the company actually understands that it has a good CEO, that it has a great governance approach to running its business, that it understands the E and the S, and that it does uses to generate shareholder value. So these are two very different examples. So in a case like Exxon, where it’s an outlier, you can, as investors – and we think we were able to make that point – make an economic argument the one. kind of spearheaded in this conversation, and a lot of people came with us and followed us as we took an activist approach. In almost everything that we do, we think it will be a lot more of a constructive approach, like what we do with General Motors.
Picker: After the Exxon campaign, many CEOs of US companies were studying their ESG skills, fearing that they would be vulnerable to the next situation. Do you think you can use that halo and do something similar in the future on the activism front, because you’ve had so much success with Exxon, that now you’re in a roll to do an upcoming one? countryside ?
Grancio: Well, the way we think about it right now is we have information, we have a way of thinking about the world where we can actually help CEOs. And what we’ve found at the back of the network with Exxon is that CEOs want that help. So many CEOs, they have ESG reports, they have studies and a lot of them, frankly, would like someone to talk to, to help them think about what are the key ESG elements that they should be thinking about. ? And we think that’s really the magic, of doing the math and figuring out which of these impact areas are the most critical for a business, and then how do they engage so that they actually generate shareholder value over time. And we’ve had great conversations with a lot of CEOs where we’re not going to become threatening activists, we get to be deeply constructive about how they run their businesses and make money for investors over time. .
Picker: Recently your head of activism left the cabinet. And if I read between the tea leaves, it looks like proxy battles won’t be the norm for Engine # 1. Am I correcting this?
Grancio: We think a lot of the opportunity is very constructive. The opportunity for CEOs to understand how they integrate E, S and G into their business, basically running their business. They want to do it, we think it’s a huge opportunity for investors. So it’s true, sometimes we may need to have a proxy campaign or an activist campaign, but most of the time we’re going to be constructive.
Picker: It is therefore not fair to call yourself an activist investor …
Grancio: It is fair to call us an investor who is trying to generate performance for everyone we work with.
Picker: There are reports that you have met Chevron and other executives in the oil and gas industry. Did anything materialize from these conversations that you would like to share?
Grancio: We’ve spoken to a lot of people and so our take on this whole industry is that companies are struggling to understand, as we go through an energy transition, how they run their business for optimal returns over time. . So we’re not commenting on exactly what we did with whom, but we do have a number of constructive conversations. And again, we think this is a great opportunity for energy companies and a great opportunity for investors to get it right.
Picker: What do you think of Exxon’s recently announced goals to reduce company-wide greenhouse gas intensity by up to 30% by 2030? Do they go far enough?
Grancio: We are pleased that Exxon has started to make progress on these issues since we launched the campaign a year ago. But our point of view is still that this is a company that has work to do on governance, and work to do to share with the market a strategic plan on how its business is transforming. So we’d love to see more and we’re happy that we were able to run a campaign that puts the right abilities in the boardroom, so there is an opportunity to have this conversation now.
Picker: If they don’t get where you need them, would you be ready to start another proxy battle at Exxon?
Grancio: Well, we’ll watch them.
Picker: You took a different approach, as you mentioned with GM. It was a largely laudatory white paper from the automaker, saying it was a leader among incumbents in making the transition to electric vehicles. Is this something that we will see more of? And will it always be linked to sustainability? Or will there be further research on maybe the social part of ESG or the governance part of ESG?
Grancio: Our take on this is that all of these things matter. So governance: how good is your board of directors? Does your board have the right skills? Are the members of the board of directors people who have proven themselves in the management of past companies? Governance matters. And then from a climate point of view, it’s just a little under our noses because companies have already disclosed a lot of information. So it is very easy to have a math and economics based conversation about the connection between environment and long term value. Then on the social side, too, and the data is on the social side.
We use the data available today and there are clear causalities and relationships between how a business elevates people through leadership perspectives and how a business thinks about its impact on the community, how a business thinks. the quality of the wages of its workforce. So, absolutely, these are all areas that are in our sights.
Picker: If you were to talk to CEOs in general, which of these “S” factors would you say, “Get things in order now, or, you know, you might get a call from us soon.”
Grancio: Yeah, I think I think it’s a little different for every business, depending on what they do and where they have the most impact. So if you are a professional services firm, you know, how do you get up through the management ladder? If you are a company that employs people at lower wages on average, are you employing people in a way where they earn more than a living wage, and hiring proportionately to the communities you serve? So it’s a little different for different companies. But our guide would be [to] think about materiality. Think about running a business the right way to make it sustainable, and you serve the customers, and you sort of beat your competition over time. So think about that long-term economic value and we think it will make it much easier for companies to do the right thing.