The # 1 engine expects more activist ESG campaigns

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The No.1 engine awaits bolder proposals from shareholders after the resounding success of the activist impact investor campaign that changed the board of directors of oil and gas giant ExxonMobil.

Michael O’Leary, Managing Director of Engine No. 1 was interviewed at the UK Sustainable Invest and Finance Association (SIF) Autumn Conference. Prior to joining Engine No. 1, O’Leary worked at Bain Capital, where he was a founding member of the private equity firm’s social impact fund and consumer, tech and industry focused investor. .

O’Leary said the No.1 engine was built on the simple idea that the long-term performance of companies depends on the value they create for their workers, employees, customers, communities and the environment, which can be measured. Shareholders have traditionally looked at financial metrics such as net income, but these metrics should be broadened to include metrics such as carbon emissions, wages, diversity and the health impact of a company’s products.

“If we can add up all of these different sources of value, we can better understand the long-term risks and opportunities of the business,” he added. “The companies that focus more on these issues will be the ones that win and the # 1 driver can work as active owners to try to improve that impact and help create long-term value. “

Engine # 1 is basically a concentrated equity fund and an index fund and votes its stocks to engage with companies within its “total value framework”.

Total value framework

The company said in a white paper that the Total Value Framework is a data-driven approach that places tangible value on a company’s environmental, social and governance impacts, and then links those impacts to financial value creation. long-term. It integrates reliable and independent ESG data into traditional financial reporting and attempts to understand and accurately predict how ESG performance affects future valuations.

Chris James, engine no.1

Chris James, Founder of Engine No. 1, said in a statement: “Based on our previous investment experience, we have seen strong correlations between ESG impacts and economic outcomes. When we used the new data available in our analysis, it became clear that these correlations are consistent for most companies, proving that ESG data is as essential to the investment process as financial analysis.

O’Leary continued that ESG investing in public markets has historically focused on exclusion and that the divestment movement deserves credit for making climate change a prominent issue. However, there is an opportunity for investors who want to take an active approach and drive change, as the scale of the climate change challenge means that almost all industries need to change, including the way we generate energy, grow food, build cities, transport people and goods, and heat homes.

“Our approach is that if you want to make an impact on major public actions, you have to take a seat at the table,” O’Leary said. “You have to use your voice, you have to roll up your sleeves, and then try to effect change. “

ExxonMobil

In June of this year, a third director appointed by Engine No. 1, and backed by CalSTRS, the giant California public school teachers’ pension plan, was elected by shareholders to the ExxonMobil board of directors.

CalSTRS said in a statement, “Shareholders have the power to effect change even in the most resilient companies and contribute to the lasting value of their investments. We will continue to actively engage our portfolio companies to prepare for the global transition while maximizing returns California educators.

O’Leary continued that Engine No.’s strategy at ExxonMobil, well before launching a public campaign in December last year, was to appoint new directors to the board who all had extensive experience of energy.

Michael O’Leary, Engine No. 1

“One of the shocking things for a lot of people when we spoke to them during the campaign was that the board had all these incredibly impressive former executives, former CEOs of Fortune 500 companies, but none of them had extensive energy experience, ”he said. he declares.

As a result, the Board of Directors was unable to adequately challenge management’s assumptions regarding ExxonMobil’s long-term strategy.

“We were fortunate enough to start with a core of partners, including CalSTRS, and eventually included people like the Church of England and big index providers like BlackRock, Vanguard and State Street,” O ‘said. Leary.

He explained that one of the influential stories behind the No.1 engine using active ownership was the situation at NRG Energy in the United States. Former chief executive David Crane has set ambitious net zero goals and started investing in renewables, but was forced out by hedge fund Elliott Management which appointed new board members , including a climate change denier

“A real transformation underway has been blocked because the investors who cared the most about climate change, and should have been there to defend David Crane, had fled the action,” O’Leary said. “Investors have a bigger role to play in saying I own stocks, which means I’m responsible for what the company does. “

One of the aspects of ESG investing that O’Leary finds most frustrating is the emphasis on asset management portfolios.

He said: “I think we all need to take a step back and say, who cares if our portfolio’s carbon emissions change if the planet’s carbon emissions don’t change?

Engine # 1 aims to use transparency to highlight the impact it has.

Another frustration for O’Leary is that many fund managers claim to care about ESG, but their voting records don’t match their words. Her favorite example is a fund focused on women’s empowerment that voted against 80% of proposals related to gender diversity.

Shareholder proposals

“In many ways, this year has been a banner year for shareholder voting with a record number of ESG proposals,” he added. “I think you will see bolder proposals from investors, given the success of our activist campaign. “

Besides the environment, he expects more shareholder campaigns on social issues; diversity, equality and inclusion.

“I’m excited to see this growing focus on the power of shareholders to drive change from within and I think that continue to grow over the next several years, ”said O’Leary.

The Harvard Law School Forum on Corporate Governance said in a blog that the 2021 proxy season has produced record levels of proposal submission, average support levels and passing levels.

“These results reveal that the increased focus of investors on ESG risks and opportunities has a significant impact on voting decisions,” the blog added.

For example, 33 environmental and social proposals were passed, the highest number on record and an 83% increase from the 2020 proxy season.

The forum said there was also record support for shareholder proposals focusing on political spending, plastic pollution, greenhouse gas emissions, deforestation, and diversity on boards and boards. workforce, as well as management-supported proposals on climate change, diversity, equity and inclusion (DE&I) and human rights.

BlackRock has significantly changed its voting practices this season, according to the study, in line with revisions to its voting guidelines indicating its intention to increasingly support shareholder proposals dealing with material ESG issues.

“Our review of its vote on the 36 environmental proposals in the 2021 season indicated around 50% support compared to around 13% for such proposals in 2020,” the study said.

Vanguard also supported around 47% of the proposals voted on, up from 21% of those proposals in 2020.

“Remarkably, however, despite the marked changes in support seen at Vanguard and BlackRock, they continued to be among the institutions most likely to vote in accordance with management recommendations,” the report added.

Northern Trust, Alliance Bernstein and Norges Bank were the most supportive institutions across the climate-focused proposals.



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