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Engine No. 1 was launched a year ago this month and has since caused a sensation in the investor world. Above all, the ESG-oriented investment firm Exxon Mobil took on a proxy battle and won. It has also launched an ETF and published a white paper that General Motors largely supports.
The CEO of Engine No. 1 Jennifer Grancio sat down with Delivering Alpha to discuss her strategy and next steps for the company.
(The following has been edited for length and clarity.)
Leslie Picker: You have lots of buckets to operate in: activism, ETFs, constructive research, maybe more that we don’t even know about. What do you think is the best way to achieve the means to achieve the ESG goal?
Jennifer Grancio: We have Engine No. 1 founded with the simple idea that you have to understand the relevant E, S and G data and then just think about what companies value today? Are they mispriced? And how do you add economic value over time? And that data is critical to long-term value. So let’s start there. And in everything we do, we are also very closely involved with companies. If you care about ESG, we want to get in touch with companies to get them on the right track. And if all you want to do is invest, build wealth, and perform strongly during these transformation cycles, ESG data is important to you and you need to really deal with the companies too. You have to hold it and we don’t believe in an alienation. Maybe we can talk more about it later. You need to hold and interact with the companies so that you can help them through the transformation cycle.
Picker: I want to elaborate on this word “engagement” because Exxon was more of a critical engagement. You looked at a company and felt that it was doing potentially bad things in terms of ESG and sustainability in particular. With GM, you’re committed, but in a more complementary way. Do you think both strategies are effective? Is there one that you focus on more than the other?
Grancio: We believe there are many different ways to get in touch with a company. And so everything we do is based on an overall framework of values. That’s that idea when looking at a company’s business and its material impact, how it relates to the company’s value over time. So when we looked at Exxon, we saw a problem. It’s an outlier. So from an E, S, and G perspective, the company made decisions that resulted in negative long-term value results for shareholders. And that’s one case where the company might not see it that way and as an investor you have to really get involved to think about how to do something differently.
In GM’s case, the company actually knows it has a good CEO, it has a great approach to governance to running its business, and it understands the E and S and uses it to add value for shareholders. So there are two very different examples. In a case like Exxon, which is an outlier, you as an investor – and we think we could make that argument – can use an economic argument to spearhead this conversation and a lot of people came with us and followed us that we took an activist approach. In almost everything else we do, we think it’s going to be a lot more constructive than we do with General Motors.
Picker: After the Exxon campaign, many CEOs across America investigated their ESG skills because they feared they could be vulnerable to the next situation. Do you feel like you can use that halo and do something similar on the activism front in the future because you’ve been so successful with Exxon that now you kind of have the wind in your sails to do another campaign?
Grancio: Well, right now we think about that we have information, we have a mindset about the world where we can actually help CEOs. And what we found on the back of the network with Exxon is that CEOs want that help. So many CEOs have ESG reports, they have studies, and honestly a lot of them would love to chat with someone to think about what are the most important things about ESG that they should think about? And we think that’s really the magic that is doing the math and figuring out which of these areas of impact are most critical to a company and how they then engage so that they actually add value to shareholders over time. And we’ve had great conversations with many CEOs where we don’t get into threatening activists but rather being deeply constructive about how they run their businesses and make money for investors over time.
Picker: Your activism boss recently left the company. And when I read between the tea leaves, it sounds like proxy battles aren’t the norm for Engine # 1. Do I understand this in the right manner?
Grancio: We think many of the options are very constructive. The opportunity for CEOs to get to the point of how they make E, S, and G part of their business, basically just running their business. They want to do that, we think this is a huge opportunity for investors. That’s right, we may have to run a proxy or activist campaign on occasion, but most of the time we will be constructive.
Picker: So it’s not fair to call you an activist investor …
Grancio: It’s fair to call us an investor trying to increase performance for everyone we work with.
Picker: There have been reports of meeting with Chevron and several other senior executives in the oil and gas industry. Has anything emerged from these conversations that you would like to share?
Grancio: We’ve spoken to a lot of people, and so our take on this entire sector is that, during the energy transition, companies are working to find out how to run their business over time for optimal returns. So we don’t comment on exactly what we’ve done with whom, but we have a number of constructive conversations. And again, we believe this is a great opportunity for energy companies and a great opportunity for investors to get this 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 you go far enough?
Grancio: We are delighted that Exxon has been making progress on these issues since the campaign began a year ago. But our perspective is still that it is a company that needs to work on governance and to provide the market with a strategic plan over time for transforming its business. So we’d love to see more there and we’re excited to have run a campaign that brings the right skills to the boardroom so we now have the opportunity to have that conversation.
Picker: If they don’t get where you need them, would you be open to another proxy fight at Exxon?
Grancio: Well we will watch them.
Picker: You took a different approach, as you mentioned at GM. This was a whitepaper that widely praised the automaker, saying it was leading the incumbent on making the transition to electric vehicles. Is that something we’ll see more of? And will it always have to do with sustainability? Or will there be other research on the social part of ESG or the governance part of ESG?
Grancio: Our point of view is that all of these things are important. So governance: how good is your board of directors? Does your board have the right skills? Are the people on the board of directors people with a successful track record of running previous businesses? Governance is important. And then, from a climate point of view, it’s just a little bit right under our noses because companies have already disclosed a lot of information. So it is very easy to discuss, on a mathematical and economic basis, how the environment and long-term value are related. Then on the social side too, and the data comes on the social side.
We use the data available today and there are clear causalities and connections between the way a company educates people through leadership perspectives and how a company thinks about its impact on the community, how a company thinks about the quality of wages for its employees thinks. So these are absolutely all areas that we have in our sights.
Picker: If you were to speak to CEOs out there in general, which of these “S” factors would you say, “Fix this right now, or we might get a call from us soon.”
Grancio: Yes, I think it’s a little bit different for every company depending on the business and where they have the greatest impact. So if you are a professional service company, how do you get people into leadership roles? If you’re a company that employs people on average lower wages, do you hire people to have more than a living wage and recruit them in proportion to the communities in which you work? So it’s a little different with different companies. But our guide would be [to] Think about the materiality. Think about running a business properly so that it is sustainable and you are serving your customers and you are beating your competitors over time. So make up for that long-term economic value, and we think it makes it a lot easier for companies to do the right thing.
