(Click right here to subscribe to the new Delivering Alpha e-newsletter.)
Engine No. 1 was based a 12 months in the past this month, and since then, has made a splash in the investing world. Most notably, the ESG-oriented funding agency took on Exxon Mobil in a proxy battle and received. It additionally launched an ETF and revealed a white paper, largely supportive of General Motors.
Engine No. 1 CEO Jennifer Grancio sat down with Delivering Alpha to debate her technique and what comes subsequent for the agency.
(The beneath has been edited for size and readability.)
Leslie Picker: You have numerous buckets that you simply’re working in: activism, ETFs, constructive analysis, perhaps extra that we do not even learn about but. What do you assume is the greatest solution to obtain the means to the ESG finish?
Jennifer Grancio: We based Engine No. 1 on the easy concept that you must perceive the related E, S, and G knowledge and you then merely use that to consider what are firms valued at in the present day? Are they misvalued? And how do you drive financial worth over time? And this knowledge is vital to long-term worth. So we begin there. And then in every thing we do, we additionally interact very deeply with the firms. So our perspective is, in the event you care about ESG, you wish to interact with the firms to place them on the proper path. And in the event you’re simply investing, and also you’re trying to construct wealth, and have robust efficiency over these transformation cycles, you care about ESG knowledge, and also you additionally actually have to interact with the firms. You have to carry them and we do not imagine in divestment. Maybe we are able to speak extra about that later. You have to carry the firms and have interaction with them so you possibly can assist them over the transformation cycle.
Picker: I wish to hone in on this phrase interact, as a result of Exxon, it was extra of a vital engagement. You checked out an organization, you felt like they had been doing probably dangerous issues with regard to ESG and sustainability, specifically. With GM, you are participating however in additional of a complimentary manner. Are each of those methods you assume efficient? Is there one that you simply’re extra targeted on than the different?
Grancio: We really assume there are numerous other ways to interact with an organization. And so every thing we do is predicated on a complete worth framework, which is this concept of while you have a look at an organization’s enterprise and also you have a look at their materials impacts, how does that then relate to what the firm’s worth is over time. And so after we checked out Exxon, we noticed, you recognize, an issue. It’s an outlier. So from an E and S and a G perspective, the firm was making decisions that had been resulting in destructive long-term worth outcomes for shareholders. And in order that’s a case the place perhaps the firm does not see it that manner and as traders, you actually have to interact to consider how do you do one thing in a different way.
In the case of GM, the firm really understands they’ve a superb CEO, they have an amazing governance approach to operating their enterprise, and so they perceive the E and the S, and so they’re utilizing it to drive worth for shareholders. So they’re two very completely different examples. So in a case, like Exxon, the place it is an outlier, chances are you’ll as traders – and we really feel like we had been capable of go and make this argument – make an financial argument be the kind of tip of the spear on this dialog, and lots of people got here with us and adopted us that we took an activist approach. In most every thing else we do, we expect will probably be way more of a constructive approach, like what we do with General Motors.
Picker: After the Exxon marketing campaign, numerous CEOs throughout company America had been finding out their ESG chops apprehensive that they could possibly be weak for the subsequent state of affairs. Do you’re feeling like you should use that halo and do one thing related in the future on the activism entrance, since you had been so profitable with Exxon, that now you may have form of the wind in your sails to do a subsequent marketing campaign?
Grancio: Well, the manner that we give it some thought for now’s we’ve got data, we’ve got a mind-set about the world the place we are able to really assist CEOs. And what we discovered on the again of the community with Exxon is that CEOs need that assist. So many CEOs, they’ve ESG reviews, they’ve research and numerous them, frankly, would love anyone to speak to, to assist take into consideration what are the key issues in ESG that they need to take into consideration? And we expect that is, that is actually the magic, which is doing the math and determining which of those influence areas are most crucial to a enterprise after which how do they interact in order that they really drive worth for shareholders over time. And we have had nice conversations with numerous CEOs the place we’re not coming to be threatening activist, we’re coming to be deeply constructive about how they run their firms and earn cash for traders over time.
Picker: Recently, your head of activism left the agency. And if I’m studying between the tea leaves, it appears like proxy battles aren’t going to be the norm for Engine No. 1. Am I understanding that accurately?
Grancio: We assume numerous the alternative may be very constructive. The alternative for CEOs to get to the nub of how they make E, S, and G a part of their, mainly simply operating their enterprise. They wish to do this, we expect that is an enormous alternative for traders. So that is proper, we could sometimes must do a proxy marketing campaign or an activist marketing campaign however principally we will be constructive.
Picker: So it isn’t truthful to name you an activist investor…
Grancio: It’s truthful to name us an investor that is making an attempt to drive efficiency for everyone that we work with.
Picker: There are reviews on the market that you simply met with Chevron and a few of the different executives from the oil and gasoline trade. Anything materialized from these conversations that you simply’d wish to share?
Grancio: We’ve talked to lots of people and so our perspective on that complete sector is that firms are working to determine, as we undergo an vitality transition, how they handle their enterprise for optimum returns over time. So we do not remark on precisely what we have accomplished with who however we’re having various constructive conversations. And once more, we expect it is a large alternative for vitality firms and an enormous alternative for traders to get this proper.
Picker: What do you make of Exxon’s lately introduced targets to cut back company-wide greenhouse gasoline depth by as a lot as 30% by 2030? Are they going far sufficient?
Grancio: We’re glad Exxon is beginning to make some progress on these points since we began the marketing campaign a 12 months in the past. But our perspective continues to be that it is an organization that has work to do on governance, and work to do on sharing with the market a strategic plan over time for the way their enterprise transforms. So we would wish to see extra there and we’re joyful that we had been capable of lead a marketing campaign that places the proper capabilities in the boardroom so there’s a possibility to have that dialog now.
Picker: If they do not get to the place you want them to be, would you be open to operating one other proxy battle at Exxon?
Grancio: Well, we’ll be watching them.
Picker: You’ve taken a unique approach, as you talked about with GM. This was a white paper largely complimentary of the automaker, saying that they seem to be a chief amongst incumbents to make the transition to electrical autos. Is this one thing that we will be seeing extra of? And will it at all times be associated to sustainability? Or will there be different analysis on perhaps the social a part of ESG or the governance a part of ESG?
Grancio: Our perspective on that is that every one of these issues matter. So governance: how good is your board? Does your board have the proper capabilities? Are the individuals on the board people who have profitable monitor information in operating prior companies? The governance issues. And then from a local weather perspective, it is just a bit bit proper in entrance of our nostril as a result of firms have already got disclosed numerous data. So it is very straightforward to have math and economics-based dialog about how environmental pertains to long run worth. Then on the social facet, as properly, and the knowledge is on the come on the social facet.
We use the knowledge that is accessible in the present day and there are clear causalities and relationships between how an organization brings individuals up via management views and the way an organization thinks about their influence on the neighborhood, how an organization thinks about the high quality of wages for his or her workforce. So completely, these are all areas which can be in our sights.
Picker: If you had been to form of converse broadly to CEOs on the market, which of these ‘S’ components would you say, “Get that in order right now, or, you know, you may be receiving a call from us soon.”
Grancio: Yeah, I believe I believe it is somewhat bit completely different for each firm, relying on their enterprise, and the place they’ve the most influence. So in the event you’re an expert providers agency, you recognize, how are you bringing individuals up via the management ranks? If you are a agency that employs individuals, at common, decrease wages, are you using individuals in a manner the place they’ve greater than a residing wage, and also you’re hiring in proportion to the communities that you simply serve? So it is somewhat completely different for various firms. But our steerage can be [to] take into consideration materiality. Think about operating a enterprise the proper manner so it is sustainable, and also you’re serving clients, and also you’re form of beating out your opponents over time. So make it about that long-term financial worth and it makes it a lot simpler, we expect, for firms to do the proper factor.