A tiny hedge fund that led a successful shareholder revolt against oil giant ExxonMobil this week does not speak the language of climate change activists.
Founded in December, San Francisco-based Engine No. 1 has agitated Exxon to invest in clean energy and begin moving off fossil fuels for financial reasons, arguing its strategy of sticking with its core oil and gas business has not produced strong returns for shareholders.
EXXONMOBIL FORCED TO ADD CLIMATE ACTIVIST-BACKED BOARD MEMBERS IN MAJOR REBUKE TO OIL GIANT
Engine No. 1, led by technology investor Chris James and hedge fund veteran Charlie Penner, parlayed a 0.02% stake in Exxon into winning at least two seats on the company’s 12-member board. It did it by convincing much larger shareholders that the oil giant had no “credible strategy to create value in a decarbonized world,” as its website states.
“That’s the genius of Engine No. 1,” said Robert Eccles, professor of management practice at Said Business School at Oxford University. “They were not saying, ‘Your product emits a lot of carbon. You have to change.’ It’s, ‘Your financial performance absolutely sucks, the world has changed, and you haven’t.’”
Engine No. 1 supporters said the group’s success was a case of taking the right approach at the right time.
Exxon, like other oil companies, struggled during the pandemic, posting its first-ever loss last year.
Last August, Exxon was removed from the Dow Jones Industrial Average and has posted weaker returns than many of its peers over the last decade after being the largest U.S. company by market capitalization.
Until the coronavirus killed demand for transportation fuels, Exxon had planned to increase spending on oil and gas production substantially. It later backtracked these plans.
Over the last few years, Exxon’s Big Oil competitors in Europe have pivoted more aggressively to clean energy. Banks that lend to Exxon have set decarbonization goals, while the auto and power companies that buy its products are moving to electric vehicles and renewables.
“We are at a point in time where Exxon looks out of step,” said Andrew Logan, senior director for oil and gas at Ceres, a nonprofit organization focused on sustainability that supported Engine No. 1’s campaign. “Running this campaign at this moment ended up being a recipe for success.”
But Engine No. 1 and its leaders, James and Penner, have not seemed to revel in Exxon’s struggles, taking a more subtle, data-driven approach to advocacy.
“This debate should not be ideological,” James told the Washington Examiner. “When companies think about their impacts, whether they are on communities or the environment, it brings a lot of common sense back to capitalism.”
Penner devised the group’s activism after running a campaign against Apple while at Jana Partners, in which he worked to push companies to embrace environmental, social, and governance (ESG) issues.
In 2018, Penner teamed with California State Teachers’ Retirement System, an Exxon investor that later endorsed Engine No. 1, in a successful push for Apple to restrict childrens’ access to cellphones and impose stricter parental controls.
Penner told Bloomberg Engine No. 1 is not strictly targeting the oil and gas sector, aiming “to find companies that aren’t doing the right thing and try to get them to do it.”
That broader approach to promoting environmental and social issues gave Engine No.1 credibility.
Pension funds, the Church of England, and large asset managers eventually backed Engine No. 1 board candidates.
“His objective isn’t to vilify Exxon,” Eccles said of Penner. “He calls them out when they play dirty, but what he wants to do is get this company to transform and change.”
James, who founded Engine No. 1, cites his aborted experience to launch a coal mine near his hometown in Illinois in the mid-2000s for inspiring his interest in pushing Exxon to diversify from fossil fuels.
Penner and James took a similar deliberate approach in recruiting potential board members to challenge Exxon, eventually choosing four candidates with energy sector experience.
Exxon has already announced that shareholders elected at least two of them to the board: Gregory Goff, former chief executive of Andeavor, and Kaisa Hietala, an environmental scientist and former executive at Neste, a Finnish oil refining company that produces biofuels.
“These were not wooly-haired environmental activists, but people running real businesses and making change,” Logan said.
Engine No. 1 may be new, but successful activism against Exxon was a long time in the making.
Andrew Behar, CEO of As you Sow, said his shareholder advocacy group has filed around 100 shareholder resolutions over a decade to persuade Exxon to become more attuned to the risks of its business to climate change.
“It’s not like this just came out of the blue in December,” Behar said. “This has been a solid decade of frustration from shareholders.”
Behar said Exxon routinely ignored those non-binding requests until 2017, when a majority of shareholders voted for a proposal for the company to assess the implications of climate change to its business, leading Exxon to produce a report in 2018 that activists considered insufficient.
“From that point forward, there was a realization we needed to take a much a harsher line,” Logan said. “With that context, Engine 1 stepped in.”
Behar said the general assumption was that investors needed to have at least a 5% share to wage a successful shareholder campaign.
To prove that wrong, Engine No. 1 devoted much of its time to courting asset managers who are the biggest shareholders in Exxon.
Exxon’s top two shareholders, Vanguard and BlackRock, are facing their own pressures to limit investments in fossil fuels, and each supports the goal of eliminating net greenhouse gas emissions by 2050.
In a scathing statement explaining the decision to vote for two Engine No. 1 board members, Vanguard blamed “Exxon’s insular culture” for “significantly underperforming” competitors and the market financially.
BlackRock issued a similar statement, saying the oil giant has not adequately assessed the risk to its business from a reduction in demand for fossil fuels.
In recent months, Exxon has taken steps to respond to outside pressure.
It set short-term targets for reducing emissions and, for the first time, started publishing data on how the use of its products contributes to pollution.
Exxon created a business unit dedicated to advancing low-carbon technologies, proposing a massive venture to install equipment to capture its carbon emissions in Houston.
The company also added an activist investor, Jeff Ubben, to its board in March, who is not one of Engine No. 1’s candidates. Ahead of the vote this week, Exxon vowed to add two more board members, including one with “climate experience,” which activists interpreted as a last-ditch effort to convince shareholders to oppose Engine No. 1 candidates.
“I don’t think any of that would have happened without the Engine No. 1 threat hanging over them,” Logan said.
Still, Engine No. 1 considered these moves inadequate and carried its shareholder campaign to the end.
Now, supporters are watching to see what the group does next and whether its success inspires copycats.
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“There will be a whole new rage of shareholder power to say our company has material risk, and if we don’t address it, we have to change the board,” Behar said. “The bottom line is shareholders own the company. You are going to see a lot more of this.”
