‘This isn’t ideological’: reluctant ‘green hero’ behind Exxon coup.
Tiny hedge fund Engine No 1 says a strong climate strategy simply makes good business sense.
The activist hedge fund behind ExxonMobil’s boardroom coup last week has claimed another seat from the oil giant’s board, to take the number of new directors who will push for climate action from within the company to three.
The result of last week’s shareholder vote has installed the hedge fund, named Engine No 1 after a San Francisco fire station, as a reluctant hero of the climate movement.
But its founders insist that the green agenda is not the primary motive behind its David v Goliath battle to drive down the oil giant’s carbon emissions. A strong climate strategy, they say, just makes good business sense.
“This debate should not be ideological,” Chris James, the founder of Engine No 1, told the Guardian. “When companies think about their impacts, whether they are on communities or the environment, it brings a lot of common sense back to capitalism.”
It has taken less than five months for the tiny Engine No 1 to succeed where many big-name climate campaigners and green investors have failed, forcing one of the world’s biggest climate polluters to confront the existential threat of the global climate crisis.
The investment fund has just a 0.02% stake in Exxon, but staged the first major rebellion against Exxon at the company’s annual shareholder meeting last week by galvanising the support of the biggest investors in the world behind its plan to oust Exxon’s board members in favour of handpicked candidates with the nous to transform the climate laggard.
But unlike the campaigns which last week forced Chevron and Shell to cut their carbon emissions, Engine No 1 puts profits first.
James said that environmental impact is just one consideration his firm uses to allocate its time and capital, and that ultimately the aim is to create wealth.
“We strongly believe that climate risk is business risk,” he says. “Fossil fuels have big negative impacts. We take a long-term view to value creation, which means taking these externalities into account. There’s an intrinsic link.”
James’s strategy is to find companies that are falling short of their potential, and then press for changes to increase their market value. The fund has just 22 employees and $240m (£170m) of funds under management.
Exxon was the first target, and the fund set out to replace four board members with directors who have “experience in successful and profitable energy industry transformations” which can help to turn the challenge of the climate crisis “into a long-term business plan, not talking point”.
The three directors shown the door were big business names: 69-year-old former MetLife insurance boss Steven Kandarian; former IBM boss Samuel Palmisano, also 69; and 60-year-old Wan Zulkiflee, a former boss of Malaysian state oil group Petronas, who joined the Exxon board this year.
Engine No 1 is now reportedly preparing to raise more funds to test its mettle beyond just waging a war on the polluting energy industry.
Industry commentators believe their success proves that the world’s biggest investors are finally aligned with climate campaigners in accepting that sustainability is not only essential for the survival of the planet, but for the future of major companies too.
The architect of the rebellion, Charlie Penner, a former partner at the activist fund Jana before joining Engine No 1, told the Guardian that it had convinced Exxon shareholders they would be better off with “more dynamic strategic planning, better long-term risk management, more disciplined capital allocation and, most importantly, directors with track records of looking profitably around corners in energy”.
“All will be needed to prepare ExxonMobil to compete in a decarbonising world over the long-term,” he says.
The road to a low-carbon future will be particularly steep for Exxon. The oil giant is one of the world’s biggest contributors to the global climate crisis and pumps about 4m barrels of oil every day. Its failure to adapt to a low-carbon agenda has provoked outrage among climate campaigners and growing unease among its investors.
Exxon was once the biggest listed company in the world, with a market value of $520bn before the financial crash in 2008. Since then its worth has shrivelled to around $234bn, amid stumbling oil market prices and the rise of future-focused technology companies such as Apple and Amazon.
The company’s chief executive, Darren Woods, said Exxon had “been very actively engaged with our shareholders, sharing our plans and hearing their viewpoints and the key issues of importance to them”.
But by April two of the largest US pension funds had joined the Engine No 1 rebellion: New York’s $255bn Common Retirement Fund and California’s $300bn teachers retirement fund.
In the days leading up to the shareholder vote at the end of May, it emerged that BlackRock, the world’s biggest asset manager with $9tn under management and one of Exxon’s largest shareholders, would also side with the insurgents at Engine No 1.
Then Vanguard Group, a $7tn investment adviser and Exxon’s largest shareholder fell into line with $3tn State Street, which is Exxon’s third largest investor. They both voted to oust two of Exxon directors in favour of Engine No 1’s candidates.
BlackRock later said it was “concerned about Exxon’s strategic direction” and that the company could benefit from the new directors who would bring “fresh perspectives” to Exxon’s board.
Prenner says they are making progress: “They’ve already abandoned their goal of growing production by 25% by 2025 in response to the campaign, which called for them to focus on their highest return projects that can be profitable under lower long-term demand scenarios rather than chasing production growth.”
Exxon will need to go much further, but it’s an encouraging start for the reluctant green pioneers of Engine No 1.
4 June 2021