The climate investor who made Exxon’s good bet on how to beat the market


A view of the Exxon Mobil refinery in Baytown, Texas.

Jessica Rinaldi | Reuters

Jennifer Grancio was among the leaders of Engine No. 1, the upstart investment firm focused on climate and energy transition, which beat ExxonMobil in an upset 2021 proxy contest that few saw coming. What Engine No. 1 decided to do next was perhaps also surprising: move away from the activist investor approach that has worked so well to win seats on the oil and gas giant’s board.

Now CEO, Grancio doesn’t want the company to be defined by Exxon’s title, but rather by a long-term investing approach that’s a model for how companies should think about huge changes. of systems like the energy transition, and how investors should access the value that will be created by the companies that obtain it, and scale the transformed companies.

“Investing is something you can do in the very short term, but for the vast majority of asset owners…they’re all looking for performance over time,” Grancio said during the CNBC ESG Impact virtual event on Thursday. “The market may be confused about investing just for ideology or for the very short term, but driver #1 goes deep with companies, looking primarily at the business model and how it will need to change over time. to create shareholder value.”

The ExxonMobil campaign addresses the big issues: having the right governance in place to support companies through big systems changes, making the right investments and avoiding the wrong ones. “We came into Exxon as an investor because we knew if it’s smart and has the right management for the energy transition and how the company is valued after the energy transition, that will be great for shareholders,” he said. she declared. “We think ExxonMobil’s campaign is about long-term governance and capitalism,” she said.

Grancio shared some of his fundamental ideas for investing in the future and staying ahead of the market at ESG Impact.

Lots of tech, but no tech stocks

“As investors, we like to talk about Google and Amazon, but where the returns will really be generated over the next decade, we look to agriculture, autos and energy,” he said. said Grancio.

The No. 1 engine is doing a lot of work with automobiles, which it has made public, including an investment in GM, on what it describes as a long-term transition.

“People know about Tesla, but they forget about GM and Ford,” Grancio said.

“We’re going to have this huge transition and it needs scale, and that’s millions and millions of cars and there’s a huge amount of leeway for incumbents like GM and Ford to help create and satisfy of all this demand,” she said. That doesn’t mean Tesla won’t be a winner, she added, but GM and Ford will be too, Grancio said.

Don’t just be an index fund investor

The No. 1 engine has a passive index ETF — Grancio was among the top executives of the BlackRock iShares ETF business before joining the No. 1 engine — but she warns investors that similarly they can focus on Tesla and forget about the rest of the automotive sector, they will miss important investment opportunities if they stick to the portfolio weightings of the index.

“If you leave your money in a passive index fund, or just buy super-growth stocks, you’ll have a huge problem in your portfolio,” she said. “Investors underweight big transition ideas if they’re in indices,” she added.

Grancio said owning the market in an index fund allows investors to use their shareholder voting power to drive results, which he did by teaming up with many large institutional shareholders to take on Exxon, but many of the biggest transition plays, from energy to transportation, are underweight for the majority of investors due to the use of index funds.

Another great example she cited is agriculture, and a company she says is doing it right: Deere. “It makes tractors and tractors dirty, but if we reverse that and think about the impact and the global food crisis and how to solve it, Deere’s steps into precision agriculture are better for the climate, the yield and farmers’ financial performance,” she said. Deere is building a business to solve a huge systemic problem that also has an impact investing perspective, she said.

Still investing in big oil companies and expecting the energy transition to take “a little longer”

Grancio says Engine No. 1’s work with Exxon is a sign that ESG investing is working. “Look at the appreciation of different companies in the energy sector and Exxon more than doubled, significantly more than its peers, and it wasn’t just the price of oil,” she said.

She also cited Oxy (formerly Occidental Petroleum) which has been a leader in energy transition and more than doubled in 2022 “because it is different from its peers”, she said. “We think it’s fundamentally about investment issues,” she added. Another important factor that made Oxy different from its peers: a massive investment made by Warren Buffett in the company.

The No. 1 engine continues to be an active owner of energy companies, working on many of the same issues as at Exxon, though not a proxy war: managing capital allocation, set clear emissions targets and invest in green energy companies. .

But she says the last year in which the price of oil has skyrocketed following the war in Ukraine and critical energy shortages in Europe have come to light means the energy transition “will probably be a bit more long”.

“People are using fossil fuels and we haven’t made that transition, and if we need fossil fuel assets, we need them to be managed by the biggest companies in a way that also looks at people. new technologies to maintain value after the transition, when we will need more renewable energy and carbon capture,” she said.

That’s why she continues to see big energy companies as an investment opportunity. “They know how to do these things on a large scale. We need to power the world today, but as we get to the other side of the energy transition, how they deal with these issues will be necessary to may they still have a great business,” she said. “We think there’s a lot of room to work constructively with business on these issues.”

Relocating manufacturing to the United States should be a new priority

While that doesn’t fit neatly into an ESG box like climate, Grancio said one of the biggest future investment opportunities she’s looking for would be U.S. manufacturing, transportation and logistics linked to a huge resurgence of domestic production and manufacturing.

“Investors don’t own railroads, not assuming cars or chips will be made in the United States,” she said.

On Thursday, President Biden touted a plan by IBM to invest $20 billion in chip manufacturing in New York, two days after Micron Technology announced up to $100 billion in investments in semi- manufacture in the state.

Without providing details, she said Engine No. 1 will create future investing around the opportunity to invest in the US supply chain. “We’re going to do something,” she said.

The renaissance of manufacturing in the United States is, in a sense, a form of “systems change,” as the globalization of previous decades is disrupted. And that aligns with the overall discipline of the #1 driver. “We truly believe in understanding systems and businesses at a deep level to make good choices. Investing should never be ideological. act to understand these companies and how the industries evolve,” she said. And at a time of serious political backlash against ESG investing focused primarily on energy companies and climate change, she added: “I hope we don’t let the theater get in the way of this.”


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