# 1 Engine Says Its New Representation On ExxonMobil Board Has Already Got A Victory
Engine No.1, the small hedge fund that pulled off a coup this year by placing three independent climate-focused directors on the board of oil giant ExxonMobil, said it had already scored a first victory.
Jennifer Grancio, CEO of Engine No. 1, said Exxon XOM,
has revised downwards its new long-term production targets. Exxon is keeping oil production at its lowest level for two decades until 2025. That would be a 25% drop from expectations before the pandemic began.
“It was a good sort of early victory,” she told the Morningstar Investment Conference in Chicago on Friday.
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Grancio said his hedge fund had been working with Exxon for about a year until news of the board seats was announced in May.
The work began when the fund began looking at how Exxon allocates capital and could plan for growth including the social cost of carbon. That is, how to assess the future damage caused by the release of an extra ton of carbon dioxide, using a current monetary value.
Including these costs, Engine No. 1 showed that investing in large, long-term projects that would take years to produce oil would not be profitable.
When accounting for carbon production, the social cost falls under Scope 3 emissions, which has an indirect impact on an organization’s value chain due to the activities of assets that do not belong to it or are not controlled by it. Scope 1 emissions are direct greenhouse gas emissions caused by sources owned by an organization, such as heating and cooling systems. Scope 2 corresponds to the indirect greenhouse gas emissions associated with the purchase of energy, for example when utilities purchase coal to generate electricity.
Grancio said the No.1 engine won over other shareholders in the proxy vote in May by making the economic case, using available environmental, social and governance data showing that Exxon could improve its long-term returns. by reducing its emissions.
The goal of Engine # 1 is that by working with a large company like Exxon, it can encourage others to invest in energy technologies, including solar, wind, and batteries, in order to achieve faster the net zero. Net zero is defined as the objective of offsetting greenhouse gas emissions.
What happens after
Grancio said that the No.1 management and investment driver’s perspective is to take ESG data and integrate it into a company’s basic financial analysis to uncover the material impacts of those metrics. whether positive or negative.
“We use this… data to improve the long-term financial and economic results of these companies,” she said.
Other socially responsible and actively managed mutual funds engage in stewardship on specific issues. What makes Engine # 1 different is that it uses data science to show companies an analysis of important ESG risks in their financial models to aid in capital allocation, Grancio said.
“It’s kind of using this very in-depth analysis, this approach to financial data modeling to help these companies,” she said.
The # 1 data analytics engine is called the Total Value Framework, a way to get companies to understand their risks and forge a better long-term strategy that can lead to better returns. The hedge fund also plans to work with private equity firms on ESG.
A new exchange-traded fund, Engine No. 1 Transform 500 ETF VOTE,
intends to invest in the 500 largest US stocks. It uses an index created by Morningstar.
Grancio, who was one of the founders of the iShares ETFs, said the fund will vote annually by proxy with an ESG focus. He will not be able to go through all the companies at the beginning.
“It gives us the opportunity to work with different companies in different industries over time,” she said.
ESG investing has been the subject of criticism of late. Tariq Fancy, former director of investments for sustainable investing at BlackRock, called ESG funds a “fairy tale”.
Grancio countered, saying ESG risks are “extremely important” and companies need to include the long-term impact of their investment decisions rather than Wall Street’s emphasis on short-term returns.
“I don’t think Milton Friedman wanted to take us down a path where you only ever look at quarterly returns,” she said, referring to the Nobel Prize-winning economist.
By helping large companies make big transformations at scale, there is the potential for long-term outperformance, she said.
“Potentially, [companies] increase their multiples, and that’s extremely lucrative just from a financial standpoint, ”said Grancio. “So our response to this is that it’s definitely not a fairy tale. … As we get more and more data, it will become more and more (based on) math, science and economics.