Stewardship | May 26, 2022

Engine No. 1 opts for accommodation over confrontation with Big Oil and big banks

Amy Cortese

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ImpactAlpha Editor

Amy Cortese

ImpactAlpha, May 26 – A year ago, the tiny fund manager Engine No. 1 was The Little Engine That Could. This year, it’s more like the dog that didn’t bark. 

Shareholder advocates and climate activists are wondering what happened to the momentum Engine No. 1 built a year ago when it jolted ExxonMobil by getting three members of its insurgent slate of directors elected to the oil giant’s board. 

At the company’s 2021 annual general meeting, Exxon executives furiously lobbied investors not to support the slate and even halted proceedings in a last-ditch effort to avert defeat.

Fast forward a year, and there were no such fireworks at Exxon’s annual shareholder gathering. Exxon chief Darren Woods praised the entire board up for reelection as “highly qualified.” There was a gentle rebuke to the oil giant in the form of a majority vote in favor of a proposal asking Exxon to assess its financial performance and assumptions under a net-zero by 2050 scenario. 

(Separately, a Massachusetts court allowed a case to proceed that accuses Exxon of lying about the climate crisis and covering up the oil industry’s role in it.) 

Even Engine No. 1 seemed placated by incremental changes made by Exxon over the past year, despite the company’s plans to expand fossil fuel production. The departure of several key actors in last year’s drama – including Charlie Penner, the architect of Engine’s “Reenergize Exxon” campaign – has further raised questions about the firm’s stances and strategy. 

At yesterday’s key meeting at Exxon, Engine No. 1 voted against a proposal by Arjuna Capital asking for a report on Exxon’s low-carbon business strategy. 

“Given our views on the energy transition, and that this proposal is asking XOM to assess how it will change its core business, we didn’t support this proposal,” Engine No. 1’s Yusuf George told ImpactAlpha in emailed comments. “We have seen Exxon continue capital discipline on fossil work and develop a low carbon business – which is significant progress from before our proxy campaign.

Similarly, at Exxon, Chevron and Shell, Engine No. 1 voted against proposals to ask companies to set targets for so-called Scope 3 emissions, which cover emissions generated by the use of its products, citing concerns about imprecise measurement and double-counting. 

Engine No. 1 voted in support of shareholder proposals calling for reporting on third-party audits of net-zero scenarios, the reduction of plastic pollution, transparency on political contributions, and racial equity audits at those companies. 

Engine No. 1 has not made its latest votes available yet on its web site as of print time. But it said it voted to reelect all existing directors on the boards of Exxon and Chevron.  

Active investors

Following last year’s win at Exxon, Engine No. 1 parlayed its celebrity status to launch an exchange-traded fund, Transform500, which trades under the ticker VOTE. The sales pitch: rather than screening out stocks, it would drive impact through proxy voting, engagement and activist campaigns.

“We want to be impact investors defined not by what we hold, but what we do as active owners,” Engine No. 1’s Michael O’Leary told ImpactAlpha at the time.  O’Leary joined private equity and venture investor L Catterton in March. 

Other active ETFs followed, including Transform Climate (NETZ), focused on the net-zero transition.  

“We’re always going to be aggressive on how we use our vote,” Engine CEO Jenifer Gracio told Time, after the magazine named Engine No. 1 one of the 100 most influential companies of 2022. “We’re going to publish them in real time, and try to put pressure on the industry to come along with us.” 

But this year, Engine has been anything but aggressive with VOTE’s votes. In April, it sided with management in opposing climate proposals put forth by shareholders of Citi, Bank of America, Goldman Sachs and Wells Fargo. 

Last week, it voted down a shareholder proposal aimed at curtailing fossil fuel funding at JPMorgan Chase, the world’s largest financier of oil and gas expansion. (It did support a request that the bank set targets for financed greenhouse gas emissions and another to become a public benefit corp.)

At Wells Fargo, it voted against the adoption of a net-zero by 2050-aligned policy, but supported calls for reports on board diversity, respecting indigenous peoples’ rights, charitable contributions and racial equity audits. 

“While we agree with the spirit of the proposals, as written they did not provide adequate flexibility for banks to finance the fossil fuel and energy transition,” said George of the climate proposals. 

“People still need fossil fuel. We want to see a fast and as-clean-as-possible transition to Net Zero, but in getting there banks need flexibility to finance that transition.”

Climate activists felt let down. “Engine No. 1 wants to be seen as a force for transformation and climate action, but they seem to be just pushing for business-as-usual with better PR,” said Ben Cushing, who runs campaigns for Sierra Club. 

“The question of whether these resolutions at the big banks were overly micromanaging was asked and answered when the SEC rejected calls from banks to block shareholders from voting on them,” he added. “Engine No. 1 would rather let big business off the hook than engage with what these common sense resolutions would actually do.”

Shifting calculus

Also missing from Engine’s activist playbook this year: proxy or board fights. 

Penner, who built a reputation as a successful campaign organizer at Jana Partners before joining former hedge fund and tech investor Chris James to launch Engine No. 1, left last November. Penner is said to be pursuing more environmental and social engagements with larger investors.  

The firm has also seen an exodus of other top talent. Michael O’Leary, the managing director who spearheaded the shareholder engagement strategy, left in March to join the private equity and venture investor L Catterton. Data scientists Rosa Català and Avi Yashchin have also departed.

James has explained the firm’s shifting calculus as a function of the war in Ukraine and spiking energy prices. In an op-ed in the Wall Street Journal, James argued that natural gas and oil would be needed for longer than expected. “Our assets in the Permian and other parts of North America should be used now as we continue to move to cleaner and more efficient energy systems,” he wrote. 

In a statement explaining its votes at the banking companies, Engine No. 1 took a similarly incremental approach. “Most leading banks are making progress towards a low-carbon economy,” the firm wrote on its website. “We believe investors should work directly with each bank to understand how management is overseeing climate related risks, the bank’s material externalities related to financing and working towards decarbonization. 

“For this reason, a vote AGAINST this proposal, as worded, is warranted.”