ImpactAlpha, December 8 – Environmental and social laggards beware. A growing set of hedge funds are redefining “activist shareholder” to mean pressure for long-term, sustainable value creation.
Engine No. 1, launched by hedge fund veteran Chris James, aims to engage companies to invest in “workers, communities, and the environment” and align “the interests of Main Street and Wall Street.” Its first act: A letter to ExxonMobil’s board nominating four independent director candidates to “refresh” the board, improve long-term capital allocation and sustainable value creation, and “ensure that management is not rewarded for outperforming the industry but eroding shareholder value.” (Last week, ExxonMobil announced it would write down up to $20 billion in natural gas assets, its largest write-off ever.)
The replacement slate of directors quickly won backing from the $255 billion California State Teachers’ Retirement System, or CalSTRS, which holds $300 million in Exxon stock.
Getting big polluters to cut greenhouse gas emissions “requires an activist investor,” says hedge fund veteran (and Agent of Impact) Jeffrey Ubben, who left ValueAct to launch Inclusive Capital Partners this summer.
Last year, CalSTRS invested $250 million to anchor Impactive Capital, launched by Lauren Wolfe and Christian Asmar (see, “CalSTRS anchors Impactive’s responsible-investing hedge fund”).
Jana Partners, Two Sigma and others are building out sustainable and impact strategies within the firms.
Engage v. exclude
Sustainable investing strategies have long focused on excluding companies from investment portfolios.
“I have a hard time seeing how exclusion creates a material impact on the world and people’s lives,” Engine No. 1’s Michael O’Leary told ImpactAlpha. “Armed with a broader view of what creates long-term value, we can work with companies through active ownership in ways that we think will have a lot of impact.”
O’Leary comes from Bain Capital Double Impact. Other Engine No. 1 founders include Charlie Penner, who led impact investing for Jana (see, “Jana wants to add ‘impact’ to activist hedge fund”); Jennifer Grancio, ex- of BlackRock; Madeline Hawes, ex- of Goldman Sachs; and Ed Sun and David Swift, ex- of Partner Fund Management.
Exhibit A: Exxon
Exxon earned a reputation for its stubborn refusal to address climate risk (see, “Exxon escapes fraud charge, but not climate risks”). The company has returned -20% over the past decade, even as the S&P 500 has soared by 277%. Last year, Exxon blocked an accounting of how it intends to align its carbon footprint with the Paris climate agreement.
“While the Company has publicly and regrettably dismissed carbon emission reduction targets as a ‘beauty competition,’ such targets have more than cosmetic value to investors,” Engine No. 1 argued in its letter.
Engine No. 1’s board candidates include Anders Runevad, former CEO of Vestas Wind Systems and Kaisa Hietala, who ran renewable products at Neste, and others with energy transition experience.
This year’s effort by the Church of England and New York State Common Retirement Fund to oust Exxon’s entire board fell short.
While Engine No. 1 is still early in developing its activist strategy, O’Leary says that one of the ways the firm hopes to drive more effective corporate engagement on environmental, social and governance (ESG) practices is by identifying and sharing better data.
“Everyone is clamoring for better and more ESG data, but no one’s quite sure what to do with it, and particularly how to use it to select investments and to create change once you find those investments,” he says.
“We’re trying to get much more tactical in what people be can be doing—to get down to the raw data on the tons of carbon emitted and dollars invested in worker training programs,” he adds, “and then use this data to show companies how they can create more value for the long-term.”
Two Sigma’s impact group is similarly leaning into better data to hold companies accountable to impact. It’s taking a more focused approach, however, by zeroing in on workforce policies.
“We need to start picking particular issues and getting really good at understanding the social consequences of the actions you take, and the long-term value consequences,” argued Warren Valdmanis of Two Sigma Impact. “When you study an issue in depth, what you see all of the “wins” that other businesses could adopt if they just knew how that worked.”
Engine No. 1’s Michael O’Leary and Two Sigma’s Warren Valdmanis take a deep dive into the active investor thesis in their book, “Accountable: The Rise of Citizen Capitalism.”