Climate investor who made right Exxon bet on how to beat the market

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

Jessica Rinaldi | Reuters

Jennifer Grancio was amongst the leaders at Engine No. 1, the upstart investing agency targeted on local weather and power transition, that bested ExxonMobil in a 2021 proxy contest upset few noticed coming. What Engine No. 1 determined to do subsequent was perhaps as stunning: transfer away from the activist investor method that labored so effectively in successful board seats at the oil and gasoline big.

Now CEO, Grancio does not need the agency to be outlined by the Exxon headline, however moderately by a long-term investing method that may be a blueprint for how corporations ought to take into consideration enormous techniques adjustments like power transition, and how traders ought to entry the worth that will probably be created by the corporations that get it, and scale reworked companies.

“Investing is something you can do for the very short-term, but for the vast majority of asset owners … they are all looking for performance over time,” Grancio stated at the CNBC ESG Impact digital occasion on Thursday. “The market can get confused about investing only for ideology or the extremely short-term, but Engine No. 1 is going deep with companies, looking primarily at the business model and how it will need to change over time to create value for shareholders.”

The ExxonMobil marketing campaign does hit on the huge themes: having the right governance in place to see corporations by huge techniques adjustments, making the right investments and avoiding the flawed ones. “We got into Exxon as an investor because we knew if it is smart and has the right management for energy transition and how the business is valued after energy transition, that will be great for shareholders,” she stated. “We think of the ExxonMobil campaign as being about governance and long-term capitalism,” she stated.

Grancio shared a number of of her foundational concepts for investing in the future and staying forward of the market at ESG Impact.

Lots of know-how, however not tech shares

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

Engine No. 1 is doing a variety of work with autos, which it has been public about, together with an funding in GM, on what she describes as a long run transition.  

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

“We will have this huge transition and it needs scale, and that’s millions and millions of cars and there is huge room for incumbents like GM and Ford to be part of creating and meeting all of this demand,” she stated. This doesn’t suggest Tesla will not be a winner, she added, however GM and Ford additionally will probably be, Grancio stated.

Don’t simply be an index fund investor

Engine No. 1 has a passive index ETF — Grancio was amongst the senior leaders of the BlackRock iShares ETF enterprise earlier than becoming a member of Engine No. 1 — however she warns traders that in the identical manner they might focus on Tesla and overlook about the remainder of the auto sector, they may miss out on huge funding alternatives in the event that they follow the index portfolio weightings.

“If you leave your money in a passive index fund, or you only buy the super-growth stocks, you will have a huge problem in your portfolio,” she stated. “Investors are underweight the big transition ideas if they are in the indexes,” she added.

Grancio stated holding the market in an index fund permits traders to use their shareholder voting energy to drive outcomes, which it did by banding along with many giant institutional shareholders to take on Exxon, however lots of the largest transition performs, from power to transportation, are underweights for the majority of traders due to index fund use.

Another huge instance she cited is agriculture, and an organization that she stated is getting it right: Deere. “It makes tractors and tractors are dirty, but if we flip that and think about impact and the global food crisis and solving it, Deere’s moves into precision ag are better for climate and yield and financial performance of farmers,” she stated. Deere is constructing a enterprise to clear up an enormous systemic downside which additionally has an affect investing perspective, she stated.

Still investing in huge oil, and anticipating power transition to take a ‘little longer’

Grancio says that Engine No. 1’s work with Exxon is an indication that ESG investing works. “Look at the appreciation of different companies in energy and Exxon has more than doubled, significantly higher than peers, and it wasn’t just the price of oil,” she stated.

She additionally cited Oxy (previously Occidental Petroleum) which has been a pacesetter in the power transition area and has greater than doubled in 2022 “because it is different from peers,” she stated. “We believe these are fundamentally investment issues,” she added. Another vital issue that made Oxy totally different from friends: a large funding made by Warren Buffett in the firm.

Engine No. 1 continues to be an energetic proprietor of power corporations, working on lots of the identical points that it did at Exxon even when not by a proxy battle: managing capital allocation, setting clear targets on emissions, and investing in inexperienced power enterprise.

But she says that the final yr throughout which the value of oil spiked on account of the battle in Ukraine and important power shortages in Europe have been uncovered does imply that the power transition “will probably be a little bit longer.”

“People use fossil fuels and we have not made this transition, and if we need fossil fuel assets we need them to be managed by the biggest companies in a way that is also looking at new technologies to maintain value after the transition, when we will be more in need of renewables and carbon capture,” she stated.

That’s why she continues to see huge power corporations as an funding alternative. “They know how to do these things at scale. We need to deliver energy to the world today, but as we get to the other side of the energy transition, how they deal with these issues will be required for them to still have a great business,” she stated. “We think there is a lot of room to work constructively with companies on these issues.”

US reshoring of producing must be a brand new focus

While it doesn’t match neatly into an ESG field like local weather, Grancio stated one in all the largest funding alternatives in the future that she is chasing will probably be American corporations in manufacturing, transportation and logistics tied to an enormous resurgence in home manufacturing and manufacturing.

“Investors are not holding railroads, not assuming cars or chips will be made in the U.S.,” she stated.

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

Without offering particulars, she stated Engine No. 1 will probably be creating an funding in the future round the alternative to spend money on the U.S. provide chain. “We’ll be doing something,” she stated. 

The U.S. home manufacturing revival is, in a way, type of “systems change,” as globalization of prior many years is disrupted. And that matches Engine No. 1’s general self-discipline. “We really think you have to understand systems and companies at a deep level to make good choices. Investing should never be ideological. It should be about understanding these companies and how industries are changing,” she stated. And at a time of great political blowback in opposition to ESG investing targeted primarily on power corporations and local weather change, she added, “Hopefully, we don’t let theater get in the way on this.” 


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