We’ve got Engine No. 1’s CEO Jennifer Grancio speaking at David Holbrooke’s Original Thinkers festival (running in parallel to ETF Donostia in Telluride 9/30-10/3. Jennifer will be discussing Engine No. 1’s busy summer. In June, the new hedge fund (and now ETF issuer) emerged as a major disruptor when it landed three new members on Exxon’s board of directors, with the goal to push the energy titan to lower its carbon footprint. (Spark has facilitated a net negative carbon footprint for the entire Original Thinkers festival and the ETF Donostia event in coordination with Morningstar and C2Zero.)
Here, I talk with Grancio about working with Exxon, Engine No.1’s vision and future plans and their hot new Transform 500 ETF (VOTE).
Tell Me About Engine No. 1. What are its key goals and focuses?
We started the firm at the end of last year, so we’ve been out here for a little while now, and what we set out to do is create another rev on sustainable investing and another rev on capitalism. The way we think about it is for every company that’s out there, that company has a line of business.
There are certain areas from an impact perspective where, on the social side, it could be their workforce, it could be wages, it could be the community. And then on the climate side, depending on what business they’re in, there’s an impact: it’s good or bad. And so our business is simply to do the math around what the material impacts are for each company, to understand each company, and whether the company is undervalued, overvalued and connect those impacts to long-term economic outcomes. Occasionally that puts us in a place where we really wrestle with the company and suggest a different path and more frequently, it puts us in a great position to understand where companies are undervalued to constructively engage and help companies and to vote the shares every year in companies, very aggressively, in line with impact, but also in line with long term financial value.
It sounds like there’s a lot going on behind the scenes. In terms of your interaction with companies and investors, you obviously had a very high-profile activist engagement with Exxon and succeeded in getting three new board members on the Exxon board. How do you view that as a tool and how central that is to what you do?
We get this question a lot, as you can imagine, which is ‘do you have to be an activist to help a company understand their impacts and the relationship between impacts and long-term value?’ And for us, in most cases, you don’t have to be an activist. We find that people running companies want the data. They want to engage very constructively. So most of what we do at Engine Number One is actually constructively engaging with data focused on long-term economic returns with these companies.
And then we launched the VOTE ETF as an anchor and way for people to really invest in the market. We love that. We think negative screening and divesting is disengaging in helping these companies address impact and run the businesses for the long term. So we spend more of our time, frankly, on constructive voting and constructive engagement.
But you know, sometimes, you can have an activist conversation with a company as well.
I have a question about VOTE. Could you tell me a little more about the structure of that and how it’s set up? Like what kind of companies are you investing in and how activist are you with the companies in the portfolio?
So Engine Number One’s VOTE ETF, which we launched earlier this summer, it’s a simple idea. It’s literally the large-cap index. We’re not screening companies out. We’re just holding the largest companies in the US market. Our main tool with those companies is using our total value framework, where we look at impacts and long-term economic outcomes, and voting in line with this model on how companies address impacts that are material and how that leads to long-term economic value.
VOTE is a very simple, large-cap index product, and we’ve priced it at five basis points. We think it’s a better vessel than a lot of the index products that are out there today because you track the market and then we do that work to vote aggressively every year. Not in a liberal way, not in a conservative way, but to vote in line with where impacts are linked to long-term economic value. So it’s good if you care about the value and performance of these companies, and it’s good if you care about material impacts and we also engage constructively with some of the companies, but it’s constructive.
Let’s talk about what’s coming up at Telluride. You’ve got two crowds there. You’ve got a very diverse, intellectual crowd around the Original Thinkers. And then, with the ETF Donostia group, you’ve got sort of like the ETF inner sanctum. How do you view those two conversations in light of what’s going on in the wider world?
ETFs are the modern vehicle. And so if, if we think about, ‘what do we want to accomplish in our world? How, how do companies govern themselves, how do we address climate change? How do we invest in innovation and work with innovative companies? Those are both the issues of our time from a societal and human perspective and they’re also the key issues we need to solve in financial services and asset management. So I actually love the fact that we’ve got kind of a senior ETF gathering with the Donostia group, which isn’t about the past, but it’s about looking forward. How, how did ETFs and these accessible structures work across innovation and across them transformation and governance, like what we’re doing in Engine Number One.
At the same time, it’s a human conversation with the Original Thinkers audience in Telluride about responsibility and the way forward. Our society has gotten far too partisan and we need to bring people together across aisles, not be divisive. Climate change is an economic issue as well as an issue for people’s everyday lives. I actually think the two separate audiences fit very well together, actually.
What can we expect over the next year from Engine Number One? I’m sure you’ve got some things in the cooker.
We’ve got two products out: One’s more of a private fund, we’ve done the activist campaign at Exxon and that work’s just starting. I’m trying to be supportive on data and analysis and support around the targets and potential path forward for Exxon.
And then we’re also spending a lot of time talking to financial advisors and big institutions about how they integrate this sort of economic-first approach to sustainability. And we’re talking about VOTE. We also have a filing for a climate ETF, which won’t be a green-only fund. As it says in the prospectus, it’ll be a transformation. So holding the companies and helping the companies transform. And, behind the scenes, a lot of work.