Engine No.1, a tiny ‘green’ investment fund, is challenging the oil titans

Issued on: 05/06/2021 – 16:49

Until this week, Alexander Karsner was best known for being a senior strategist for the innovation lab Alphabet, the parent company of Google. On June 2, Karsner became the third candidate backed by the Engine No.1 hedge fund to be elected to the board of directors of the American oil powerhouse Exxon.

For this small-scale financial player, it was almost total victory. Founded only seven months ago, on December 1, 2020, this fund set itself the mission to shake up the oil industry from the inside out, to push these rich multinationals to prepare for a future without fossil fuel.

Eternal battle of David versus Goliath

Engine No.1 began its assault on fortress Exxon just a week after its creation. With $240 million (€200m) in its pocket and 22 employees, this David of ‘green’ finance set out to bring the US energy Goliath, which is worth $250 billion and employs more than 70,000 people, back into the environmental fold.

The investment fund’s first step was to acquire 0.02 percent of Exxon’s capital. This allowed it, as a shareholder, to send a letter to the ExxonMobil board on December 7 demanding the group’s management to focus more on renewable energies to boost its long-term growth and achieve carbon neutrality by 2050.

When Exxon predictably refused to comply with these demands, Engine No.1 moved on to phase two of its plan: to propose four candidates for election for the board of directors. It seemed an almost preposterous idea, this small unknown investment fund taking on Exxon’s favourites for these board positions.

David had laid down the gauntlet to Goliath and emerged victorious: Engine No.1 started to gain seats. The election on May 26 of the first two candidates put forward by this fund reverberated “like an earthquake in the industry”, said the Financial Times. The triumph of Engine No.1’s third candidate on June 2 confirmed their successful entry in a board that has the power to influence strategic choices such as the replacement of the CEO of Exxon or the validation of his salary.

A sign of a change in mentality

These appointments do not fundamentally change the balance of power within the board of directors, since nine of the 12 seats are occupied by Exxon-backed directors. But they do highlight a change in mindset among Big Oil investors.

To get support for their candidates, Engine No.1 had to convince a majority of investors to vote essentially against Exxon’s advice. In particular, it obtained the support of three pension funds (including the Church of England) that are Exxon shareholders, and of the Blackrock and Vanguard investment funds, which hold more than 15 percent of the oil group. “This would not have been possible one or two years ago,” said business website Quartz.

Engine No.1 cleverly appealed less to the “green” motives of these investors and more to their appetite for profit. In a document the firm circulated to shareholders, it said that Exxon’s obsession with fossil fuels and disdain for renewables was jeopardising future dividends.

“This is one of the first times that talk of the long-term financial prospects of the energy transition has had concrete consequences for a major oil company,” reported the Bloomberg business channel. The Exxon fight is the most high-profile proof to date that environmental and social issues are now fully at the forefront.

Engine No.1 has also been careful to choose candidates who do not have an overly “green” CV. In addition to the Alphabet executive, their other two new Exxon directors are Kaia Hietala, an executive who worked for Finnish oil refiner Neste, and Gregory Goff, a veteran of the North American oil industry.

Exxon the perfect target

Exxon was also the perfect target for this first environmental infiltration operation. Currently, the group appears to be the weak link in the oil industry. In 2020, it lost money for the first time in its history. Some analysts put this poor performance down to Exxon’s stubbornness in producing only oil without seeking to diversify into renewables.

In this context, Engine No.1 “tapped a well of discontent among Exxon shareholders, arguing that the company’s climate approach and its financial underperformance were part of a whole – and only deep changes to the board and strategy would fix it,” said the Financial Times. Frustrated investors were ready to lend an attentive ear to an investment fund that came to explain that by changing strategy now, it will be possible to return to profit growth.

Exxon is not an isolated case. Since the end of May, disappointments have been piling up for the oil giants, which are struggling to make the transition to cleaner energy. In the Netherlands, a court ordered Shell “to reduce its CO2 output by 45 percent” on May 26, and Chevron’s shareholders voted by a 60 percent majority that same week to ask the group’s executives to reduce their CO2 emissions.

Of course, multinational executives are not going to be rushed into action. The Dutch court ruling can be appealed, Chevron’s shareholder resolution is only a recommendation, and Exxon retains control of its board despite the arrival of three Engine No.1-backed troublemakers.

But this black streak for these oil giants does suggest “an ongoing transformation of the industry”, says the news site Vox. One of the pension funds that supported Engine No.1 issued a statement after the appointment of the new directors to say that “this is just the beginning”. Revolutions are no longer just happening in the streets, they are now in the boardrooms too.

This article has been translated from the original in French.