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Exxon Mobil defeated by Activist Investor Engine # 1

Wall Street has seen its fair share of strange bedfellows, but a recent alliance of investors that took Exxon Mobil was unprecedented.

Last week, an activist investor fought a successful battle to install three directors on Exxon’s board of directors in a bid to push the energy giant to reduce its carbon footprint. The investor, a hedge fund called Engine No. 1, was virtually unknown before the fight.

The small business wouldn’t have been lucky without an unusual twist: the backing of some of Exxon’s largest institutional investors. BlackRock, Vanguard and State Street voted against Exxon’s leadership and gave powerful support to Engine No.1. These huge investment firms rarely side with the activists on these issues.

The astonishing result turned the sleepy world of board elections into front-page news as climate activists declared a major triumph and a blinded Exxon had to ponder his defeat.

Engine No. 1 instantly became a Wall Street name. The company is part of a new generation of activist shareholders, driven by the idea that social good also benefits the bottom line, just as politics and public sentiment about the environment change. Chris James, the founder of Engine No. 1, argued that Exxon management was not making the necessary changes fast enough.

The firm convinced the powerful BlackRock. “We believe that more needs to be done in Exxon’s long-term strategy” on reducing climate risk, which threatens shareholder value, he said in a statement explaining why he sided with the government. engine n ° 1.

Laurence D. Fink, CEO of BlackRock, highlighted the importance of climate in his annual letter to executives. “No problem ranks higher than climate change on our clients’ priority lists,” he wrote in this year’s edition. “They ask us for it almost every day. “

Observers say the No.1 Engine victory shows there is a way for shareholder activism to change the way companies approach issues like racial diversity and the environment, often seen as distractions for generate profits.

“We see that there are other components that play into a company’s overall performance: social, cultural and, now, environmental,” said Andrew Freedman, partner and co-head of the group at shareholder activism at Olshan Frome Wolosky, a New York law firm. “Shareholders are now able to find a way to run a campaign where there is alignment with initiative, because it all fuels results. “

In other words, activist investors can now advocate for changes in companies on the grounds that such changes are not only the right thing to do, but will also enrich shareholders by driving up the price of shares.

So far, the performance of Exxon shares confirms this. In a reversal of years of underperformance, the price has risen by more than 45% since the No.1 engine began its campaign in December, beating the market at large and close competitor Chevron.

Exxon Mobil is not the only energy giant facing pressure on climate-related issues. Royal Dutch Shell announced on Wednesday that it would step up efforts to reduce its carbon dioxide emissions, after a Dutch court ruled that Shell must reduce its global net carbon emissions by 45% by 2030 compared to 2019.

The No.1 engine’s strategy hinged on getting the votes of Exxon’s three biggest shareholders, BlackRock, Vanguard and State Street, meanwhile, a tough climb as these companies often side with management.

The No.1 engine held only 0.02% of Exxon shares, giving it a similar share of proxy votes, while these three institutional investors together accounted for nearly 20% of the voting shares.

With nearly 30 years as a technology investor under his belt, James and his colleagues knew how to frame their climate-focused arguments in a way that mixed activism and a focus on bottom lines.

“The refusal to accept that the demand for fossil fuels may decline in the decades to come has led to a failure to even take the first steps towards evolution,” Engine No. 1 analysts wrote in the 82 fund pages to investors.

The hedge fund reminded Vanguard, BlackRock and State Street that its campaign was in line with their own publicly stated goals of seeing the carbon emissions of companies in their portfolios drop sharply over the next 30 years.

The success of Engine No. 1 aligned with a rapid change in public sentiment on climate change. Companies have had to recognize their impact on the environment and have made a public commitment to improve.

Originally known as “corporate raiders” or “greenmailers” – a rack for “greenback” and “blackmail” – activist investors were historically not seen as a force for good. Their main activity, started in the 1980s, is to buy a stake in a company and campaign for clear economic results, such as cutting costs, selling assets or increasing dividends, measures that would do increase the share price and provide an immediate gain. Activists then tended to empty their stocks, pocket the profits and move on to the next target.

Some activists, like Nelson Peltz’s Trian Fund Management, were credited with keeping business leaders on their toes and helping turn businesses around, but many on Wall Street saw them as quick-win speculators who cared little for the long-term future of a business. business.

Carl Icahn, an activist investment titan, was famous for his tough tactics. For about three years, he held a large stake in Apple and repeatedly fought for the company to increase its share buyback program. Like dividends, stock repurchase plans are a way for companies to return money to their shareholders. Apple never formally followed Mr. Icahn’s guidelines, but it expanded its buyback program, and it abandoned the investment in 2016 with an estimated profit of around $ 2 billion.

In recent years, activist investors have adjusted their approach as companies like ValueAct and Third Point have sought more strategic changes in a company’s long-term strategy.

Engine # 1 marries the aggressive strategy of old-school investors like Mr. Icahn with the new thinking behind social investing. The company is distinguished by the implementation of such a bold campaign even if it had little financial clout or public influence.

The No.1 engine’s approach is unique, but analysts and observers say its overwhelming success will likely inspire others to try similar tactics.

Investing in social good has been beneficial for investors. Many have seen strong returns in so-called ESG funds, which invest in companies that meet certain standards (set by investors) on environmental, social and governance issues.

In 2020, three out of four equity funds classified as “sustainable” beat a roughly comparable conventional equity market index, according to research firm Morningstar. This in part reflects the types of businesses that make up these funds. They tend to contain fewer stocks of fossil fuels, which were hit last year by closures linked to the pandemic. At the same time, big tech companies like Microsoft, which often feature in many sustainability portfolios, have made solid gains.

In some areas of the stock market, sustainability is a sexy attribute. Industries such as solar and electric vehicles have become hot growth topics. The Tesla share price has more than tripled in the past 12 months. Invesco’s exchange-traded fund for solar power has more than doubled.

Money is pouring in. Last year, $ 51.1 billion was invested in ESG funds, more than double the $ 21.4 billion invested in 2019 and more than nine times the level of 2018.

The asset management industry has a long history of issuing public statements in support of social issues, but with unclear goals. It seems to be changing.

This year, BlackRock, Vanguard, and State Street all joined the Net Zero Asset Managers Initiative, a commitment to push the companies they invest in to completely reduce their net greenhouse gas emissions by 2050.

Average shareholder support for this year’s resolutions on environmental, social or governance issues increased by more than 12 percentage points to 44%, according to Jackie Cook, analyst at Morningstar, and Lauren Solberg, data reporter there. low.

They noted in a Morningstar article last month that “the strong levels of support are likely due to more votes in favor of ESG resolutions by these large fiduciaries – particularly BlackRock and Vanguard, who have historically supported fewer ESG resolutions than most of their asset manager peers. “

Analysts say it’s hard to overstate the impact Exxon’s defeat will have on businesses across the country.

In 2018, BlackRock, Vanguard and State Street averaged around 25% of the vote in director elections for all S&P 500 companies, according to academic research. The mere threat that some of those votes are more likely to be cast against management will force executives to think long and hard about how to address their concerns, analysts say.

“You saw this kind of drastic change overnight,” said Lyndon Park, chief executive of ICR, a company that advises boards of directors on investor relations matters.

Mr Park, who previously worked at BlackRock, added: “Gone are the days when you could think, you know, these guys would give management the benefit of the doubt.”

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