At Marcellus, we often remind ourselves that the larger purpose of investing is beyond just generating returns or managing risk – it is about influencing, even in a small way, positive change in the world we live in. We believe in some ways it is our duty to try and engage in constructive dialogue with managements about key issues, not least about corporate governance and protecting minority shareholder rights but also issues concerning the society at large. And studies show such efforts are not necessarily in conflict with the primary objective of generating risk adjusted returns – it can indeed contribute to enhancing returns in the long run. Here’s one such story about an investor – Charlie Penner of a little known fund, Engine No 1, not a meaningful one in terms of size but ended up wielding outsized influence on one of the world’s largest companies – Exxon Mobil, caught front and centre in the climate change revolution.
“Penner’s broader aim: to get Exxon to treat climate change as a threat not only to the planet but also to its bottom line. As a shareholder in Exxon, Engine No. 1 argued that a fresh set of directors could help the company find alternatives to its heavy investment in fossil fuel production and increase its share price in the process.
…The title “head of active engagement” may sound unassuming, but Penner was at the helm of the Exxon fight—essentially the campaign manager for the insurgents. Engine No. 1 held only 0.02% of the shares in the energy giant descended from John D. Rockefeller’s Standard Oil. To win the seats, Penner logged 16-hour days, endless Zoom calls, and sleepless nights preparing for the vote and rallying other shareholders to the fund’s side. Like any good election campaign, his had a slogan: “Reenergize Exxon.” Penner quit Engine No. 1 in November to explore ways of running campaigns with larger investors.
Engine No. 1’s feat has eluded others in the past, including members of the Rockefeller family, who’ve tried for years to pass even nonbinding resolutions asking the Texas company to do things such as study the impact of climate change. The key was that Penner built his case around value for investors, and his argument found a receptive audience at Exxon’s top three shareholders—the giant fund managers BlackRock, State Street, and Vanguard. Penner said “aggressive” spending was piling on debt and producing diminishing returns while leaving the company—currently worth about $270 billion—unprepared for a future in which governments take a harder line on pollution that heats the planet. “Engine No. 1 hit the top of the top of corporate America with a strategy that merged a company’s financials with the environment,” says Luigi Zingales, a finance professor at the University of Chicago.”
It also reminds us of the power ‘passive’ investors like Blackrock, State Street and Vanguard can wield, given they are now the largest institutional investors in most listed companies.
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