WHEN: Today, Thursday, October 6th
WHERE: CNBC’s ESG Impact
Following is the unofficial transcript of a CNBC interview with Engine No.1 CEO Jennifer Grancio at CNBC’s ESG Impact conference, which took place today, Thursday, October 6th. Video from the interview will be available at cnbc.com/esg-impact-events/.
All references must be sourced to CNBC’s ESG Impact.
SARA EISEN: Tyler, thank you. Good morning. And Jennifer, it’s good to have you here, welcome.
JENNIFER GRANCIO: Thank you.
EISEN: So you’re squarely in the middle of all of this. It’s a great place to start our event here today because you’re investing around some of these principles, right? Climate, social responsibility, but you’re also trying to make money and returns for investors. And my question to you is do those two things go hand in hand right now, when we’re in the middle of a bear market, and the priority for investors really is profits, cash preservation, not necessarily some of these ESG policies?
GRANCIO: Well Sara, thank you for that question and it’s great to be here with everyone. We think about investing as, you know, this is this is something that you can do for the very short term, but for the vast majority of asset owners and even retail and wealth investors, people are investing over time. They’re looking for very strong economic performance over time and so we built Engine No. 1 because we think the market sometimes gets confused about investing only for ideology or the market gets confused and investing extremely short term. So what we have done is we look at a company’s primary business, we look at the material impact areas, and we take that into account and we go deep with companies so an example like the move from internal combustion engines to battery electric vehicles, that’s a change that happens over time. It’s complicated. There’s a way to do that where you understand consumer demand, you understand material impact on climate, and you can work with a company to help the company win and be very successful.
EISEN: Well, you mentioned your mission statement. Nobody ever heard of Engine No. 1 until what was it early last year with a .02% stake in ExxonMobil you fought management in a proxy battle and somehow won three board seats on this issue of climate policies and sustainability. How did that happen?
GRANCIO: Well, from an Engine No. 1 perspective, we actually think of it as a campaign that was about governance and a campaign that was about long-term capitalism. And so the work that we did with Exxon was our principle of investing, which I talked about before, is to look at how companies change and how they need to change through big systems transitions. So as investors, sometimes we like to talk about Google and Amazon, that’s great. But if you think about where value is really going to be created in the next decade, we’ve got an energy transition. We’ve got changes in how people get to work and use cars and transportation, changes in agriculture and so forth. And so we simply looked at Exxon as an investor and we said, if Exxon is smart and has the right capabilities from a governance perspective on the board to manage through an energy transition because we use energy and we’re in transition, and also to look at how the business has value after that transition. That’s great for financial shareholders of Exxon. So we were able to do that and bring a lot of other investors with us.
EISEN: Well, you convinced the big institutional shareholders. Yeah, no, that that was what was so impressive as a fund that many had not heard of before. So what’s the update, Jennifer? How has Exxon been doing since that that battle was won May of last year?
GRANCIO: So from from a from a proxy perspective, the work that we did and investors came with us was to add some additional capabilities to the board to help Exxon manage capital allocation and to develop additional businesses over time. And so Exxon has done those things. They’ve been disciplined on the capital allocation side, they’ve set clear targets and made progress to those targets from an admissions perspective, which gives them credit and a social license to operate as they move forward. And they’ve also started a green energy business and on the back of the work that we did with Exxon, and this gets to this, you know, we believe that investors need to be active owners. We continue to do work across the energy sector, and work with a number of great companies that have set clear scope one and two targets and actually agreed to third party methane verification. And for people that care about climate, you know that methane matters. And so being transparent, being audited across different energy companies is a big step forward, whether you’re a financial only investor and you need that data to look at the company’s risk and the company’s value over time, or you’re interested because you’re interested in impact at scale and reducing these emissions.
EISEN: I guess what I’m wondering Jennifer is the Exxon has done remarkably well in the market, up a ton since you got in but a lot of it is because oil prices have spiked and there’s a war with Russia cut off from from a large part of the market, a major oil producer. So is ExxonMobil a good long-term bet from here on some of these ideas about sustainability?
GRANCIO: I would say if you look at the appreciation of different companies in the energy sector, the work that we did with Exxon their stock was more than doubled, was significantly higher than any of their peers. So it wasn’t oil prices. It was actually the improvement in their governance and then another good example is Occidental, which has been a leader in the space of transparency and mission working on green businesses, and their stock was up more than 60% the first half of the year, again, different than peers. So you know, we believe that these are fundamentally investment issues and at the same time if as investors we’re working with companies, this is, you know, good old American capitalism, we’re working with these companies to create value and have appreciation in their price over time. At the same time, you’re holding these companies if you’re worried about impact, and you wanna find the emissions and you can work with the company to turn it down as you go through time.
EISEN: But still, I mean, a part of it has to be the fact that we need fossil fuels right now and we need them desperately and Europe needs them even more right now. So what is the right balance to think about these the future of some of these energy companies and clearly, Oxy also Warren Buffett has been buying so that’s been a big help but, but clearly, some of these companies find themselves at a crossroads where, where they’re being asked to produce more oil and also to to shift toward a more sustainable position for the future.
GRANCIO: Yeah, I think that’s right and we talk about it as an energy transition. So Engine No. 1 is looking at these very complicated systems transitions, and we are in an energy transition, thanks to the war, the transition probably is a little bit longer. So what does that mean? It means if I’m an investor and I care about sustainability, I mean, I have a choice people use fossil fuel, we haven’t made the transition. We as a society haven’t done that yet. And so if we need fossil assets, we need them to be managed by the big companies in the most responsible way possible and we need these huge engineering and development companies to also apply resources where they can where and only where they’ll be financially rewarded for it over time to look at new technologies and how do these companies maintain value after that transition when we’re in more of a renewable environment or carbon capture environment and potentially, some of these companies can be winners in that space as well because they know how to do these things at scale. So definitely think about it as we’re in energy transition. How do you be responsible and run a business to deliver energy to the world which we need today. And then as you get to the other side of that transition, how do some of these great companies have business models where they can participate and they can still have value over time.
EISEN: How much of your portfolio right now is energy company?
GRANCIO: We have, we have as a business, we think about it as you can hold the market. And we think that there is some improvement that could be done in the index or passive side of the market. So one business we have is simply an index fund. If you’re going to hold an index, we think you should be active and use the votes to drive these great long-term economic outcomes. So in that product, energy is the same. Excuse me, Sara. Energy is the same, energy is the same percentage as the index. And then we have another another ETF. It’s active, it’s concentrated that holds primarily energy, transportation and ag stocks because we think that’s a part of the portfolio that is underweight for the vast majority of investors and you need these active themes to participate either in value creation in these industries and as you participate in these industries to do it responsibly.
EISEN: Okay, I’ll give, I’ll give you a break to clear your throat Jennifer, hopefully, hopefully you have water there. But, but what my next question I’ve seen you quoted lately saying that you’re not you’re not necessarily always going to take an activist stance and you actually want to get away from the activist moniker. Even though as I mentioned, Exxon, the proxy fight really helped put you on the map. So I’m curious where your focus is and where you see the biggest opportunities and how you’re gonna engage from here.
GRANCIO: Yeah, we learned from the Exxon campaign, I think is that the we think the market is ready to have a conversation about economics. And so we don’t need political theater on either side, we need to actually work with the biggest public companies in America as the capitalist system was set up to do to take material impact areas into account. And if you think about it that way and you think about it as aligning how the companies have higher value over time as well as how they can quantify and address their their major impact areas, it becomes extremely constructive. So the work we did with the other big energy companies after Exxon that I mentioned around three more companies joining oil, gas methane partnerships, that was very constructive. We do a lot of work with the auto sector. We’ve talked very publicly about GM and GM is a great example where supporting them on making this transition, which is long term, it does not take only a quarter. That is good for GM and that’s good for the financial investors and that’s good from an impact perspective.
EISEN: So is GM a better play on the EV transition and Tesla?
GRANCIO: It is they’re both I mean they’re both plays would be our opinion. And what we see in a lot of portfolios is that people know about Tesla, but they have forgotten about GM and they’ve forgotten about Ford. And so our sort of theory about this is if you leave your money in a passive index, or you’re only buying the kind of super growth stocks, you’ve got a huge problem in your portfolio because we’re going to see all these transitions happen in the coming decade and they need to happen at scale. The market wants EVs as battery electric vehicles, and the market is going to switch and from a scale perspective, that’s 20, 30, that’s millions and millions of cars. I mean, Tesla’s right here, and so there’s huge room for an incumbent like GM and for Ford, frankly, to be part of creating and meeting all of this demand. And when they do that, the winners are going to be still Tesla, but also the GMs and Fords and then all of the other companies that are enablers as they build their businesses.
EISEN: Is there another example, another company that you can share with us that you think is doing a good job and leading and maybe underappreciated?
GRANCIO: I think it’s I think if you think of it very crudely as you know, who’s doing good job on governance, who’s doing good job on their their businesses, very sensitive to climate, they’re doing a great job, and then the same can be said for workers and wages. You know, we think the vast majority of companies are actually trying to get this right. We have more data, we have more data on the climate side today as investors as Engine No. 1 but the whole market has really great data on scope one and two, and we’ll get there on scope three, so that can be quantified and we can show financial causality and when a company deals with a risk in a smart way, their value goes up. We see this in the ag space as well.
GRANCIO: Go ahead Sara.
EISEN: Oh, no, no, go ahead. Please I want to hear some examples from you.
GRANCIO: Yeah, I was gonna say an example is in the in the in the ag space. An example of a company that we think is getting it right is Deere. So Deere makes tractors, we think tractors are dirty if we have our impact hat on, but if you flip it and you think about how do we solve, how do we solve the food crisis globally? Deere is a company that does precision agriculture. What does that mean? It means the tractor helps you manage water and fertilizer. And what does that mean? It means it’s better for the climate, but it also increases yields and money and financial performance for the farmers and so there are a lot of examples of companies that we think are totally on the right path where they’re building a business. They’re solving these huge systemic problems that we have and it’s also from an impact perspective. You aren’t you’re making you’re doing a better job. And then in the in the consumer space, there are companies like Walmart’s a great example. That has been working on how to understand the supply chain and optimize supply chain and be able to describe everything that happens along the way and that puts them in a great perspective because as consumers want to understand that consumers want good practices, they’re able to understand the whole chain and explain that to consumers.
EISEN: Will you guys launch another another proxy fight anytime soon?
GRANCIO: Well, if we would, we wouldn’t we probably wouldn’t talk about it publicly. But joking, joking aside—
EISEN: I’m just wondering if the strategy where it fits in—
GRANCIO: Our strategy is to be constructive. We think there’s, we think there’s a lot of room to work very constructively with companies on these different issues and really effectively as investors be long-term investors and support these companies on solving supply chain issues and bottleneck issues. And you know, frankly, for a lot of, lot of North American companies it particularly on the manufacturing, manufacturing, transportation, logistics, we’re gonna see a huge resurgence in production and manufacturing in the United States. This is great for impact, but it’s going to create a huge amount of value and again, in a lot of portfolios today, thematically, the portfolio isn’t holding railroads, you’re not assuming cars get made in the US, you’re not assuming chips get assembled made and assembled in the US. And so we will do something, we will do something in the future around this opportunity to really invest in the, in the US supply chain as well as all the work that we’re doing on climate, as well as the work we do to just continue to work with companies through the proxy voting process. So no plans to do an activist campaign. But definitely we will continue to be very active. We think you should always as an investor or manager on behalf of others, be very active with the companies that are in the portfolio.
EISEN: No, it’s very interesting about the supply chain. So Jennifer, right right before we came on I don’t know if you saw the the clips of some of the backlash, fierce backlash against ESG woke capitalism. I’m curious what you make of that pushback which only seems to be increasing politically.
GRANCIO: I guess the way that we would think about it is you know, systems systems change is complicated and investing is complicated. And so as investors which we are as opposed to politicians or or anything else, we really think you have to understand these these systems and companies at a very deep level to make good choices. And so investing shouldn’t our point of view at Engine No. 1 is investing should never be ideological. Investing should be about understanding these companies, understanding how the industries are changing and working with the companies on their material areas of impact. It’s financial, and it all ties together. So hopefully, hopefully, we don’t let theatre get in our way on some of this. We move towards looking forward, we have good data, we can use data to make investments, we can have transparency, and we can get away from some of the theater-oriented debates and focus on value creation.
EISEN: Well, on that note, I did want to ask you about BlackRock because that’s where you come from. You helped you helped, I think found the iShares business and I’m curious what you make of BlackRock’s strategy versus your own strategy, what the big differences are, especially in light of some of these new news tidbits like we got this week with Louisiana pulling $900 million out of BlackRock funds because they say that BlackRock’s policies are harmful to Louisiana’s energy economy.
GRANCIO: Well, I think as from an Engine No. 1 seat, I’m not in a position to comment on other people’s practices or policies. But what I would say is a large companies with many existing businesses, it’s harder as an incumbent to to pivot and to make everybody happy and to change business practice. Which is why for us we think we need new entrants as well like Engine No. 1, where we don’t have a huge number of businesses, we’re able to have a very simple principle of we use data, we use it to invest, impacts are a big part of that and we’re entirely transparent on everything we do, including every single vote every year. It’s a little easier for us as a new entrants to the market to do that, then not just one, but many of the larger asset managers where it’s a little bit more complex for them.
EISEN: Yes, Jennifer, thank you so much for the time today. We so appreciate it.
GRANCIO: Thank you Sara.
EISEN: Don’t get to hear from you too often at Engine No. 1. Tyler, with that, I’ll send it back over to you.