Q&A: Investor activist who shocked ExxonMobil’s advice on how – or when – it changed the company

A year ago this month was a small hedge fund won an unlikely victory over ExxonMobil, having received support from most of the company’s shareholders to replace its three directors, against the wishes of management. A fund called Engine No. 1 argued that Exxon did not plan to switch from fossil fuels, and as a result jeopardized the long-term business prospects.

While the № 1 engine held only a small number of shares, it did led a six-month campaign and convinced major investors such as BlackRock and State Street that Exxon needed new faces on the board. Even before the vote, Exxon responded to outside pressure announcing a new low-carbon business and more ambitious plans to reduce its own direct greenhouse gas emissions.

This month, Inside Climate News spoke with Charlie Penner, who was the head of the active division of the № 1 engine, to sum up what has changed, if anything has changed. Since then, Penner has left the fund, and he declined to comment on what will happen next.

This interview has been edited for length and clarity.

What actually was Engine No. 1 and what was she trying to achieve?

In short, it was about short-term and long-term thinking. If you looked at Exxon’s strategy before the campaign started, then it had to be the most aggressive spender in the industry on really long-term oil and gas projects that depended on the idea that demand for oil and gas would not change for decades. come. And, obviously, this is important from a climate point of view, because it captures the infrastructure that oil and gas companies are encouraged to continue to operate for decades to come, even as other energy sources become more affordable and cheap over time.

But it is also important only from the point of view of major shareholders. Even for a shareholder who doesn’t care about the transition to energy and doesn’t really care about climate change, they care about poor capital allocation. Much of what I worked on in my old job as a simple traditional activist was about companies that have bad capital allocation histories. The idea was to connect these two things, which means that if you are a company that for the last 10 years, even before Covid, worked very poorly on capital allocation and was an undisciplined spendthrift, this problem will only get harder in the face. hopefully a growing energy transition.

A year later, how would you rate the success of the campaign?

I think it’s too early to tell. I think in the company we were pretty clear that any transformation would take a long time.

In terms of what you might expect, I think there are things in the short term that I would categorize as low-hanging fruit, in terms of greater disclosure of emissions 3. [the emissions generated when Exxon’s products are burned]what they did during the campaign; promises to reduce 1 and 2 emissions [Exxon’s direct emissions] to a greater extent than they are, and set more ambitious goals, which, again, is a rather low fruit in the industry; spend more on low-carbon solutions.

Now it depends on what it actually means. It’s nice that they’ve said they’ll be allocating more capital to these things, but it’s good if they’re allocating it to things that really make sense and can push the energy shift forward.

The good news, coming back to the people on the board, is new people like Kaisa [Hietala] and Andy [Karsner]who have actually built profitable businesses and companies with transitional energy supplies can now be in this boardroom and say, “Wait, this is something real, or is it just advertising.”

So I think it’s one of those things where, even if you can’t say where those costs will go, there’s a better chance that could change the situation.

Another important thing is that during the campaign they went from having to say, “We will increase production by 25 percent,” to the time that they keep it stable. But the real report card will be in 10, 20, 30 years, if they still spend as if everything will never change.

Sometimes I hear executives and people outside the industry say, “We respond to demand, and if we extract less oil or gas, someone else will produce more.” The question arises as to what impact investment or lobbying of an individual company may have, even if it is Exxon or Shell, in terms of incentives or barriers to transition.

It is a matter of distinguishing between current activities and very long-term costs and planning. People are not mistaken when they say, “Hey, if you just stop extracting so much oil and gas today, others will save the slack, or prices will just skyrocket.” The issue, however, is that no one is involved in the campaign, and I don’t think smart defenders say, “Just turn off the pipes today.”

This debate is not about current production. They relate to what you spend on manufacturing capacity that won’t connect to the internet for decades and will continue to produce for decades. If you have a $ 30 billion project that depends on a certain level of demand for decades to come, you’ll fight like hell to make sure demand still exists.

Now there is a real debate about whether the world will ever change. But it’s kind of a very fluid thing, because it also depends in part on whether or not oil and gas companies create incentives for themselves to make sure the world never changes, even if there are ways the world can change that’s cheaper for consumers, obviously , better for the climate and much less volatile than the current energy market today.

If you could snap your fingers and outline how an oil and gas company should behave or distribute its investments today, what would it look like?

This would be in short-term projects that could relatively quickly appear online that generate really high returns. We spoke during the Perm investment campaign Exxon [in Texas]most of them actually look pretty good.

But other things, especially in developing countries, if you look, for example, at the LNG project in Mozambique … It’s mostly their gateway to India. The more people are locked into LNG as a transition for countries like India, from coal to renewables, it’s not a short-term bridge, it’s a project for 30 or 40 years. And if the developing world does not switch from coal to renewable energy, but switches from coal and delays liquid natural gas or other fossil fuels for three or four decades and delays their achievement, it has a huge impact on energy transfer.

One thing you didn’t touch on there is lobbying. How do you see this fit?

It seemed to me that it was pretty interesting that right after the campaign The lobbyist came out and basically talked about members of Congress as if they were some kind of company employees. It’s pretty depressing.

We drew attention to the fact that the lobbying arguments they gave did not make much sense. They had it all about, well, you know, “We support the carbon tax.” But we noted that you will not spend $ 30 [billion] or $ 35 billion a year on the new oil and gas costs that were their plan before the company if you really wanted the carbon tax to pass.

So it was nice that the lobbyist came out and said, “Yeah, it’s just a topic for conversation.” But even before that we just looked at the basic economy of it, it didn’t make sense. Unfortunately, lobbying can be incredibly short-term and incredibly destructive even for your long-term interests.

Now we have a shareholder propaganda season. What do you think can be achieved by shareholder resolutions in this regard? What role can they play?

This whole thing is about scaffolding. Much of the work we did in Engine on Exxon was based on the work of people at CalPERS and CalSTRS [two California public pension funds] and the Anglican Church.

I don’t think there’s a knockout blow to this. Unfortunately, many people in the initial excitement over the Exxon vote thought it was a knockout. But there is no knockout. There’s not some giant button [Exxon CEO] Darren Woods’ desk says “renewable energy” that he can get. And even if every major oil company suddenly made all the decisions perfectly, they still make up only 15 percent of the world’s reserves. So you know a lot of things have to go right for a long time.

The cynic in me is often skeptical of climate change efforts aimed at profit. One of your company’s successes has been that profit and climate interests have coincided, but you can’t guarantee that they always coincide. What happens when there are none?

I think that’s really fair. And I’m probably more likely to be skeptical than not when I see commercials and stuff about it. I think one of the misconceptions is that what I’m trying to do, or what other people are trying to do, should somehow displace what other people are doing, or should replace government, a well-functioning government, reasonable regulation. I think it really should just be an expression, “Hey, we’re part of this system. And we can make smarter decisions. “

It’s fair to say that, as an investor, you can say, “Hey, a lot of the things that are happening here are focused on the short term and don’t make sense to any of us in the long term.” And I think that here you can do what needs to be done, and that is to appeal to the interests of the people. This is a very small number of people and I think there are zero children who will benefit from the worst outcomes of climate change.

Some people are in favor of ending the industry under government leadership. Do you think that the investor-oriented oil and gas industry can get to where it should be?

If there weren’t a game clock here, and it’s more like a shot clock, given the current schedule, so probably at some point it would have reached just based on a drop in the cost curve for renewables based on technological developments. But I think if you see things that have been successful, it’s because good regulation has paved the way for making good business decisions, and good business decisions have shown how you can wisely regulate the system.

I don’t think the problem is necessarily in capitalism as a concept. I know as many capitalists, if not more, who are focused on trying to push the energy transition forward. But they are not behind the wheel now, because they have no weights. So if you’re a U.S. senator, and you’re called by the CEO of an oil company, and you’re called by the CEO of a solar company, now many of them say it’s the current power balance, and that’s who we’re going to listen to. And this is not really the problem of capitalism; both of these sides are driven by goals of efficiency and profitability. This is a problem of a rather disgusting and anti-democratic system.

All I know is that there are certain tools sitting on the table that people can try to use to bend the curve a bit, and these are, incidentally, the tools of capitalism. And if the government wants to participate in the game as well, that would be great.