Jennifer Grancio was among the leaders at Engine No. 1, the upstart investing firm focused on climate and energy transition, that bested ExxonMobil in a 2021 proxy contest upset few saw coming. What Engine No. 1 decided to do next was maybe as surprising: move away from the activist investor approach that worked so well in winning board seats at the oil and gas giant.

Now CEO, Grancio doesn’t want the firm to be defined by the Exxon headline, but rather by a long-term investing approach that is a blueprint for how companies should think about huge systems changes like energy transition, and how investors should access the value that will be created by the companies that get it, and scale transformed businesses.

“Investing is something you can do for the very short-term, but for the vast majority of asset owners … they are all looking for performance over time,” Grancio said at the CNBC ESG Impact virtual event on Thursday. “The market can get confused about investing only for ideology or the extremely short-term, but Engine No. 1 is going deep with companies, looking primarily at the business model and how it will need to change over time to create value for shareholders.”

The ExxonMobil campaign does hit on the big themes: having the right governance in place to see companies through big systems changes, making the right investments and avoiding the wrong ones. “We got into Exxon as an investor because we knew if it is smart and has the right management for energy transition and how the business is valued after energy transition, that will be great for shareholders,” she said. “We think of the ExxonMobil campaign as being about governance and long-term capitalism,” she said.

Grancio shared a few of her foundational ideas for investing in the future and staying ahead of the market at ESG Impact.

Lots of technology, but not tech stocks

“As investors, we like to talk about Google and Amazon, but where the returns will really be generated in the next decade, we look to agriculture, autos and energy,” Grancio said.

Engine No. 1 is doing a lot of work with autos, which it has been public about, including an investment in GM, on what she describes as a long term transition.

“People know about Tesla, but they forget about GM and Ford,” Grancio said.

“We will have this huge transition and it needs scale, and that’s millions and millions of cars and there is huge room for incumbents like GM and Ford to be part of creating and meeting all of this demand,” she said. This doesn’t mean Tesla won’t be a winner, she added, but GM and Ford also will be, Grancio said.

Don’t just be an index fund investor

Engine No. 1 has a passive index ETF — Grancio was among the senior leaders of the BlackRock iShares ETF business before joining Engine No. 1 — but she warns investors that in the same way they may focus on Tesla and forget about the rest of the auto sector, they will miss out on big investment opportunities if they stick with the index portfolio weightings.

“If you leave your money in a passive index fund, or you only buy the super-growth stocks, you will have a huge problem in your portfolio,” she said. “Investors are underweight the big transition ideas if they are in the indexes,” she added.

Grancio said holding the market in an index fund allows investors to use their shareholder voting power to drive outcomes, which it did by banding together with many large institutional shareholders to take on Exxon, but many of the biggest transition plays, from energy to transportation, are underweights for the majority of investors because of index fund use.

Another big example she cited is agriculture, and a company that she said is getting it right: Deere. “It makes tractors and tractors are dirty, but if we flip that and think about impact and the global food crisis and solving it, Deere’s moves into precision ag are better for climate and yield and financial performance of farmers,” she said. Deere is building a business to solve a huge systemic problem which also has an impact investing perspective, she said.

Still investing in big oil, and expecting energy transition to take a ‘little longer’

Grancio says that Engine No. 1’s work with Exxon is a sign that ESG investing works. “Look at the appreciation of different companies in energy and Exxon has more than doubled, significantly higher than peers, and it wasn’t just the price of oil,” she said.

She also cited Oxy (formerly Occidental Petroleum) which has been a leader in the energy transition space and has more than doubled in 2022 “because it is different from peers,” she said. “We believe these are fundamentally investment issues,” she added. Another important factor that made Oxy different from peers: a massive investment made by Warren Buffett in the company.

Engine No. 1 continues to be an active owner of energy companies, working on many of the same issues that it did at Exxon even if not through a proxy war: managing capital allocation, setting clear targets on emissions, and investing in green energy business.

But she says that the last year during which the price of oil spiked as a result of the war in Ukraine and critical energy shortages in Europe were exposed does mean that the energy transition “will probably be a little bit longer.”

“People use fossil fuels and we have not made this transition, and if we need fossil fuel assets we need them to be managed by the biggest companies in a way that is also looking at new technologies to maintain value after the transition, when we will be more in need of renewables and carbon capture,” she said.

That’s why she continues to see big energy companies as an investment opportunity. “They know how to do these things at scale. We need to deliver energy to the world today, but as we get to the other side of the energy transition, how they deal with these issues will be required for them to still have a great business,” she said. “We think there is a lot of room to work constructively with companies on these issues.”

US reshoring of manufacturing should be a new focus

While it does not fit neatly into an ESG box like climate, Grancio said one of the biggest investment opportunities in the future that she is chasing will be American companies in manufacturing, transportation and logistics tied to a huge resurgence in domestic production and manufacturing.

“Investors are not holding railroads, not assuming cars or chips will be made in the U.S.,” she said.

On Thursday, President Biden touted a plan by IBM to invest $20 billion in New York-based chip manufacturing, two days after Micron Technology announced up to $100 billion in semi manufacturing investments in the state.

Without providing details, she said Engine No. 1 will be creating an investment in the future around the opportunity to invest in the U.S. supply chain. “We’ll be doing something,” she said.

The U.S. domestic manufacturing revival is, in a sense, form of “systems change,” as globalization of prior decades is disrupted. And that fits Engine No. 1’s overall discipline. “We really think you have to understand systems and companies at a deep level to make good choices. Investing should never be ideological. It should be about understanding these companies and how industries are changing,” she said. And at a time of serious political blowback against ESG investing focused primarily on energy companies and climate change, she added, “Hopefully, we don’t let theater get in the way on this.”

https://www.cnbc.com/amp/2022/10/06/climate-investor-who-made-right-exxon-bet-on-how-to-beat-the-market.html