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How Engine No. 1 aims to reshape the future of ESG investing

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Yahoo Finance’s Brian Sozzi and Julie Hyman speak with Engine No. 1 CEO Jennifer Grancio about the company’s new framework for ESG investing, its campaign against Exxon, and how it aims to reshape the future of big oil.

Video Transcript

[MUSIC PLAYING]

JULIE HYMAN: There's a new breed of activist investment firms that are focusing squarely on ESG. One of them is Engine No 1, which has made its name, among others, by targeting successfully Chevron. And one of the challenges with ESG is sort of defining what it is and what are best practices. That's been really a challenge that has been bedeviling the industry for quite some time now.

Jennifer Grancio is with us now. She's the chief executive officer of Engine No 1, which is out with a new white paper aimed at that challenge-- how do you define ESG, how do you figure out how best to improve it. And you guys over at Engine No 1 have come up with something that you call the total value framework, Jennifer. Give us sort of the high-level way to think about the total value framework.

JENNIFER GRANCIO: Thank you, Julie. And I would say, at Engine No 1, we started with Exxon and the activist campaign, but much of what we do-- in fact, predominantly what we're doing is constructive. So total value framework is something that we've been doing, and wrote a paper and put it out to everybody yesterday.

The idea here is that companies are out and they're having material impacts as part of their business. And so if we can use the data around ESG and around areas of impact and we can turn it into dollars and cents, it helps take these ESG and impact issues and drive long-term value. And so that's what total value is, and it's the core of what we do at Engine No 1, is to constructively understand what companies are doing and how their actions help drive value up over time.

We think, today, a lot of financial analysis is too short-term. You start with the income statement. You don't have a good way to think about ESG and impact. And so with our total value framework, we're turning these impact areas into a core part of the financial analysis. And the work we're doing as we're talking to companies and boards and investors, there's a lot of receptivity to boiling down how you think about ESG and impact as part of a company's strategy, and helping these companies make great choices to drive long-term value.

BRIAN SOZZI: Jennifer, if I'm a CEO at a large publicly traded company, what actions should I be taking today just to fit inside of your framework? Because I still view a lot of executives, they passively mention ESG on an earnings call, but no clear-cut initiatives. They passively mention it in their annual reports. No clear-cut initiatives. What should they be doing?

JENNIFER GRANCIO: We think CEOs are actually trying to do the right thing. And what they should be doing is understanding for their business. And businesses are different. Some have huge workforces. Some have huge climate, environmental impact. For their business, what areas are most material, frankly. And then, you know, the ratings and the disclosure is part of that. So given the business you're in, doing a great job of disclosing.

But more than that, how can you boil down thinking about these impact areas when you're making long-term strategic decisions? And sometimes, decisions about workforce and wages or decisions about pivoting capital allocation, in terms of how you're affecting the planet or the climate, these are long-term decisions. And so we think companies want information, and we can be constructive and work with them and help them think about how they model out changes in business, changes in capital allocation.

And in many cases, what we do with CEOs and boards is help them tell their story-- and we'll do more of this over time-- help them tell their story about the good things they're doing to take what might be seen as negative impacts out there in the world, and turn them around and do things differently to actually reduce negative impacts, drive up revenue, drive up performance of their business over time.

JULIE HYMAN: You know, Jennifer, your approach is also really interesting to me not just from the company perspective, but obviously from the investing perspective, as well, because there are so many things that say ESG now, aren't there, and a lot of them are passive strategies. And most of them just sort of avoid, right, they avoid companies that they say are not up to various criteria, but they also include a lot of stuff that other ESG criteria might exclude, whereas your approach is much more let's change it instead of just leaving it out. So I guess then the next question is, how do you decide which companies to look at that can potentially be changed?

JENNIFER GRANCIO: Yeah, thank you. Thanks, that's exactly to the heart of what is generation two of ESG. And so with the total value framework, we're looking at all these companies, and we're turning their impacts into dollars and cents and helping them think about how that affects better revenue over time, better multiples over time. And in terms of how do you invest in the market and how do you take advantage of these insights, our belief is that you have to own companies and engage with companies.

And so at Engine No 1, we don't believe in divestment. We believe in holding the companies and working with the companies to be constructive and help them manage business, taking in all this ESG data into consideration. You know, and maybe 10 or 20 years ago, that was hard because the data wasn't there, but this data is out there now, and the companies can use it. And that's the right way, we think, to invest, is to work with the companies, and particularly these big public companies, help them make these transformations.

BRIAN SOZZI: Jennifer, let's just look into the oil patch for a second. Could a big oil company, can they ever truly deliver on the changes that you would like to see?

JENNIFER GRANCIO: At Engine No 1, our whole business is around economics. And so whatever industry you're in, if you understand your business, then you understand the economics of the impact you make. And so if you're a high carbon intensity company, you have scope one, you have scope two, you have scope three. And what happens in scope three, if you can put dollar values around that and then start to do business differently or allocate capital differently to make reductions there, we actually think that dramatically drives up the value of these companies over time.

And as I said, at Engine No 1, we were an activist on Exxon, but we do not consider ourselves to be an activist firm. We consider ourselves to be a firm that's constructively working with these companies. And in the vote ETF, we're holding the market, so definitionally the product holds the market. And then we have an opportunity to work constructively with companies, and also, every year, to very assertively vote the shares of each company. So we think that's a great way for investors to be involved in the transformation of all of these industries and all of these businesses, taking ESG and sustainability, turning it into dollars and cents, and helping these companies be more profitable and more valuable economically over time.

JULIE HYMAN: Jennifer, I'm looking forward to continuing to keep up with you as you guys continue on your journey here. It's really interesting stuff. Jennifer Grancio, chief executive officer at Engine No 1, thank you.