Engine No. 1 burst on to corporate America’s radar in 2021 as the little hedge fund that bested ExxonMobil. The investor holding 0.02 per cent of the oil major’s shares won three seats on the board with a demand to take climate change more seriously.
Two years on, the excitement has faded even as climate concerns have not. Engine No. 1 is in the middle of a strategy shift that does not include public proxy fights.
“I never considered myself an activist investor,” Chris James, Engine No. 1’s founder and chief investment officer, said in an interview with the Financial Times. “I consider myself an investor and activism is a tool of last resort, not a strategy.”
Taking shape instead is a firm focused on private investments. Late last month Engine No. 1 announced it would put $780mn into the base metals business of Brazilian miner Vale through its private capital arm, giving it a 3 per cent stake.
Days before, Engine No. 1 announced the sale of its fledgling exchange traded funds business, including products such as the “Transform Climate ETF”, to the big asset manager TCW.
The moves stand apart from what put Engine No. 1 on the map: its forceful and successful campaign against Exxon, which set companies and their advisers on edge and pointed to a new league of small but aggressive activist investors who could acquire minuscule stakes and push for changes.
“Engine No. 1 was just the tip of the spear, but you couldn’t ignore them,” said one banker who advises companies on how to deal with activist attacks.
James launched Engine No. 1 in late 2020 with approximately $250mn of his own money. He had previously founded Partner Fund Management and spent more than two decades investing in tech companies, including an ill-fated bet on fraudulent blood-testing start-up Theranos, and had worked for famed investor Louis Bacon.
Just 10 days after its debut, Engine No. 1 began its proxy fight at the biggest US oil company. Exxon faced an “existential business risk” by pinning its future on fossil fuels, the fund declared. The months-long proxy campaign attracted at least partial support from big investors such as BlackRock and Vanguard, culminating in the election of three of its four nominees to the board in May 2021.
Investors who score such big wins typically try to replicate their strategy and use the momentum to raise money. Engine No. 1 intended to raise money from institutional investors after its Exxon triumph, the FT reported at the time.
Yet Engine No. 1 manages little outside capital: regulatory filings show that its Perennial Total Value Fund, which makes concentrated bets on public companies, contained about $300mn in assets as of December 31. James declined to disclose how much money sits in the private capital arm but said it was larger than the public fund.
Several crucial personnel have left Engine No. 1 including Charlie Penner, a veteran of activist investor Jana Partners who masterminded the Exxon campaign. James had hired Penner, who pushed for changes at companies such as Whole Foods Market and Apple, as head of active engagement at the start of 2020.
Penner exited after a falling-out with James in late 2021, later alleging in a legal dispute that Engine No. 1 was fighting to stop him from launching new activist campaigns, according to three people familiar with the matter.
Engine No. 1 has since dropped a non-compete claim against Penner and the matter was settled in private arbitration, they said. James and Penner declined to comment on legal matters.
One former Engine No. 1 employee said Penner’s departure and the firm’s decision to distance itself from activist investing had made them question whether it would just take a more corporate-friendly stockpicking approach.
James maintains that nothing has changed about the way Engine No. 1 is run or its goals since inception. “What we tried from the very beginning is exactly what we’re doing today,” he said. “The strategy has been exactly the same.”
Engine No. 1’s website says its “focus is to create value by helping companies transform their businesses to be sustainable — and voting is a key lever with which we push for best corporate governance practices, advocating for transparency at the economy’s largest companies”.
Hot on the heels of its Exxon victory, Engine No. 1 established its first ETF, a competitive sector dominated by the largest fund managers. James told the FT he had expected it would take about seven years to scale the business. The sale to TCW is taking place just two years after the launch.
Neither TCW nor Engine No. 1 disclosed the price. The Los Angeles-based group is getting all of the business’s people, infrastructure and assets, which total more than $600mn, as part of the deal.
“We started to see early traction,” James said. “But we felt this was going to be a longer-term build because distribution is such a huge component in the ETF business.”
James said he was largely focused on Engine No. 1’s private capital fund, which is run by Erik Belz, who previously led the natural resources group at Blackstone. The Vale base metals business, which mines nickel and copper, will be its first big investment.
James acknowledged that mining companies tend to have a risky reputation. Vale agreed to a $7bn settlement with Brazilian authorities, and later a $55.9mn settlement with the US Securities and Exchange Commission, over a dam disaster that killed 270 people in 2019.
“While extractive industries have been a point of controversy, what we want to do is we want to go in a sector like this and we want to find what good looks like,” James said, adding that he believed he could drive more change from private investments than he could from public ones.
Engine No. 1 has conducted no activist campaigns at public companies since Exxon.
Late last year it was reported that the firm planned to target Coca-Cola but James denied this, saying he had only brokered an introduction between the drinks company and the waste disposal company Republic Services.
“It was really just an introduction from the [chief executive] of one business to a senior leader on another business,” he said. “I don’t really know if there’s a model for this, but I don’t think that’s activism.” James added that the company did not own shares in Coca-Cola at the time.
At Exxon, Engine No. 1 last year voted against a resolution proposed by climate-focused investment group Follow This that called for Exxon to reduce its so-called scope three emissions, or those produced by consumers burning its fuels.
“That was one of the big disappointments of 2022,” said Mark van Baal, head of Follow This, the climate-focused investment group that proposed the resolution. “I think everyone can see that this was just either a [public relations] campaign, or they really have been convinced by Big Oil that the Paris Climate agreement cannot be achieved.”
Engine No. 1 said at the time it couldn’t support such resolutions because Exxon and other oil producers could not be precise enough about how to cut the emissions without clearer guidance from customers.
For his part, James said he was unprepared for some of the effects of Engine No. 1’s proxy victory at Exxon.
“I thought we could win the Exxon campaign,” he said. “I was not fully prepared for the expectations associated with that, and how so many people put their own ideas on what we are or what we should be given that win.”