 The Sharpe Angle Interview: Jennifer Grancio Engine No.1 CEO on the firm's new constructive approach  Engine No. 1 was founded a year ago this month, and since then, has made a splash in the investing world. Most notably, the ESG-oriented investment firm took on Exxon in a proxy battle and won. It also launched an ETF and published a white paper, largely supportive of General Motors.
Engine No. 1 CEO Jennifer Grancio sat down with me to discuss her strategy and what comes next for the firm.
(The below has been edited for length and clarity.)
Leslie Picker: You have a lot of buckets that you're operating in: activism, ETFs, constructive research, maybe more that we don't even know about yet. What do you think is the best way to achieve the means to the ESG end?
Jennifer Grancio: We founded Engine No. 1 on the simple idea that you have to understand the relevant E, S, and G data and then you simply use that to think about what are companies valued at today? Are they misvalued? And how do you drive economic value over time? And this data is critical to long-term value. So we start there. And then in everything we do, we also engage very deeply with the companies. So our point of view is, if you care about ESG, you want to engage with the companies to put them on the right path. And if you're just investing, and you're looking to build wealth, and have strong performance over these transformation cycles, you care about ESG data, and you also really have to engage with the companies. You have to hold them and we don't believe in divestment. Maybe we can talk more about that later. You have to hold the companies and engage with them so you can help them over the transformation cycle.
Picker: I want to hone in on this word engage, because Exxon, it was more of a critical engagement. You looked at a company, you felt like they were doing potentially bad things with regard to ESG and sustainability, in particular. With GM, you're engaging but in more of a complimentary way. Are both of these strategies you think effective? Is there one that you're more focused on than the other?
Grancio: We actually think there are a lot of different ways to engage with a company. And so everything we do is based on a total value framework, which is this idea of when you look at a company's business and you look at their material impacts, how does that then relate to what the company's value is over time. And so when we looked at Exxon, we saw, you know, a problem. It's an outlier. So from an E and S and a G perspective, the company was making choices that were leading to negative long-term value outcomes for shareholders. And so that's a case where maybe the company doesn't see it that way and as investors, you really have to engage to think about how do you do something differently.
In the case of GM, the company actually understands they have a good CEO, they've got a great governance approach to running their business, and they understand the E and the S, and they're using it to drive value for shareholders. So they're two very different examples. So in a case, like Exxon, where it's an outlier, you may as investors - and we feel like we were able to go and make this argument - make an economic argument be the sort of tip of the spear on this conversation, and a lot of people came with us and followed us that we took an activist approach. In most everything else we do, we think it will be much more of a constructive approach, like what we do with General Motors.
Picker: After the Exxon campaign, a lot of CEOs across corporate America were studying their ESG chops worried that they could be vulnerable for the next situation. Do you feel like you can use that halo and do something similar in the future on the activism front, because you were so successful with Exxon, that now you have kind of the wind in your sails to do a next campaign?
Grancio: Well, the way that we think about it for now is we have information, we have a way of thinking about the world where we can actually help CEOs. And what we found on the back of the network with Exxon is that CEOs want that help. So many CEOs, they have ESG reports, they have studies and a lot of them, frankly, would love somebody to talk to, to help think about what are the key things in ESG that they should think about? And we think that's, that's really the magic, which is doing the math and figuring out which of these impact areas are most critical to a business and then how do they engage so that they actually drive value for shareholders over time. And we've had great conversations with a lot of CEOs where we're not coming to be threatening activist, we're coming to be deeply constructive about how they run their companies and make money for investors over time.
Picker: Recently, your head of activism left the firm. And if I'm reading between the tea leaves, it sounds like proxy battles are not going to be the norm for Engine No. 1. Am I understanding that correctly?
Grancio: We think a lot of the opportunity is very constructive. The opportunity for CEOs to get to the nub of how they make E, S, and G part of their, basically just running their business. They want to do that, we think that's a huge opportunity for investors. So that's right, we may occasionally need to do a proxy campaign or an activist campaign but mostly we're going to be constructive.
Picker: So it's not fair to call you an activist investor…
Grancio: It's fair to call us an investor that's trying to drive performance for everybody that we work with.
Picker: There are reports out there that you met with Chevron and some of the other executives from the oil and gas industry. Anything materialized from those conversations that you'd like to share?
Grancio: We've talked to a lot of people and so our point of view on that whole sector is that companies are working to figure out, as we go through an energy transition, how they manage their business for optimal returns over time. So we don't comment on exactly what we've done with who but we are having a number of constructive conversations. And again, we think it's a big opportunity for energy companies and a big opportunity for investors to get this right.
Picker: What do you make of Exxon's recently announced goals to reduce company-wide greenhouse gas intensity by as much as 30% by 2030? Are they going far enough?
Grancio: We're glad Exxon is starting to make some progress on these issues since we started the campaign a year ago. But our perspective is still that it's a company that has work to do on governance, and work to do on sharing with the market a strategic plan over time for how their business transforms. So we'd like to see more there and we're happy that we were able to lead a campaign that puts the right capabilities in the boardroom so there's an opportunity to have that conversation now.
Picker: If they don't get to where you need them to be, would you be open to running another proxy battle at Exxon?
Grancio: Well, we'll be watching them.
Picker: You've taken a different approach, as you mentioned with GM. This was a white paper largely complimentary of the automaker, saying that they're a leader among incumbents to make the transition to electric vehicles. Is this something that we're going to be seeing more of? And will it always be related to sustainability? Or will there be other research on maybe the social part of ESG or the governance part of ESG?
Grancio: Our point of view on this is that all of those things matter. So governance: how good is your board? Does your board have the right capabilities? Are the people on the board people that have successful track records in running prior businesses? The governance matters. And then from a climate perspective, it's just a little bit right in front of our nose because companies already have disclosed a lot of information. So it's very easy to have math and economics-based conversation about how environmental relates to long term value. Then on the social side, as well, and the data is on the come on the social side.
We use the data that's available today and there are clear causalities and relationships between how a company brings people up through leadership perspectives and how a company thinks about their impact on the community, how a company thinks about the quality of wages for their workforce. So absolutely, those are all areas that are in our sights.
Picker: If you were to kind of speak broadly to CEOs out there, which of those 'S' factors would you say, "Get that in order right now, or, you know, you may be receiving a call from us soon."
Grancio: Yeah, I think I think it's a little bit different for every company, depending on their business, and where they have the most impact. So if you're a professional services firm, you know, how are you bringing people up through the leadership ranks? If you're a firm that employs people, at average, lower wages, are you employing people in a way where they have more than a living wage, and you're hiring in proportion to the communities that you serve? So it's a little different for different companies. But our guidance would be [to] think about materiality. Think about running a business the right way so it's sustainable, and you're serving customers, and you're kind of beating out your competitors over time. So make it about that long-term economic value and it makes it much easier, we think, for companies to do the right thing. |
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Big wealth investors are likely to put money to work in stocks after amassing record levels of cash
Hundreds of billions of dollars in cash have been amassed by big investors in the last few weeks of 2021, setting the stage for a massive risk-on move into equities in the new year.
Investors added more than $43 billion into money market funds last week, bringing the total amount of cash raised in the past seven weeks to a massive $226 billion, according data from Goldman Sachs. The money market stockpile has not declined in 2021 despite the rally in stocks, with assets under management in cash equivalents standing near a record $4.7 trillion, the data showed.
"My core thesis is that money will come out of negative real yielding cash and out of bonds aggressively and early in 2022 following December board room asset allocation meetings," Scott Rubner, analyst at Goldman Sachs' global markets division, said in a note.
"Every private wealth advisor in the world is conducting 'year-end allocation review' meetings right now. The feedback will be largely that investors hold too much cash with rising inflation," Rubner said.
Investor's cash allocation jumped 14 percentage points this month from November to a net 36% overweight, the highest cash exposure since May 2020, according to Bank of America's monthly fund manager survey.
A lot of the move out of cash could happen in January when money managers make their initial bets of the year. January typically makes up for 134% of the yearly flows, according to Goldman, meaning the month typically sees a big inflow, while the rest of the year has a net outflow.
It also speaks to Wall Street's old theory of "January effect," which believes that there is a seasonal rally in stocks during the first month of the year.
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All this cash on the sidelines could be the powder that fuels the next leg up in risk assets if investors feel comfortable enough to take on risk. The S&P 500 has rallied over 25% this year as the market climbed a wall of worry from surging inflation to the ongoing pandemic and to the rollback of monetary stimulus.
The market seemed to have moved past one of the big uncertainties heading into year-end as stocks jumped in a relief rally after the Federal Reserve signaled a more aggressive unwinding of its monthly bond buying. The central bank also signaled on Wednesday that its members see three hikes in 2022.
"We see another year of positive equity returns coupled with a down year for bonds," BlackRock strategists said in their 2022 market outlook. "Central banks will start to raise rates but remain more tolerant of inflation. The powerful restart of economic activity will be delayed but not derailed due to new virus strains."
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Delivering Alpha Headlines
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Leon Cooperman says he likes the stock market a little less now
Omega Advisors founder Leon Cooperman said he's less fond of the stock market right now and that he recently cut his equity exposure. "I've been slowly reducing positions. I went from a fully invested bear to a heavily invested bear," Cooperman told CNBC. The longtime investor is wary of the market being overvalued, noting he believes the fair value of the S&P 500 is around 4,100. That's 13% below Wednesday's close of 4,709.85. Still, Cooperman reassured that significant market declines are unlikely at this moment and that there're plenty of places for him to pick bargains.
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Cathie Wood says big-money investors could add $500,000 to bitcoin
Widely followed investor Cathie Wood said increasing allocation to bitcoin from hedge funds and other large investors could add $500,000 to the cryptocurrency's value over time. "Institutions are moving in. To some extent, this is a new asset class with correlation very different compared to other asset classes," Wood said on CNBC. "Institutional managers have to look at new asset classes that are evolving and that have low correlation. That's the key to diversification, and it's the holy grail in terms of asset allocation."
Charlie Munger says market condition is more extreme than ever
Charlie Munger sounded the alarm on sky-high equity valuations and investors' speculative behaviors, saying that the current environment was "more extreme" than anything he had ever experienced. "The dot-com boom was crazier on the valuations even than we have now but overall, I consider this era even crazier than the dot-com era," the vice chairman of Berkshire Hathaway and Warren Buffett's business partner recently said at a conference. "You have to pay a great deal for good companies and that reduces your future returns."
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