Engine No. 1: The little hedge fund that shook Big Oil

Hastening the death of the age of oil.
Hastening the death of the age of oil.
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Engine No. 1, a hedge fund just six months old, manages around $250 million in assets. It owns a meager 0.02% of ExxonMobil, the oil and gas giant that’s worth $250 billion.

Yet the hedge fund, instigating an activist campaign to turn ExxonMobil away from fossil fuels, managed to get two of its nominees elected to the ExxonMobil’s board on May 26—much against the company’s wishes. A third shareholder was declared elected a week later, after final votes were counted.

Looking back, it can almost seem as if Engine No. 1 was set up expressly to effect these changes in ExxonMobil’s board. Ever since it was founded in December, Engine No. 1 has been calling on ExxonMobil’s shareholders to “Reenergize Exxon”—the name of its campaign, complete with slick web site. The fund’s arguments were strategic rather than ideological: that the company’s returns have been consistently disappointing shareholders over the last 10 years, and that it needed fresh direction in a rapidly decarbonizing world.

The past decade saw ExxonMobil’s total shareholder returns—dividends included—languish at -15%, compared to the 271% return the S&P 500 provided. Sticking to oil and gas, and not exploring clean energy alternatives, was an “existential risk” for ExxonMobil, Engine No. 1 argued. (Engine No. 1 did not respond to a request for comment.) On Dec. 7, the hedge fund sent ExxonMobil a letter listing its four nominees for the board. “It is time,” the fund wrote in the letter, “for shareholders to weigh in.”

Who is behind Engine No. 1?

Engine No. 1 was set up by veterans in the investment industry. Chris James, the fund’s founder, worked for a range of investment firms beginning in 1991, and co-founded Andor Capital Management in 2001, where he tended to the fund’s tech portfolio. Andor survived only until the financial crash of 2008, when the firm shut down and returned its $2 billion in assets under management to investors. By then, though, James had long split with Andor, setting up the San Francisco-based Partner Fund Management in 2004 with about $430 million in assets, to invest in global equities.

Although James began his career as an analyst, he transformed gradually into a big-picture investor. One research report, written in 2011, remarked: “Mr. James is not intimately involved in the details of the bottom up research process… [He] will often challenge ideas that are driven from the bottom up, particularly when they do not line up with his top down views.”

In 2014, Partner invested $96 million in Theranos, the blood-testing startup. Not long afterwards, Theranos’ science came into question, and in 2016, Partner sued Theranos, claiming that the fund had been fooled into parting with its money “through a series of lies, material misstatements, and omissions.” The following year, Theranos and Partner reached a $43 million settlement out of court.

At its peak, in 2018-19, Partner managed nearly $6 billion in assets. By March 2020, before the pandemic began, Partner’s assets had dropped to around $3 billion.

The activism behind Engine No. 1

James funnels his philanthropy through the James Family Foundation, which endows scholarships and supports conservation and environmental studies programs at a number of state universities. James has also chaired the board of Tipping Point, an organization that raised funds from San Francisco’s wealthy elite to address issues of chronic poverty in the Bay Area. He was a donor to Neighbors for a Better San Francisco, a PAC that funded city official candidates who ran against progressives. Last year, the PAC unsuccessfully opposed a referendum to double real estate transfer taxes on sales of $10 million or higher.

In an interview with Bloomberg, James said that Engine No. 1 was born out of his attempt to start a new coal mine in the mid-2000s, near his hometown of Harrisburg, in Illinois. He saw the price of coal fall and the market for coal withering, he said. It seemed to point to radical shifts in the use of energy. “That was a real eye-opening exercise,” James said.

When he started Engine No. 1, James hired Charlie Penner to head the fund’s “active engagement practice”—to, in other words, lead the charge in activist investing campaigns such as the one at ExxonMobil. Penner had worked previously at Jana Partners, a 20-year-old firm that is heavily interventionist in the companies it invests in.

In at least one instance, Jana pressed for changes that were more socially responsible than strategic. In 2018, Jana teamed up with the California State Teachers’ Retirement System and, using their combined $2 billion-worth of ownership in Apple shares, pushed Apple to help parents limit their children’s use of phones. The same year, when Jana set up a new fund managed in part by Penner, it included on its advisory board Sister Patricia Daly, the “nun with a fund“—a vocal member of a coalition of faith-based investors. Daly has, in particular, targeted ExxonMobil, one of her coalition’s portfolio companies, over its “liability, or at least poor integrity, related to its knowledge about the climate impacts of its core business practices,” as she wrote in a letter in 2016.

Penner led the minor shareholder revolt against ExxonMobil in similar fashion. He sought the support of massive asset management firms such as Vanguard and BlackRock, which together own roughly 15% of ExxonMobil. But he also turned back to his old ally, the California State Teachers’ Retirement System, as well as to the Church of England and the New York State Common Retirement Fund. The latter two organizations had already urged shareholders during the last annual meeting to persuade ExxonMobil to address the climate emergency. “If you can get Exxon to change,” Penner told Bloomberg, “everybody else in the industry has to listen.”

This article was updated on June 3 to reflect the election of a third director from Engine No 1’s slate, after ExxonMobil confirmed the vote tally.