The transcript from this week’s, MiB: Jennifer Grancio, Engine No. 1, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest, Jennifer Grancio was there at Barclays when the beginning of ETFs and passive indexing really took off on an institutional basis. She was one of the founding members when BlackRock bought iShares from Barclays and really helped drive broad adoption of passive and ETFs in the financial community.
Today, she is the CEO of Engine No. 1, which focuses on the fascinating transitions that are taking place in broad strokes across the economy. There are numerous opportunities in energy, in climate, in robotics, in automation, and her firm helps invest in those spaces. Not quite an activist investor, but she has worked with a number of companies like Exxon and General Motors and Occidental, where the input of Engine No. 1 drove significant changes at those companies.
They’re a longtime investor than a black hat activist where they’re looking to buy stock Forza, an exit of the CEO and sell once the stock pops, really fascinating story. I found it quite fascinating and I think you will as well.
So with no further ado, my interview with Engine No. 1’s Jennifer Grancio.
Let’s start out talking about the early part of your career. I’m really curious how you ended up in BlackRock. But before that, you’re working as a consultant.
JENNIFER GRANCIO, CHIEF EXECUTIVE OFFICER, ENGINE NO. 1: Yes. I think like a lot of people in undergrad, I went to Stanford thinking I was going to do genetics and science —
RITHOLTZ: Right.
GRANCIO: — did an internship, pivoted, ended up doing international relations. Then as you head towards the end of college, you figured you’re going to save the world, then I’m going to go work for the World Bank. The World Bank wants you to take out more student debt and get a master’s degree. So like so many other bright-eyed graduates, I trooped off to, you know, one of the traditional professional services professions. But what’s kind of interesting for me about consulting was this idea that you almost apprentice with somebody that’s senior, and you run around and try to help companies and problems. So it seems like a good idea at that time.
RITHOLTZ: At that time.
GRANCIO: And that’s what I went off to do.
RITHOLTZ: So how do you go from that? How do you end up at a place like BlackRock? iShares seems to have been almost an accidental business line from them. Am I remembering correctly, that was a post financial crisis Barclays’ purchase, something along those lines?
GRANCIO: Yes, exactly. Yeah. So if you go back, so management consulting, moved back to California and decided I was going to be a California person, not a New Yorker, no offense to New York, spent a lot of time here, all those things, right?
RITHOLTZ: Better weather. The geography is beautiful. Sure.
GRANCIO: And so I went looking for what I thought would be the best asset management business, I focused on asset management within the consulting space. Like, this idea that somehow if you got portfolio construction and savings right, you help people over time. And so I joined what was Barclays at that time. The asset management business of Barclays Bank was this little firm called Barclays Global Investors based in San Francisco.
RITHOLTZ: And that was not such a little firm at that time, was it?
GRANCIO: No. It was growing very quickly. And that business was an institutional business. So as an institutional business, we did indexing. We thought indexing was cool. And the iShares and the ETF idea came from, we just had a fundamental belief it was a better mousetrap. So there’s something about an ETF and we could go into that another time. There’s something about an ETF that’s a better mousetrap than a mutual fund.
And so for Barclays Bank, we pitched here’s a great idea. Let’s build this ETF business in the U.S. And it’s a way for Barclays to build in the United States. And so we launched the business in 2000. So we launched it right into the dot-com crisis.
RITHOLTZ: So from the dot-com crisis to the global financial crisis, what were the circumstances surrounding BlackRock saying to Barclays, yeah, we’ll take that little worthless business off your hands for a couple of hours?
GRANCIO: Yeah. And the interesting thing about an ETF business is that it takes a long time to build. And so to your question, around that time, you’re going into 2008, Barclays needed cash. And the index business was starting to take off in the form of ETFs, or at least we thought that, but it was still a relatively small business.
And so who were the other people that probably looked at that acquisition included other big indexers, big asset managers who weren’t sure, was indexing going to be a thing or not? Because remember, at the time, ETFs and index were synonymous, but Larry, you know, was more forward-looking.
RITHOLTZ: Larry being?
GRANCIO: Larry Fink of BlackRock.
RITHOLTZ: Who arguably, and I know who Larry is, I just want the audience to know, arguably the purchase of iShares by BlackRock from Barclays could be one of the great opportunistic distressed purchases in the middle of a crisis ever in financials. What is iShares up to now? Like $4 trillion, something insanely?
GRANCIO: Enormous.
RITHOLTZ: Yeah. And they picked it up for a teeny tiny fraction of that. So what was your experience like when BlackRock took over iShares?
GRANCIO: Yeah. So we built the iShares business first within Barclays. And we were a, you know, small but mighty team doing ETFs. And the whole idea I remember of ETFs is to go and to challenge mutual funds and challenge active management. So that’s a big thing to take on.
And so as BlackRock work through the acquisition of all of the BGI business, including iShares, we spent a couple of years then getting to know BlackRock, as a little iShares team, and talking about ETFs and fee-based advice and portfolio construction, and all these things that we thought were trends we could take advantage of and use to build the business.
But then the business really just got from strength to strength after that acquisition. We came out of the financial crisis, few rocky years in the ETF industry overall. Vanguard decided to get into ETFs in a serious way. BlackRock and iShares launched that core series as a competitive business. So kind of responding to what was going on in the market, and the business continued to grow and grow.
And then I think from an ETF industry perspective, we did some important work on trying to protect the category of ETFs. So we did a lot of work with the U.S. regulators, European regulators and run the business in Europe for a while as well, talking about the differences between like a passive index fund, for example, an ETF that’s got commodity exposure and ETF that’s leveraged or inverse, in terms of trying to protect the vehicle and protect the category. And really since then, there’s just been continued explosive growth.
RITHOLTZ: In your wildest dreams, did you ever imagine back from the sleepy early days of passive and ETF at Barclays that would grow up to be just the dominant intellectual force in investing, and reach the size it’s reached? What is even after this year, BlackRock has something like $8 trillion? $9 trillion?
GRANCIO: Yeah. I mean, the numbers are huge. I think we did, but maybe we were naïve. But our view was, it was a trend that was going to happen. And if you could own the trend, and if you could accelerate the trend, this was a better way to invest. A better way to invest is to have a low cost solution at the core of the portfolio, and then hire people that are deeply capable to deliver alpha. So I would say we thought it could be big. But you know, it’s pretty amazing.
RITHOLTZ: So you talk about accelerating the trend. What exactly do you do to help accelerate that trend? How do you drive acceptance of both ETFs as a wrapper as opposed to traditional ‘40 Act mutual funds, and passive versus more traditional stock picking market timing, active investment?
GRANCIO: Yeah. I think when the industry first started, so going back, you know, 20 years now, the two things were synonymous. But, you know, let’s take those one at a time. So from a passive perspective, the argument we made as an industry selling passive ETFs was you really had to take a look at what the portfolio is doing over time, total cost, total risk exposure. And when you did that, you often found that there was a way to get better long-term performance and cheaper, by having some index in a portfolio. So that was the story on indexing.
And then we kind of kept driving that into this idea of models. So now, you know, there’s a model, a huge amount of money, you know, trillions of dollars sit in models in U.S. wealth. What does that mean? It means a big wire house. Your brokerage puts a model together, this much of Europe, this much U.S., this much small cap. And then you can use index products to fill all those allocations. And so that was the kind of the 20-year build of how did passive get so big.
And then ETF as a wrapper, it’s just a great way to get the price at the moment if you’re buying into the public markets, number one. And number two, it’s a great way to manage tax, where if you buy something now and you sell it in 20 years, and the markets gone up, guess what, we have to pay tax on that. But the kind of annual capital gains gift you get from a lot of mutual funds, it can be managed very astutely in the ETF wrapper. And that’s great. Like, that’s great for all investors.
RITHOLTZ: Meaning if you’re a mutual fund owner who’s not selling, but somebody else sells and generates a capital gain, that gets spread around to the other older (ph) —
GRANCIO: Exactly. So even if you’re —
RITHOLTZ: — which doesn’t make sense at all.
GRANCIO: I mean, as somebody that’s been doing ETFs for a long time, I say it doesn’t make any sense, whatsoever, because there’s another way to do it. And we’re finally seeing that now. We’re finally seeing a lot of the big mutual fund companies start converting into ETFs.
RITHOLTZ: The flows even in a down year like 2022, the flows have all been towards passive, towards ETFs, towards low cost. It seems like a much better mousetrap.
GRANCIO: I think it is.
RITHOLTZ: But I’m not going to get much of an argument from you on that. So you mentioned Vanguard, we’re talking about Black Rock. Let’s talk a little bit about the role of brand on in the industry. How important is that when you’re putting out either a low cost passive ETF at 3 or 4 BPS, or something more active or thematic on the ETF side?
GRANCIO: Yeah. I mean, the role of brand is pretty critical. And if you think about in the index business, if you’re managing it well, there’s not a lot of performance. It’s are you tracking the index? Yes or no. And so that power of the brand is massive. And my observation in this space is that the average investor, the average retail person that’s going out and investing or talking to an advisor, they don’t necessarily know one product provider or investor versus another. But they definitely know who they do business with or who they buy from. So that retail brokerage brand, their advisory brand has a huge impact on them.
So to your question on Vanguard, like Vanguard is a brokerage firm, so you kind of know Vanguard. Vanguard does your 401(k), you’ve heard of Vanguard. And so for other people that enter the industry, and this is certainly what we did in the iShares business or what we do now at Engine No. 1, is you really have to be clear on who are you and what is your story because that brand matters a lot.
RITHOLTZ: So you mentioned brokerage firms, and Vanguard does 401(k) brokerage. They do all sorts of obviously mutual funds and ETFs. How do you see some of the bigger custodians and actual brokers like Schwab and Fidelity in terms of ETF developments? We know it’s BlackRock, Vanguard and State Street at the top. These guys are no slouches either, are they?
GRANCIO: No. I mean, I would say if we go back and we look at the history of ETFs and how they’ve developed, we see State Street, Vanguard and BlackRock. BlackRock iShares is very dominant, and they’re going to continue to be dominant in passive, period. They’re there. They’re big. They’re so big now. And we’ll come back to this later. I personally think there’s some problems with how big they are. But from an ease of buying decision-making perspective, they’re big. They’re dominant.
The brokerages were late to get in the game. So Fidelity and Schwab got in much later. They don’t charge fees for those products. And so it makes it harder for them as a kind of a corporate organism to, you know, have that be a big part of their business. And then what we’re very excited about it Engine No. 1, and what you’re seeing with the mutual fund conversions, the big ones at DFA, at Franklin Templeton, and the list goes on, there are many, is that we’re now ready to move active funds into the ETF structure. And that I think is very exciting. But that’s new, that’s very new development.
RITHOLTZ: So let’s talk a little bit about Engine No. 1. First, how did you get there from Black Rock? What led that transition?
GRANCIO: Yeah. So I left BlackRock very large. I wanted to do a little bit more innovation. And I think sometimes the biggest firms are great, but they can’t always lead from an innovation or change perspective.
RITHOLTZ: Right.
GRANCIO: So I spent a couple of years, I built an advisory firm, and took a couple years to decide on, you know, what was the next move? And I did some great work with a number of large wealth and IRA firms that were going through an M&A or selling themselves process, did some work on impact investing, actually led me to Ethic and joined the MannKind board, but decided I was definitely going to be a builder, that there was this opportunity to do something different than traditional mutual fund and passive ETF. And so I started looking for what would be the thing I wanted to build with partners, and then I met Chris James.
RITHOLTZ: And did you launch Engine No. 1, or did you join him when it was already existing?
GRANCIO: We launched it together. Going back, you know, before we started the firm, so Chris James is our founder at Engine No. 1. And Chris’ background is hedge fund and private fund investments. And what he’s really known for, he’s known for taking an extremely long view on something and doing the work to let’s say, where is the opportunity as you go through a huge transformation or transition?
So Chris was hard at work on this and wanted to reach into the wealth space. So rather than just doing products that were private and you could help institutions invest, what could we do that was broad and into the wealth space? So I joined him to collaborate, given my background on that side of the business.
And the idea of Engine No. 1 is just to help people benefit from these huge transitions and transformations that are very much not the backwards-looking. Look, Google and Amazon got great. You know, our portfolios have a lot of growth in tech, great. There’s a lot of money to be made in the energy transition, transportation, agriculture. And so really, the idea of the firm is to be able to look forward, find mispricing, and make money as we go through these huge changes.
RITHOLTZ: The firm’s name is intriguing. Where does Engine No. 1 come from?
GRANCIO: The first firehouse in San Francisco is actually a couple of blocks from our office. And in talking about what we were trying to do, which is maybe it’s grandiose, but if you think about it like capitalism works. And what we were agitated about is we saw the market, you have ESG over here, very small. We think old school ESG does not work. We have a strong view on that. We’ll come back to that.
Indexing, too many shares are locked up in indexes. Index don’t vote their shares. And then maybe most important of all, we’re going to need a General Motors and Ford to actually be able to do this huge transition from internal combustion to battery electric vehicles. And so, you know, actually, the firehouse is the center of the community, right.
And if you think about how a community survives, the firehouse is the center of the community. It takes care of itself. A well-run business really should be as simple as sort of taking care of the environment, it’s in being aware of it. And in public markets, that means you also have to be able to adapt and manage their change.
RITHOLTZ: So tell us a little bit about the strategies you guys employ. What are your key focuses? How do you deploy capital?
GRANCIO: Yeah. As a business, we run an alts business, and then we run the ETF platform. So if you think about it very simply, these huge ideas about transition and transformation and how to make money are very common across what we do. But we have two businesses. And the big ideas are these transitions and transformations, and how do you take advantage.
And so when we look at public companies, we look at every single company, and we look at what their path is through time. So I think this is one of the problems with a lot of investment strategies right now is they’re looking to short term. And then we build the impact or externality data, we just build it into the financial model, right? Because the data is out there particularly on governance, particularly on environmental issues.
And when we do that, in the sectors that are in transition, let’s take energy, for example. If you’re an oil and gas company, and you don’t account for the emissions that you’re dealing with and you don’t decrease them over time, you’re going to have a problem. And we saw this when we started building the business that a lot of these companies were heading towards zero terminal value. So let’s take Exxon, for example —
RITHOLTZ: Okay.
GRANCIO: — where if you take Exxon, and Exxon keeps doing long-dated fossil fuel projects, and has no plan to reduce emissions at any point in time, and has no plans to develop a green business. Well, that’s not very good for Exxon stock when we get to 7 or 10 years out. And so we see a lot of these opportunities where like it’s just math. The capitalist system is supposed to have the company govern itself, so that it’s making money through time. It has a longer duration of business, and it has a higher value. And that’s the kind of the way that we work in everything that we do.
RITHOLTZ: So you mentioned environmental issues and impact. You mentioned governance. This sounds a lot like two-thirds of ESG.
GRANCIO: Yeah. We think the way people use that label is a little bit problematic. So people often use that label looking backwards.
RITHOLTZ: Flash that out a little more —
GRANCIO: Yeah, yeah.
RITHOLTZ: — because when I hear someone mentions ESG, I typically think of an investor and for the most part, as we go through this generational wealth transfer, you do surveys of investors, husband passed away, the wife tends to be much more empathetic with issues of equality and environmental concerns. And the next generation is much more concerned. So it seems like there is a desire to express those beliefs in their portfolios. Why does that not work with ESG?
GRANCIO: Yeah. I mean, I guess our view on that would be, you can always express values in a portfolio. But if you’re going to express values in a portfolio, say that I am expressing my values in the portfolio, which is different than the core concept of managing money over time generally, for the person that’s doing the managing is to be a fiduciary —
RITHOLTZ: Right.
GRANCIO: — and drive good outcomes and strong returns. And in general, for the investor, is to drive returns over time. And so the way we think about it is, really, you can do that. And any business that is going to survive over time has to be sustainable, has to address or basically cover their impacts, right, after the cost of capital so that they can be profitable over time.
So instead of thinking ESG means it’s values based, I don’t like the company, they’re bad, I’m going to screen them out of my portfolio. We don’t think that’s a great way to manage your core portfolio over time. We think the better way is you simply have to engage with the companies to make sure that their most material impacts that’s financial data, right? That’s risk data if you don’t manage your emissions as an oil and gas company.
And so let’s build that into just investing to make returns as opposed to this special class, which, you know, it devalues base and ESG tends to kind of infer value over performance, right, or divesting from companies that you don’t like. And we don’t think that’s a great way to invest.
RITHOLTZ: So let me push back a little bit on the low carbon strategy. It seems like it’s half of the economic equation because people seem to be approaching entities like ExxonMobil and others, the suppliers of the carbon-based fuel. What is that doing if you’re ignoring the other half, the consumers? So every other company that is not a carbon energy producer is likely to be a carbon energy consumer. They’re running factories. They’re shipping goods. They’re having offices. Why focus on one half of the equation and not the other?
GRANCIO: Yeah. I mean, I think that’s the right question. And we focus on both. And so let’s take for a minute the energy industry, and then the transportation or auto industry. That’s an example of that kind of handshake or handlock, right?
So in the case of the car companies, that’s consumption. So if we’re consumers and we’re driving cars, which we still do and people are planning to do in the future, the car company can switch from encouraging the behavior of driving internal combustion engines, which have very high emissions, or the car company can know that the consumer demand is shifting a little bit and they can build a car that is an awesome battery electric, reasonably priced vehicle. And then they can capture that shift in demand. And that’s really good for the car company.
So actually, we a hundred percent believe that this has to primarily be driven on the consumer demand side and on my first piece of that. So if I’m a consumer, I buy a car, you’ve got to start with the car company. However, if you look at global emissions, you know, 34 percent of that today comes from the energy companies. So at the same time in parallel, there’s still an opportunity to work with those companies on, as battery electric comes up, as fossil fuel comes down, how do those companies make a lot of money 9 or 10 years from now as we go through that transition?
RITHOLTZ: Explain that 34 percent. Because, again, it’s that someone is a buyer, someone is a seller. They’re not burning 34 percent of the fossil fuels, they’re selling it to consumers —
GRANCIO: That’s right.
RITHOLTZ: — who were burning it. Like, there are some low carbon ETFs. I just don’t understand. It’s why the war on drugs failed, if you’re only going to interdict the supply but ignore the demands, you’re not going to be successful.
GRANCIO: Yeah, that’s right. I mean, and we think from an investment perspective, if you want to solve this problem on how do you take emissions down, we think that problem can be solved and you can make money by owning the people that are going to win. So you asked before, like, what do we do? What strategies do we run in the ETF business? Our active team, it’s effectively hedge fund investors. So they’re very concentrated portfolios.
We believe we’re right. There’s a handful of names, like under 30 names today in the portfolio. Ticker is NETZ, Transform Climate (NETZ), and what that portfolio holds is it holds companies that have emissions. But we believe that the companies in the portfolio are the companies that have the right strategy to, if I’m an energy company, I’m producing energy. There’s demand for energy, that’s what I do. But I’ll tell you my emissions, I’ll do methane third-party monitoring. I’ll do all the right things. So that from a social license to operate perspective, I’m at the top of my peer group.
And in all cases, they have a strategy whereas fossil fuel demand declines, not today, but in 7, 10 years, they have a strategy to actually make money and still have value. So we’re picking the top best performing energy companies. We’re not saying energy is bad. Energy is essential, and we need that energy in the transition. And the portfolio then also holds the car companies that we think win.
RITHOLTZ: So let’s talk about a couple of names. So a couple of energy names from NETZ and a couple of core companies from NETZ.
GRANCIO: Yeah. And so one of the names we had in the portfolio, which is actually so highly valued, it goes in and out, depending on if it’s overvalued —
RITHOLTZ: Right.
GRANCIO: — it’s an active fund, is Occidental (OXY). And that’s an example, they were really the leader in the space. So they had started to develop greener businesses so that as fossil use comes down, they have another business and they’re competitive. That’s great for long-term value of the company. And —
RITHOLTZ: What are their green businesses? Things like solar and wind or —
GRANCIO: They have a range of things that they do in that space, but think of it as committing early to find ways to make money, having these people on staff, on the board that know how to run green businesses. And then from an emissions perspective, also, they were very early on telling us, being very transparent on Scope 1 and 2, and agreeing to oil, gas, methane partnership emissions with third-party monitoring of emissions, which we think is critical because again, methane emissions leaking, that’s probably the biggest thing.
RITHOLTZ: Especially with natural gas. But with pretty any form of car being —
GRANCIO: That’s right.
RITHOLTZ: — capture, your carbon removal from the ground, that’s a big risk. Methane is even worse than CO2 in the atmosphere, right?
GRANCIO: That’s right. And that’s right, and that’s some of the active ownership work we did on that portfolio, where Conoco and Devon are companies that we worked with, to join the methane third-party verification partnership this past summer. And that’s when we talk about Engine No. 1 as active owners, it’s not always, you know, the black hat activist. We actually haven’t done that other than Exxon. But the ability to really understand their business and go in and work with them. And actually, having them methane verified is a big deal, because then people understand what you’re doing in that part of the business. And it gives you license to operate because we need that energy source.
RITHOLTZ: What are the car companies that are in NETZ?
GRANCIO: General Motors is in NETZ. Ford has been, it goes in and out of the portfolio, based on how they’re doing, managing some of their supply chain constraint issues. And then Tesla is in the portfolio. But GM is at a much larger weight than Tesla. And then Tesla went out of the portfolio for governance reasons.
RITHOLTZ: Because? Give me more specific.
GRANCIO: Twitter. Because of Twitter. So the way that we manage that portfolio, basically what NETZ is, is you’re holding some of the biggest emitters, and you’re holding this 1.8 metric tons of emissions a year, so not low carbon, high carbon. And then what we expect is that those companies are going to take that number down to less than half within a decade. And so if you care about impact or sustainability, yeah, that’s great. That’s a huge win. You’re holding the companies, watching them. They’re taking emissions down.
But if you want to make money, you’re holding the companies that are providing energy, but doing it in a way that they have a social license to operate. And then sort of come back to your Tesla example, all of this starts with governance. And so if a public company is going to make money over years and years, it’s all about governance. And do you understand your markets? Do you understand how things change? And so if you’re running Tesla and you have a huge job to do in terms of scaling that business, but you’re also doing other things at the same time —
RITHOLTZ: Assess.
GRANCIO: — and saying you don’t have time to run Tesla, well, that’s kind of a governance issue.
RITHOLTZ: So when I looked at the acquisition of Twitter which started out as a lark, $44 billion, the market drops, wild overpayment. The bigger issue is if you think about who’s Tesla buyers, they seem to not be the people who Elon is playing to on Twitter. And in fact, as much as there are a lot of fanboys and I think you have to give Elon full credit for moving the entire auto industry to EVs, I think all the legacy-makers looked at him and said, we can’t let Elon do to us what Bezos did to the book industry and the booksellers and a dozen other industries. But it seems like he’s alienating that core middle left, all those liberals we’re going to own on Twitter. He seems to be chasing away a lot of his future buyers of Tesla’s.
GRANCIO: He may be. That’s good news for GM NASA. We’re okay. We’re covered on that one.
RITHOLTZ: And to say nothing about valuation issues and other assorted things —
GRANCIO: Right.
RITHOLTZ: — I’m assuming this is in strictly an ESG checklist. You looked at the usual —
GRANCIO: Not at all. Yeah, we looked at the usual things and that’s maybe our main point, which is the people get in our industry in particular. They get stuck in old frameworks, right? An ETF is an index fund. An activist is somebody that comes in short term and fires the CEO. So I think we need to be careful of those sort of short ways and shorthand ways of thinking in investments.
Our point of view is that there’s a lot of data available now. We have a huge amount of data. Take the climate and environmental-related issues. We have a lot of data on carbon, and we can estimate carbon prices. And so in a basic fundamental financial model, you can start with your old traditional financial model. But you can add in, we do this, we can add in the monetization of those emissions.
And then as you build out your financial model, you can look at how the company reduces them over time. And we see those as purely financial metrics, right? That large externality for a company is a risk or financial measure. It’s not some separate ESG dot bubble rating system. It’s just their numbers, it’s math. It should go into the long-term valuation of the business.
RITHOLTZ: Let’s talk about the Exxon situation. You accumulated a relatively small number of shares, and then reached out to management. Tell us about the process and how they reacted to your overtures.
GRANCIO: Yeah. So from a team perspective, we started by making an economic case. So we did the work on here’s what we would do differently, here’s how we think the value of the business wouldn’t be higher if we did this. And the suggestions on what we would do differently included disclosure of emissions. It included better capital allocation decisions between this sort of short-term energy transition period. And we don’t know when it’s going to be, thanks to, you know, Putin and the Ukraine, longer than we thought a year ago.
RITHOLTZ: Right. Right.
GRANCIO: But at some point, we’re going to start to really pivot into an energy transition. And so what’s your best thinking, Exxon as a company, on what your business looks like, and your capability at a board level to extend the duration of the business, do things that may be renewable, or whatever they may be. What is it that you can do that’s in that area? And so those were the things that we requested.
RITHOLTZ: They were receptive to that?
GRANCIO: They were not receptive to that. But those are the things that we requested, which is usually how these things start.
RITHOLTZ: So .02 percent of outstanding shares doesn’t exactly put the fear of God into them. Why a toe in the water and not a more substantial stake?
GRANCIO: Exxon, going back to when we started the proxy campaign —
RITHOLTZ: They were giant, right?
GRANCIO: They were giant, but also they were a giant in terms of the big asset managers had not been able to get them to pivot from a governance perspective. So there were known concerns about governance. A lot of the big investors take a slower approach to work with management, not cause too much change, request changes. And there just hadn’t been any progress in this case.
So we were able to have conversations. And the team did a huge amount of work with investors and passive investors, and active investors, walking through our economic case. If these things happen, better governance, better economic performance, and that, we think, is what allowed us to rally support. And as we were rallying support, as you see in this situation, I’m sure Exxon was talking to some of those investors as well. And so as we went through the campaign process, we saw some of these changes, changes in capital allocation decisions, and intention to launch a green business. So some of these changes started even before the proxy vote where new directors were elected onto the board.
RITHOLTZ: So we talk a lot about specific companies. How do you look at the macro environment and geopolitics? You mentioned Putin’s invasion or the Russian invasion of Ukraine. Arguably, that’s going to accelerate the greening of Europe in particular, and the move to alternative energy sources, not dependent on Russia, which is all carbon.
GRANCIO: Yeah. And I think to some extent, you can’t control what is the moment in time where the energy transition happens, right? However —
RITHOLTZ: Right now. Right. Aren’t we more or less in the midst of this today?
GRANCIO: We are in the transition. Absolutely. But we think that if you wanted to not use fossil or carbon intensive now, it wouldn’t possibly work.
RITHOLTZ: Right.
GRANCIO: We’re not ready to be transitioned. We are in the transition. And so the way we think about it is we have to be very savvy about where do you have a brown business? Where can that brown business be gray? Where does it start to use green techniques?
Natural gas is a great example. We need natural gas. So how do you move natural gas in a way where you’re looking at methane. You don’t have methane leaks. You’re using green energy and electric sources to process the natural gas. There are a lot of things we can do even while we’re using fossil to be cleaner, nd to put the people that are cleaner and doing fossil in a better position to sell versus their competitor, because we are seeing these changes. And we do have a lot of people looking at carbon footprint as they’re buying or investing in companies.
RITHOLTZ: So my colleague, Matt Levine mentioned your win. And now says, when they see you coming, you are no longer presenting as a scrappy, small startup. You’re bringing some receipts to the table. Hey, Exxon knuckled down. Now, you and I have a conversation. How has that changed since that win?
GRANCIO: Yeah. We started with Exxon effectively. And so I wouldn’t say the next day, it was a sea change in a positive way. I would say it’s complicated, because after you’ve done that, the board and the CEO are a little bit worried about what our intentions are and it takes time to build those relationships. And Chris does a lot of this work directly with the CEOs and the companies that are in the portfolios. And it takes time to build trust.
But our relationship with them is basically having modeled their business ourselves and modeled all their competitor businesses, and have gone to kind of up and down the supply chains. And once we get to know each other, we’re giving them what they find is actually some very helpful point of view on if I like your business, I think this, you know, consumer demand is going to flip sooner, you’re going to miss it, or how organized are you on supply chain? What are your bottlenecks? And so it’s become really very constructive with a lot of the companies that we work with.
RITHOLTZ: It sounds like your early training in the consultant world wasn’t for naught. This is almost a hybrid between activist investing and consultants.
GRANCIO: And just investing, right, high quality investing means you really have to understand what a company strategy is and what are the bottlenecks, what are the places where they may miss. If you understand those, you can make those faster, shorter, better, less risk. Then that’s really positive for being more sure that the company increases in value.
RITHOLTZ: So let’s talk a little bit about your toolbox. You mentioned proxy voting, you mentioned modeling. What else does Engine No. 1 bring to the table as ways to get management to see the world from your perspective?
GRANCIO: Yeah. And part of it is the data science work that we do around the sizing of emissions, comparative emissions, monetization of emissions, so call that our total value approach to looking at the externalities of these companies. So we bring that. We’ve done the modeling all the fundamental work that we do. And then it’s very active engagement, where we want to stay engaged. That’s part of where the alts business came from. If there’s something in the private markets that could work differently to help a big public company move, can we make connections? Can we help that move along?
And then proxy voting is important. So most of what we do is this kind of very intense active engagement. And we’re active owners of the company, not always an activist in a traditional meaning. We also launched an index product. So you know, our view is that you really have to hold these companies if you want to own the winners over time. And if you want to drive change, you also have to hold the companies, you can’t divest.
A problem in the dominance of the current index providers is that they’re big and it’s complicated to vote shares, because you have people on different sides of every issue. So while we’re at it, put a new index product out on the market, that ticker is VOTE, which is pretty simple. It’s literally an index. We vote the shares in line with our economic outcomes, and we post them as soon as we vote. So a little option for people that still want to use index instead of active.
RITHOLTZ: That’s really interesting. We’ve talked about Exxon so far, and Tesla and Ford. Tell us about your involvement in General Motors, what attracted you to the company, and what sort of positioning do you have with it.
GRANCIO: Yeah. And General Motors, it’s going to take some time, right? So General Motors has been in the portfolio since we launched NETZ and still is, and has stayed there. And when we work with General Motors, a lot of our work has been about how do we accelerate the transition to battery electric vehicles for them as a manufacturer, and not for an ideological reason, purely because we think the consumer demand is shifting more quickly.
RITHOLTZ: That’s where the market is going.
GRANCIO: Right. That’s where the market is going.
RITHOLTZ: That’s where the consumer demand is moving.
GRANCIO: Again, this is an economic argument for us in working with General Motors, that the faster you get to all battery electric, which means you need to build the battery plants, you need to build them bigger, you need to build them faster, you need supply agreements locked up for the rare metals, and then you need to work on bringing the cost of batteries down.
Because as all of that happens, GM makes 8 to 9 million cars a year. And so if those cars are all battery electric vehicles and the battery cost comes down, you know, what’s Tesla’s multiple, right? They have the opportunity to go from where the GM multiple is today, which is very low, very depressed value stock, all the way up to what producing BEVs at scale is going to look like. And that’s a huge value creation opportunity.
RITHOLTZ: Let’s talk about what’s going on in the world of ESG and greenwashing and wokeism. There’s so many things happening here and I think people don’t really use these buzzwords appropriately. Let’s start out with greenwashing. Tell us your view of it and why it’s problematic.
GRANCIO: Well, I think if you could do everything from scratch, I get this a lot from people that run large asset management companies, they’re like, gosh, I wish I could just start everything from scratch again in this environment. So I think the reality is, if you’re running a strategy and you don’t care, or you don’t have risk metrics on, let’s say, the environment and your strategy, it’s very hard to fit them on top. And I think a lot of people get caught in that from a greenwashing perspective.
What we do is we start from scratch. We think about these material impact things as financial data, and it’s just part of our process. And so there’s no greenwashing there. But for people that were investing in something and now want to take advantage of a moment in time, or people that are investing and actually don’t really understand how environmental risk factor into the portfolio, I do think you just have to take a timeout and go back to basics and better articulate what the strategy is and what you’re actually doing to the market. And if it’s not a green strategy, you kind of have to say that.
RITHOLTZ: It seems like a lot of this has just been on the hot buzzword of the day.
GRANCIO: Well, a lot of our society right now has been on the buzzword of the day. So I think we need to be very careful about that when it comes to investing.
RITHOLTZ: So let’s talk about wokeism. You’re describing ESG as sort of a risk management tool to filter out certain potential problems down the road. But if I pick up the Wall Street Journal or the New York Post and flip it to the editorial section, all I hear is woke capitalism and this is what Disney is doing, and this is what Apple is doing, and this is what Nike is doing. Is this really woke capitalism? Tell us what’s happening in that space.
GRANCIO: Yeah, I think we have to remember what capitalism is. And then I’m not sure what we mean by woke, which is part of the problem. So your capitalism is meant to be you in public markets kind of, you know, put that in the private markets as well. It’s meant to be you have a set of financial shareholders, you have other stakeholders. You’re making money for the shareholders over time. That’s the definition of capitalism. It’s really hard to make money for shareholders, the financial shareholders over time if you don’t treat your workers well or you destroy the community in which you live. That’s just kind of good business or doing business the right way.
I think we sometimes get confused when we talk about values or practices, and you can’t link it directly back to financial returns. So, listen, when it comes to climate, we feel like we can do a pretty good job with the data out there, to link how a company handles climate and environment with how they perform as a stock over time.
You know, there’s not enough data on the social side. The research is spotty. I really hope there’s better data. I hope the research gets better. I hope we have causality there. But I think as investors, we have to be careful what we’re talking about. If the company has less emissions, they get credit for trying to do the right thing and the stock price goes up. That’s capitalism. Where from a values-based perspective, we want to ask a company to do something, that’s a little bit different. So I think that distinction is really important.
RITHOLTZ: And it’s pretty robust then on governance, if you —
GRANCIO: Yes, it did.
RITHOLTZ: — elevate women to senior members, if you have people on your board that are diverse. Those companies historically have outperformed the companies that have not.
GRANCIO: Yeah. And the board, for a minute, is another one that’s very hard to reduce into one stat. So if you think about all the research that’s been done on boards, in Engine No. 1, we do a lot of work with academics. So we’re always trying to look for these places where we’ve got data and causality, and we can link it to economic outcomes.
And when it comes to boards, what a lot of the research would tell us is if a board is deeply non-diverse, that first, if you add one diverse person or thinker, they may actually have worse performance. But if a board starts to have multiple varieties of diversity, and the board listens to the diverse points of view, those are the boards where we get the real outperformance.
And then remember, it’s a board. So it’s not just diversity of thought, it has to be diversity of capability. Because as these companies go through change, you know, you need other CEOs that have been successful through change. You know, if you’re an old school media company, you need people on the board that are successful with where the puck is going. So I think we have to look for both of those kinds of diversity. And boards that listen to each other, have diversity and have that important diversity of capability, absolutely, those are going to be the highest performing ones.
RITHOLTZ: So we talked about Exxon. We talked about GM, and Ford, and Tesla. What other companies are you looking at as being on the cutting edge of change to take advantage of this transitional moment?
GRANCIO: Yeah. I mean, one of the things we’re excited about, I can’t talk about the product because we’re not through the SEC with it yet —
RITHOLTZ: Right.
GRANCIO: — although it’s in filing. But from a theme perspective, we’re super excited for the U.S., from a U.S. competitiveness perspective. What happened during COVID is supply chains were too global, too fragile, and they broke.
RITHOLTZ: Right.
GRANCIO: And so what we’re already seeing, and we’re going to see a lot more of this in the next few years, is we’re seeing a huge resurgence of manufacturing jobs in the U.S. and it’s going to be great for a lot of these communities. So we see semiconductor plants. We see battery plants, Michigan, Tennessee, Kentucky.
RITHOLTZ: Arizona is starting a big chip —
GRANCIO: — Texas. Exactly. So it’s happening already. There’s a huge increase in manufacturing. And then as that happens, if you build a manufacturing plant, there’s a huge job multiplier. You have people come in to build the plant, and people work in the plant, and people work to move goods in and out of a plant.
And we’re going to see a huge growth, we believe, in railroads. So if you’re going to increase manufacturing in the North America, guess what, you don’t need to ship things overseas. You need better, more effective railroad, continuing to strengthen the lines and the movement of goods around the U.S.
And then automation, so good and bad is, you know, we have less birthrate and less people coming to the U.S. And we’re going to have a huge number of quality jobs. And so companies like Rockwell Automation, that high quality jobs and brand new factories, with automation to assist in the manufacturing. It’s going to be pretty awesome from an investment team perspective.
RITHOLTZ: So Rockwell just isn’t terrifying us with YouTube videos of robots that are coming to kill jobs (ph)?
GRANCIO: No. The high quality blue collar, if you will, workers and all these new plants, they’re not going to be enough of them. And they’re going to be happy that robots are there to help them
RITHOLTZ: Really quite interesting. So let’s talk a little bit about some of the political pushback to the sort of investing you do. Maybe Florida is the best example, passing laws to punish a specific company, Disney, who objected to Florida’s anti-LGBTQ sort of legislation. Is the environment changing for this sort of proxy voting and criticism and working with companies? Or is Florida just Florida and you know, it’s kind of a one-off?
GRANCIO: Listen, I think companies have consumers. And so if I’m a company, if I’m Disney and I have consumers, and I feel like my company needs to stand for something because it allows me to serve my consumers to say my brand has value, that’s something that Disney is going to have to push for.
So I think, first of all, when it comes to public companies, some of them have one audience, some of them have another audience, and they may need to behave in ways to make their audience feel good so they can be in business and sell their product. And I think, separately, if we talk about proxy voting, successful proxy votes should be economic. So back to the kind of fiduciary concept we were talking about earlier. So if a proxy vote says, you know, can you please disclose more information about your workforce? That’s helpful to investors. Great. That often makes sense to us.
If the proxy vote says, I don’t like this thing you do, please don’t do it. But there’s no economic causality.
RITHOLTZ: Right.
GRANCIO: I think it’s hard for that to be a proxy voting issue versus a values-based conversation with the company. So our belief is proxy votes matter. We should all use our vote. But proxy voting is a tool to drive kind of long-term economic performance with companies. Sometimes there are just value-based issues that shouldn’t be tackled through proxy votes.
RITHOLTZ: I know I only have you for a limited amount of time. So let’s jump to our favorite questions that we ask all of our guests starting with, tell us about your early mentors who helped to shape your career.
GRANCIO: Yeah. It’s funny, I don’t have a lot of mentors where it was that one guiding light. I found that I picked up little bits and pieces from different people. So Condi Rice was a provost when I was at Stanford.
RITHOLTZ: Really?
GRANCIO: And so it was that inspiration that sort of sent me off down the international relations path. There was just a level of smarts and confidence that I really appreciated, that I picked up from her. And then a professor in business school who said women can definitely have it all. But you’re kidding yourself if you think you can have it all at the same time. So, like, pace yourself, Like, go after it, but pace yourself. You can’t literally do it all at the same time, which is good advice.
And then I think there are a lot of people for me, where I learned one or two lessons from different people. And now, I do a lot of mentoring of other people. And that is my overarching suggestion on this is you got to ask a lot of questions. And you don’t always have to have a lifetime relationship with everyone, but get any nugget you can get and run with it.
RITHOLTZ: I like it. Let’s talk about books. What are some of your favorites and what are you reading currently?
GRANCIO: So Maya Angelou is actually a favorite of mine. I find it relaxing and it’s so different than what I do every day, and kind of American and lyrical. Harry Potter, one of our kids is younger, so working our way through Harry Potter. And then the Daniel Kahneman Thinking Fast and Acting Slow, I read that last year. I like that a lot because you got to remember sometimes how our brains work. And the fact that we rush to things and we shortcut, and we group things. And so I find that helpful sometimes and just being calm about how else can we solve a problem, or why is somebody reacting the way that they do.
RITHOLTZ: What sort of advice would you give to a recent college graduate who is interested in a career in either impact ESG activist, whatever you want to call it, type investing, or ETF and passive investing?
GRANCIO: Well, first, I’d say those are great areas to go into. You should go into it. And definitely learn how to invest, learn how to be an investor. Don’t stick to one fad or one mousetrap. If you can learn how to be an investor, or how investors think, that will serve you so well in our business.
And I guess to new graduates, I would say don’t give up hope. It’s going to be a bad job market. So take those internships, be a little bit scrappy, and just learn from whatever that first job is, two years in, because you’ll pick up a phenomenal amount of information. And if it’s not what you love, great, then go do something else after it. But it’s a great place to build a career.
RITHOLTZ: Really interesting. And our final question, what do you know about the world of investing today that you wish you knew 30 or so years ago?
GRANCIO: I think it’s that the overall portfolio construction matters, right? So as an investor, thinking about when you build, like when we build Engine No. 1, we built products or we put strategies out into the market, the more you can make them balanced and with some duration. So if somebody puts something in the portfolio, they sort of understand what it’s going to do, and what the return stream looks like and what the risk looks like, as we’re investing and then selling to other people. I think that ability to build products that are durable, and it’s clear what they do is really, really important. It lets you build your brand. It lets you build trust with the investors.
RITHOLTZ: Really interesting. Thank you, Jennifer, for being so generous with your time. We have been speaking with Jennifer Grancio. She is the CEO of Engine No. 1.
If you enjoy this conversation, well, check out any of our previous 450 interviews. You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcasts. Sign up from my daily reads at ritholtz.com. You can follow me on Twitter @ritholtz. Check out all of the Bloomberg podcast @podcast.
I would be remiss if I did not thank our crack team who helps put these conversations together each week. Sarah Livesey is my audio engineer. Atika Valbrun is my project manager. Sean Russo is my head of Research. Paris Wald is my producer.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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