A year ago this month, a small hedge fund won an unlikely victory against ExxonMobil, gaining support from a majority of the company’s shareholders to replace three of its directors, against management’s wishes. The fund, called Engine No. 1, had argued that Exxon was failing to plan for a transition away from fossil fuels, and as a result was jeopardizing its long-term business prospects.

While Engine No. 1 held only a tiny number of shares, it waged a six-month campaign and convinced large investors like BlackRock and State Street that Exxon needed fresh faces on its board of directors. Even before the vote, Exxon responded to the pressure by announcing a new low-carbon business line and more ambitious plans to reduce its own direct greenhouse gas emissions.

This month, Inside Climate News talked with Charlie Penner, who was head of active engagement for Engine No. 1, to take stock of what, if anything, has changed. Penner has since left the fund, and he declined to comment on what comes next.

This interview has been edited for length and clarity.

What was Engine No. 1’s campaign really about, and what was it trying to achieve?

In a nutshell, it was about short-term versus long-term thinking. If you looked at Exxon’s strategy before the campaign started, it was to be the most aggressive spender in the industry on really long-term oil and gas projects that were dependent on the idea that demand for oil and gas won’t change for decades to come. And obviously, that’s important from a climate perspective because it locks into place infrastructure that the oil and gas companies are incentivized to keep going for decades to come, even as other sources of energy become more feasible and cheaper over time.

But it’s also important just from a basic shareholder perspective. Even for a shareholder who doesn’t care about the energy transition, and doesn’t care much about climate change, they do care about bad capital allocation. A lot of what I worked on in my old job as just a straightforward traditional activist was about companies that have poor capital allocation histories. The idea was to basically meld those two things, which is to say that if you’re a company that over the past 10 years, even before Covid, had done a really bad job allocating capital, and been an undisciplined spender, that challenge is only going to get more difficult in the face of, hopefully, a growing energy transition.

One year out, how would you gauge the success of the campaign?

I think it’s too soon to say. I think we were pretty clear in the campaign that any transformation is going to take a long time.

In terms of what you can actually judge, I think there are near-term things, which I would categorize as low-hanging fruit, in terms of increased disclosure about scope 3 emissions [the emissions generated when Exxon’s products are burned], which they did during the campaign; promises to reduce scope 1 and 2 emissions [Exxon’s direct emissions] to a greater extent than they have and set more ambitious targets, which, again, is pretty low-hanging fruit in the industry; spending more on low-carbon solutions.

Now, it depends on what that actually translates to. It’s good that they’ve said that they will allocate more capital to these things, but it’s only good if they allocate it to things that actually make sense and can push the energy transition forward.

The good news, going back to the people on the board, is new people like Kaisa [Hietala] and Andy [Karsner], who’ve actually built profitable energy transition type businesses and companies, can now be in that boardroom and say, “Wait a minute, is this something real, or is this just an advertisement.”

So, I think that’s one of those things where even though you can’t really say right now where that spending is going to go, there’s a better chance that goes into something that could actually turn the tide.

The other big thing is, during the campaign, they went from saying, “We’re gonna grow production by 25 percent,” to now saying they’re holding it steady. But the real report card is going to be 10, 20, 30 years down the road, are they still spending as if things are never going to change.

I hear executives, and people outside of the industry sometimes, saying “We are responding to demand, and if we produce less oil or gas, someone else is just going to produce more.” It raises the question of what impact the investments or lobbying of an individual company, even if it’s an Exxon or a Shell, can have in terms of driving or hindering a transition. 

It’s a question of distinguishing between current activity, and very long-range spending and planning. People are not wrong when they say, “Hey, if you just stop producing as much oil and gas today, then others will pick up the slack, or prices will just go through the roof.” The issue, though, is that nobody on the campaign, and I don’t think smart advocates are saying, “Just turn off the pipes today.”

Those debates are not about current production. They’re about what your spending is on production capacity that wouldn’t come online for decades, and would keep producing for decades. If you’ve got a $30 billion project that is dependent on a certain level of demand for decades to come, you’re going to fight like hell to make sure that demand is still there.

Now, there is a real debate to be had about whether the world will ever change. But it’s kind of this very fluid thing, because it also partially depends on whether or not oil and gas companies create the incentives for themselves to make sure that the world never changes, even if there are ways that the world could change that are cheaper for consumers, obviously better for the climate and a whole hell of a lot less volatile than the current energy market today.

If you could snap your fingers and map out how an oil and gas company should be behaving or allocating its investments today, what would that look like?

It would be on short-lived projects that can come online relatively quickly, that generate really high rates of return. We said during the campaign, Exxon’s Permian investments [in Texas], most of them actually look pretty good.

But other things, particularly in the developing world, if you look at, for example, the Mozambique LNG project… That’s basically their gateway to India. The more people are locking in LNG as the transition for places like India from coal to renewables, that’s not a short-term bridge, that’s a 30 or 40 year-lived project. And if the developing world doesn’t go from coal to renewables, but goes from coal and has a three or four decade layover in liquid natural gas or other fossil fuels, and delays them getting there, that has a massive impact on energy transition.

One thing you didn’t touch on there was lobbying. How do you see that fitting in?

I thought it was pretty interesting that right after the campaign, that lobbyist came out and basically talked about members of Congress as if they were kind of staff members of the company. That’s pretty depressing.

We pointed out that the lobbying arguments they were making didn’t make a whole lot of sense. They had the whole thing about, well, you know, “We support a carbon tax.” But, we pointed out that you wouldn’t be spending $30 [billion] or $35 billion a year on new oil and gas spending, which was their plan before the campaign, if you actually wanted the carbon tax to pass.

So it was nice a lobbyist kind of came out and said, like, “Yeah, it’s just a talking point.” But even before that, we just looked at the basic economics of it, it didn’t make sense. Unfortunately it’s kind of been baked into the corporate cake that lobbying can be incredibly short-term focused and incredibly destructive, even for your long-term interest.

We’re in shareholder advocacy season now. What do you think shareholder resolutions can achieve on all of this? What role can they play?

This whole thing is about scaffolding. A lot of the work that we did at Engine on the Exxon thing was building on the work of people at CalPERS, and CalSTRS [two California public pension funds] and the Church of England.

I don’t think there’s any knockout punch in any of this. Unfortunately, a lot of people in the initial excitement over the Exxon vote thought it was a knockout punch. But there is no knockout punch. There’s not some giant button on [Exxon CEO] Darren Woods’ desk that says “renewables” that he can hit. And even if every oil major all of a sudden made every decision perfectly, they’re still only 15 percent of the world’s supply. So, you know, a lot of things have to go right over a long time.

The cynic in me is often skeptical of profit-driven efforts to address climate change. One of the successes of your campaign was that the profit and climate interests aligned, but you can’t guarantee they’re always aligned. What happens when they’re not?

I think that’s really fair. And I’m probably more often skeptical than not when I see advertising and stuff about that. I think one of the misimpressions maybe, though, is that what I’m trying to do, or what other people are trying to do, is somehow meant to crowd out what other people are doing, or meant to serve as a replacement for government, well-functioning government, smart regulation. I think that it’s really only meant to be an expression that, “Hey, we are a part of this system. And we can be making smarter decisions.”

It is fair to say that you can, as an investor say, “Hey, a lot of the stuff that’s happening here is very short-term focused, and doesn’t make sense for any of us over the long term.” And I think you can do what needs to be done here, which is appeal to people’s self interest. It’s a very small number of people, and I think zero number of kids, who benefit from the very worst climate change outcomes.

Some people argue for a government-led wind-down of the industry. Do you think an investor-driven oil and gas industry can get to where it needs to be?

If there were no game clock here, and it’s more like a shot clock given the current timetable, yeah, probably at some point it would get there just based on the falling cost curve for renewables, based on the technological development that’s happening. But I think when you see things that have been successful, it’s been because good regulation paved the way for good business decision making, and good business decision making showed how you could sensibly regulate a system.

I don’t think the problem is necessarily capitalism as a concept. There’s just as many capitalists, if not more, that I know of, that are focused on trying to push the energy transition forward. But they’re not the ones who are currently in the driver’s seat, because they don’t have the scale. So if you’re a U.S. senator, and get a call from the CEO of an oil major, and you get a call from the CEO of a solar company, right now a lot of them are saying, well, this is the current power balance, and this is who we’re gonna listen to. And that’s not really a problem with capitalism; both of those parties are driven by the goals of efficiency and profitability. It’s a problem of a pretty disgusting and anti-democratic system.

All I know is that there are certain tools that are sitting on the table that people can try to use to bend the curve a little bit, and those happen to be the tools of capitalism. And if government wants to get in the game, too, that’d be awesome.