The activist fund that shook Exxon is now investing in GM

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Activist investors have traditionally been anything but agents for positive change. They are more often compared to vultures.

Engine No. 1, a hedge fund launched less than a year ago, is a still-rare exception. Its activism more closely mirrors the broader sense of the word. It engages with companies with an eye to pushing social and environmental causes.

The fund is best known for coming out of nowhere to defeat an old guard of the fossil fuel industry, Exxon Mobil, in a proxy battle in June. Despite owning only a tiny stake in Exxon, it recruited major shareholders—including BlackRock and the California State Teachers’ Retirement System—to its side, and eventually won three seats on Exxon’s corporate board.

Now Engine No. 1 has announced that it has a stake in GM, not to be a combative force, but to support CEO Mary Barra’s established commitment to phasing out cars that run on gas and diesel fuels by 2035. GM’s stock price rose on the news, gaining more than 1.75% in late afternoon trading in New York.

Making the long-term case for greener energy

Chris James, the investing veteran who founded Engine No. 1, has been clear about the distinction between the firm’s relationship with Exxon and its new toehold in GM. Both are legacy companies facing major transitions “but that’s where the analogy stops,” he told CNBC.

At Exxon, his company needed to convince shareholders of the business case for reducing the oil giant’s carbon footprint and making investments in sustainable sources of energy as part of a long-term vision. He had help from Exxon’s own pattern of investor returns. “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,” as Quartz’s Samanth Subramanian wrote after the Exxon board vote.

But at GM, the hedge fund will be supporting a similar premise already established by Barra, who has long embraced a plan to overhaul her company’s products. In June, the automaker promised to spend $35 billion on its push into plug-in vehicles by 2025.

Changing the auto industry narrative on electric cars

The shift won’t be easy, given that electric cars still cost more for consumers and aren’t yet as convenient to use. But Engine No. 1 sees the momentum is there. The automaker, with “the support of a really strong management team, a great board, has decided that they’re going to embrace the future. They’re going to make the investments necessary in order to be successful during this transition,” James told CNBC.

Engine No. 1 has praised Tesla for bringing mainstream interest to electric cars, but it believes that giants of the automaker industry will need to expand in electric cars to have a meaningful impact on emissions.

In the auto industry, he said, “there’s been a narrative for a very long time, that only technology companies can actually disrupt their own industry, and we just don’t think that’s true,” James said on CNBC. “We think, with the right management team, with the right investments, that they themselves can go in and disrupt the industry and be successful during this transition.”

The hedge fund is estimated to hold fewer than 400,000 GM shares, worth about $22 million on Oct. 4. That may be minuscule compared to other institutional shareholders, but the tiny fund already has proven its capacity to have an outsized influence working from the inside.

Progress for “conscious capitalism”?

Engine No. 1’s success with Exxon—where it says it has already has seen some impact— suggests that social impact investors can successfully steal from the playbook of classic corporate raiders. But rather than agitate for short-term profits, they can insist on changes that may require increased spending, such as racial equity or other social justice initiatives, observers told the New York Times in June.

This newer strain of activist investors in the growing environmental, social, and corporate governance space is mainly aiming at companies that have not moved fast enough to shed old habits, that continue to conduct business as usual as the world burns. Every high-profile win is a hopeful sign for the cause of conscious capitalism and for the sustainability and equity issues that have become increasingly important to employees, customers, and investors.

As it happens, Barra was last week named the new head of the Business Roundtable, an influential group of corporate leaders that in 2019 chose to throw its weight behind stakeholder capitalism over mere shareholder capitalism. Barra is the first woman to head the group in its quarter-century history.