A tiny ESG hedge fund took on Exxon – and won. Now Engine No. 1 has a new play for transforming activist investing.

An Exxon refinery in Baton Rouge, Louisiana.

  • Engine No. 1 recently won a proxy battle with oil giant Exxon despite holding just 0.02% of the company.
  • The small activist fund announced the launch of an index-investing ETF earlier this week.
  • Managing director Michael O’Leary walked Insider through how the fund thinks about activism.
  • See more stories on Insider’s business page.

After a rousing win against oil giant Exxon Mobil, small ESG-driven activist investor Engine No. 1 took its newfound momentum and attention and launched an index-investing ETF. It’s a big departure from the exclusive, high-fee hedge fund club.

The goal for the young manager, which is run by Andor Capital Management cofounder Chris James, is to spread its philosophy on investing to as many people as possible.

Activist hedge funds and passive, low-fee products like index exchange-traded funds don’t typically have a lot in common, but the firm sees the ETF launch as the next step in its overall goal of transforming the investment-management industry.

“We are taking the tools of activism and applying them in new ways,” Michael O’Leary, a managing director at Engine No. 1, told Insider.

“It’s very different from activism campaigns in the past.”

Activist investors usually build up stakes and then agitate for companies to make changes to boost their stock prices or press for actions like spinning off certain businesses. But Engine No. 1’s belief is that “environmental issues are economic issues,” O’Leary said. In turn, it’s betting measures to address environmental issues can also help boost company performance.

But the environmentally-minded manager is tiny compared to the most feared activists, like Elliott or Starboard Value. In the Exxon battle, Engine No. 1 received support from massive asset manager BlackRock and large pensions that had shares in the company. Together, the shareholder votes were enough to elect three new members to Exxon’s board in a stunning upset.

O’Leary said this type of support is critical, noting that “there has to be” a running dialogue with the asset management giants to get anything done.

“The power is always going to derive from the strength of our ideas, the strength of our facts, and the ability to get other investors to go along as well,” he said.

Michael O'Leary Engine No. 1
Michael O’Leary is the author of “Accountable: The Rise of Citizen Capitalism”

“Other investors are ultimately key to our success.”

The firm hopes its influence rubs off on other passive asset managers, which manage trillions for investors and often have sizable stakes in a given company. Engine No. 1’s new ETF, which launched with $100 million, will be invested in the same top 500 companies that the big firms like Vanguard, State Street, and BlackRock are passively invested in.

The difference will be that the Engine No. 1 will be voting and campaigning for changes it sees fit instead of mindlessly riding along with whatever the company recommends.

“Rather than excluding companies that need to change, VOTE works to change them,” the firm’s website for its ETF, which trades under the ticker VOTE, reads.

The firm’s jump into index investing won’t force companies to make radical changes overnight, but it may serve as a wake-up call for other index players that have tagged along with the stock market’s impressive rise over the last decade with minimal interaction with the companies.

“Our approach is to come at index investing the way you’d come at activist hedge-fund investing,” O’Leary said.

“A huge amount of power is in passive products.”

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