Jeff Ubben: Engine No 1 model is ‘not enough to create lasting change’

Jeff Ubben, who has taken on the world’s biggest companies as an activist investor, took one of the hardest jobs of his career this year — he joined the board of ExxonMobil, the US oil major whose business and share price were pummelled by the pandemic recession last year.

After leaving ValueAct, the activist fund he started that challenged Japan’s Olympus and Britain’s Rolls-Royce among others, Ubben teamed up with Lynn Forester de Rothschild, chief executive of the non-profit group Coalition for Inclusive Capitalism, and two former ValueAct colleagues, to start a new activist fund called Inclusive Capital Partners.

In an interview with Moral Money, Ubben talked about Exxon’s epic fight this year with eco-conscious hedge fund Engine No 1, which secured three seats on the oil company’s board. Ubben said that while he appreciated the pressure that Engine No 1 applied on Exxon, making changes from the inside offered more significant returns.

“You likely cannot change company investment strategy through shareholder resolutions or divestment; rather you are in the room with a view that E and S is the new value lever.”

Read on for more from the activist investor on why he is taking a different approach to some of his peers. Ubben spoke to us a day before the Wall Street Journal reported that Exxon is considering pledging to have net-zero carbon emissions by 2050. The following has been edited for length and clarity.

Moral Money: Do you think Engine No 1 was wrong about how it ran its campaign against Exxon?

Jeff Ubben: Shareholder resolutions have been around for years. But much like the shareholder voice in the boardroom has changed the game over the past 20 years, we now need the stakeholder voice in the boardroom. That’s Engine No 1’s goal and that is a great goal. But Engine No 1 is a campaigner. There is nobody from Engine No 1 in [Exxon’s] boardroom right now. Nobody. The new directors are unaffiliated and independent of Engine No 1.

At Inclusive Capital, we will remain the leader in the boardroom because we have put our money where our mouth is. We own a bunch of shares [in Exxon]. We “eat our own cooking”. So when we are working with the CEO on strategy and capital allocation, this gives us tremendous credibility. 

You can’t just do the Engine No 1 model — it’s not enough to create lasting change. You need constructive stakeholders in the boardroom [who] have real money invested and are considering all constituencies, shareholders, employees, the planet and customers.

MM: Do you expect to see other attacks from the likes of Engine No 1 against other big companies? And do you think there are lessons that activists should take from this to change their tactics?

JU: I hate to see a jump right to proxy contests. I built my whole shareholder activism business on not doing proxy contests, but rather on spending a lot of time with the management and the board, before we saw a role for ourselves and before we ask for a board seat. 

If you sit in your office in New York, don’t engage with the management team, and come up with theories about the business in a vacuum and then launch — without ever talking to the company — and go straight to the proxy contest, I think that model, if it is endorsed, would be a shame.

And it does put too much power, if you go straight to proxy, in the hands of the [asset managers’] governance teams. The problems are deeply analytical and require a lot of time with the business model, which is not something the governance teams do by nature or mandate.

To celebrate it too much, to encourage people to go straight to proxy rather than real engagement and going on the board and working from the inside out worries me. 

MM: What is your goal to get Exxon to a better place on the climate problem?

JU: Exxon will be making investments in carbon abatement technologies now. The dedicated work going on with the Houston carbon capture project is an indication of the company’s commitment.

It is Exxon’s role to demonstrate what it will take to decarbonise these hard to electrify industrial processes as fast as possible.

Longer term, the company’s deep technology capabilities and scale will drive down the cost of low-carbon fuels. That’s the role they have to play. And they also will develop and design whole new technologies like direct capture, which they’re working on. That will be required, to get to the net zero 2050 goal.

MM: You mentioned that Exxon is supporting a carbon tax. The political reality in Washington is that Republicans are never going to go for this. How does Exxon make that politically palatable to conservatives? 

JU: I think it’s do-able. The Exxon CEO (Darren Woods, pictured) is talking to congressmen and women, specifically talking to Republican congressmen and women. It’s not going to be passed by COP26. 

But could it be tabled whereby you have a carbon fee and a carbon dividend? We’re talking about up to $2,000, to certain families that are going to be most hurt by a carbon fee. That is something that’s being worked on right now. To me, a carbon capture tax credit should be fully bipartisan. 

The [issue] with ESG indexing is that it skirts the [carbon] problem altogether. Mostly you run away from the problem because you own Big Tech, because they are already clean. The real emissions are happening at fertiliser companies and oil and gas companies and utilities. That’s where you need to go to move faster on emissions. And ESG would run away from that.

MM: What else are you following in the ESG space?

JU: The public market, active ESG investor is the key to decarbonising as fast as possible. 

And I have to say it’s not easy to be that guy because to many asset owners, it is very counter-intuitive to own Exxon in this space.

And the frustrating thing is that I want exactly what the ‘E’ and ‘S’ leaders want — and I am actually going to work to make it happen. That’s the perversity of all of this, this whole idea of negative screens and reputation laundering.

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I’m just early, right? The pioneer takes the arrows. There is going to be a great return. While the hydrocarbon industry provides an essential good, energy, it needs to do so with less harm. Not until the stock price reflects these externalities, however, is the pressure there for change. Many other industries that feed, cool, clothe or transport people — or even social media companies for that matter — are going to have to address their own harm.

Active ESG will earn its idiosyncratic return by addressing these externalities, with new investment in Big Oil’s case behind emission reductions. You likely cannot change company investment strategy through shareholder resolutions or divestment, rather you are in the room with a view that ‘E’ and ‘S’ is the new value lever. 

What worries me about ESG — as it is currently being pursued by others — is that it’s likely to contribute to a paper decarbonisation of the economy while the real economy continues to grow emissions.

Only by going into the problem can you solve the problem, and the problem is that we need to decarbonise faster.

[To] decarbonise goods and services is what we really need to do and we need to do it now, faster. And that’s why I joined the Exxon board. Defossilising is ideological. It is prohibitively expensive today. This is what the politicians and the [environmental] NGOs do not talk about. My goal is to use the existing infrastructure, whether it’s the ammonia infrastructure, or the hydrocarbon infrastructure, and put the carbon back in the ground to allow the more expensive new infrastructure like green ammonia and green hydrogen to be layered in over time as it becomes economic. To me, that is the only way you do not shock the global economy and have prices go up too fast. ESG is very inflationary to be honest with you.

Asked about his other big board role — at the troubled electric truck company Nikola — Ubben declined to comment.

Stakeholders Incorporated: our guide to the ABCs of PBCs 

Do you know your B Corps from your public benefit corporations? In the third Moral Money Forum report, published heretoday, Sarah Murray digs into the “stakeholder governance” models more companies are adopting around the world and asks what role they can play in making business more sustainable. 

Many thanks to all of the Moral Money readers whose responses to our survey on this subject informed Sarah’s reporting. An overwhelming majority of you told us that traditional corporate structures were holding back the shift to a more stakeholder-focused form of capitalism.

So can capitalism change if company charters stay the same? Please check out our report and give us your feedback. (Andrew Edgecliffe-Johnson)

Smart watch

Moral Money’s latest animated cartoon is here: Welcome to the era of the activist accountant. Once regarded as stuffy businessmen, the balance sheet fundamentalist is now on the front line of change. Watch the full video here.

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