Energy Transformation Impact

Ann Berry: Hello everyone and welcome to Public live. I'm your host Ann Berry and we are always diving in together to the latest from the world of investing. Today, we are focused on energy transformation and what it means to be an investor in this space. Joining me as our guest today is Yasmine Dayha Bilger who is the head of ETFs at Engine No. 1. Yasmine, welcome to Public Llive. 

Yasmin Bilger: Thanks so much for having me.

Ann Berry: I would love to jump right in Yasmine and learn more about what Engine No. 1 is focused on besides sounding like a fire station. But perhaps appropriate given the topic? Could you just walk our audience through what you do, who you all are and what it is that you guys are focused on? 

Yasmin Bilger: Absolutely. And in fact, you are right on the fire station piece. So pretty good image. But absolutely. So number one is an investment firm that is focused on identifying and investing around what we believe are large scale transformational investment themes. We're a firm founded by former hedge fund and private market investors and have a background in deep fundamental analysis. We launched a little over two years ago, and I think are probably best known for our activist campaign in which we successfully placed three people on the board of directors at ExxonMobil.

And I think, actually, the campaign was quite interesting, because it reflects, I think, two things that really sit across the entire firm, really pillars of what we do. The first is that we were able to do that while only owning five basis points of the company. Well, the reason we were able to was because we focused all of our arguments and recommendations on why they were additive to long term shareholder value, which allowed I think other investors to vote alongside of us. And I think what it shows is, if you've grabbed your thinking in economics, you can accomplish quite a lot in the public markets. 

The second that I think is kind of reflective of what we do is that we're an engagement focused company. And usually in the space of climate, the mantra is, if you don't like it, you don't own it. So most climate strategies don't own the largest emitting sectors, the largest emitting companies – we very much own and deeply engage.

Ann Berry: And so just to sort of unpack that a little bit more, first of all, as an activist with less than five basis points of ownership to to effect that change, Yasmin, it really brings to life what you say by actively engaging.Let's talk a little bit more into the work that Engine No. 1 is doing specifically on the topic of energy transformation. It's a really buzzy topic, everyone's talking about it. I'm just back from Davos, Yasmin, where climate and energy transformation was just a huge focus area. Help us cut through the jargon. What does energy transformation really mean, in your context?

Yasmin Bilger: Yeah, absolutely. So there are a number of reasons why we see a significant move towards decarbonization across our energy systems. Now, with that said, I think it's really important to note that we, as many other people believe that we continue to have a real near term need for fossil fuels. So that's really the transformation we're talking about. It's not a light switch. And I'd also say a lot of people talk about this as the energy transition. And there's so many terms that goes around. To us, that sort of implies a one to one move from traditional fossil fuels to cleaner energy sources. But this is much more about truly a transformation of our entire energy system, and will take decades to play out. 

And you did mention it's an enormous investment opportunity. By some estimates, it will require somewhere between $3-5 trillion of investment per year to meet Net Zero targets. So the opportunity creates a lot of investment opportunities, in fact, and they're not just in one sector, when people traditionally think about the energy sector. They really do span our entire economy. I will say I think the opportunity in my opinion is a little misunderstood. I think as I mentioned, the traditional thinking and climate is if you don't like it, you don't own it. So what does that really mean?

Most people tackling climate from an investment perspective, almost definitively have no exposure to traditional oil and gas companies, for example, are basically not exposed at all to the largest sources and uses of energy. We flip the entire conversation of this theme on its head. But just as a set stat to give this to life to people, nearly 75% of global greenhouse gas emissions just come from three segments of our economy, energy, agriculture and transportation, that is the heart of the energy transition. And in our opinion, to drive that sort of decarbonisation at scale, you really need to go where the emissions are. And I think it's the transformation of these various systems that we'll see both, you know, a meaningful reduction in carbon emissions, but also huge investment opportunities for people looking to take advantage of some of the dollars that are being put to work in these spaces. 

Ann Berry: So just to really drill into that, Yasmine, to make sure that there's no ambiguity here. So the ETF that you have, together at Engine No. 1 one does or does not include the stocks of what we people might think of as the more traditional carbon focused energy production companies. 

Yasmine Bilger: No, we absolutely do our energy  transition focus strategy. Net Z absolutely has exposure to the companies that we believe are leading and benefiting from the transformation, which include companies exactly in those segments. I mean, if you think about it, if three-quarters of emissions are coming from the systems themselves, the leaders and incumbents as well as the enablers within these systems will be the companies that actually should benefit most from it. And so we do actually own traditional oil and gas companies, we own auto companies, we own agriculture companies. Now with all that said, these are the companies that are making the investments and have the I'd call it a short, medium and long term strategies to think about how they win in a world with lower carbon emissions. So they're absolutely focusing on the theme. But I think there's a lot of misunderstanding about where the opportunity lies from a company perspective. 

Ann Berry: That's a really interesting clarifying point, Yasmine, because I do think that there is this bias or this general perception that when you see instruments out there focused on energy transformation, they tend to exclude some of those traditional players. And just, you know, as an observation that we've seen, you know, in our discussions on public life, a lot of these energy, traditional energy stocks have done quite well, performance wise recently. So it's so interesting that you guys are not shying away from those rather, instead, including those.

You've been very enthusiastic and emphatic about the fact that energy transformation, as you've defined it, is positioned to be an impactful opportunity and it's going to touch a myriad of industries. You talked about the three largest, can you just unpack for us a little bit more? It was transportation, agriculture, and energy as the biggest pockets of opportunity. But within that, where are you seeing key trends?

Yasmine Bilger: Absolutely. So maybe I'll say two things up front. In order to best take advantage of this opportunity, I have two beliefs. One, I think this is absolutely the space for active investment. I think you need to manage your hunting for the best opportunities across this value chain. Secondly, I think you need to be thinking broadly about the opportunity beyond just one sector, you need to be looking at the largest producers and consumers of energy and thinking about how these systems evolve. So maybe two examples to bring that to life. Transportation is a huge source of emissions. Now, most investors when they think about the opportunity and transfer, transportation are really thinking about the move to electric vehicles, and are solely focused on the automakers as they make a push to electrify their car fleet. Now, that is absolutely part of the opportunity. 

However, the real broader investment opportunity is much, much wider than that. You also need to think about the elements that are required to accomplish that electrification. So with that broader view, you would be looking at spaces like the metals and inputs that are required to produce batteries such as Lithium, for example. You would be thinking about the companies that are required to extract those metal metals, like mining equipment companies. You would also be thinking about the transportation of those inputs to battery plants, so you know what companies would benefit from this change in transportation. And I think the broader framing is much wider in that we play across that ecosystem and are sort of looking on a short, medium and long term basis for where we think the best opportunities lie. 

Another area maybe to highlight would be in agriculture. I think one of the interesting areas within agriculture is just precision agriculture. This is really about giving technology to farmers to be more precise and efficient in their usage of fertilizer and other chemical inputs in the farming process, which is one of the largest sources of emissions and farming. So the companies that are leading in this space are not only helping to reduce emissions by increasing efficiency and how we use these chemicals, but they're also saving farmers and therefore their customers on input costs. So this is a really interesting example of almost what you think of as a win win win. It's good for the company playing in this space, because it should lead to increased market share. It's good for farmers, and it's obviously good for the environment if we're being more precise and how we use these inputs.

Ann Berry: Let's talk Yasmine, a little bit too, about the engagement work and sort of go full circle, you know, you opened with what you've done in effectuating change at ExxonMobile., What is your approach to working with companies? What's your process? What's your ideation process to then how you engage with the company to then how you affect change?

Yasmine Bilger: Yeah, it really comes down to taking all of this with an investment foot view. So we're an engagement focus firm. What does that mean? That means in our opinion, whether you own one share, or you own an entire company, you're an owner. Now, most engagement that happens in the asset management community, in my opinion, is really coming from the perspective of quantity, talking to as many companies as possible about as many issue areas. 

And you see that, for example, and a lot of stewardship reports that come out at the end of the year from asset managers who say, you know, we talked to 25% more companies this year, therefore, we had more engagement. We take a very different approach, we go very deep and very focused, and we're working directly with the companies that we think are really impactful in the spaces that we operate in. So for example, in the energy transition space, what meets the bar for engagement? Well, first, it's deep fundamental work. We're trying to understand where some of these areas around decarbonization link to an unlocking of value. And secondly, it's about, you know, really working closely with the C suite of many of these companies to help them think about affecting their strategy. 

I think the goals can be really wide ranging on one end, it's simply accountability. You know, these are hard strategies to execute for public companies that are focused on quarterly earnings, where these are much longer term strategies in nature. But there's also an acceleration component. Many of the parts of this transition really involve impediments and bottlenecks to the strategic plan. So we sit across the entire ecosystem, and I think can offer some valuable perspective on how best to achieve these long term goals.

Then there's transformation, you know, companies that are not on the right path, we think, to maximize shareholder value in a world that's decarbonizing and so there's, there's really opportunities there, too, that maybe worth highlighting to bring it to life. Maybe just to play on some of the spaces we talked about. We've actually been working really closely with a number of the executives at large automakers as they think about how to reach their EV goals, given the challenges around creating batteries. And so helping them think through how to source the input parts and how to sort of think about their overall approach to battery plants, and then how to execute on the long term goal of electrifying their fleet. 

The second was really building upon what we've done in oil and gas, which is we've worked with several large oil and gas companies on helping them to measure and ultimately reduce their methane emissions. Most people don't know this, but methane is something like 80 times more potent than CO2, and so has a really meaningful impact when you reduce it. But in all of these cases, since our Exxon engagement, they have all been very collaborative. I think many management companies really welcome the engagement and I think really appreciate the approach we take, which is really focused on how to think about this from a shareholder value lens.

Ann Berry: Yasmine, this is a question coming a little out of left field, but it really is on this topic of engagement and how retail investors can do that. You know, I go to my mailbox, and I often you know, I get shareholder vote, correspondence where I hold stocks, what can the average retail investor do? And to your point who doesn't have the kind of huge holdings where you typically see more engagement? What can they do to have their voice heard with these kinds of companies?

Yasmine Bilger: I love this question, because to me, this is one of the most interesting trends happening in investment management. The reality is that our whole public market system is centered around the shareholder. Now, as an individual investor, you own a very small piece, but actually, collectively, individual investors own a tremendous amount of the public markets. In fact, the three largest passive firms in the world own about 20 to 25% of the average S&P 500 company, and who are their beneficial holders? Well as individual investors, in many cases. 

What I think the first thing to do is actually understand the system altogether, there's 10s of 1000s of votes that come up that public companies, and I'd say about 500 of them are actually focused in areas around the environment, social issues, governance issues, issues that may be really important to you as an investor. And I think it's really first and foremost understanding that. Secondarily, it's understanding how your manager’s voting, you know, you get to pick and choose where you put your money. And I think now there's certainly more choice in the space around managers who may have a different approach to how they support or not support certain proposals that come up for vote at companies. These are happening every year - so I do think a little bit more of knowledge is power. And I think this is actually going to be a really important trend for the next coming years, as retail investors understand that they actually collectively do own a lot of the largest companies in America. 

Ann Berry: It's exciting, it's exciting to hear that there's a way to do these things. And then just last question Yasmine, which is, you know, supply chain strategy. We saw so much disruption, I know, that's something that you had Engine No. 1, have filed as a thematic to do something so just closing thoughts and a little more about that.

Yasmine Bilger: Yeah, we're very excited about this one. This also fits into the bucket of the types of themes we invest in, which are really all about themes that are, you know, long duration and nature, large scale and their size, and I think maybe not perfectly are really understood by the markets. If you think about supply chains, where we're going really has to do with where we've been, which is for the last, you know, let's call it 40 years, companies have been really focused almost exclusively on one thing in their supply chains, which is minimizing cost. And as a result of that, they've moved large portions of their supply chain overseas to lower cost regions, and in many cases, you know, eliminated redundancies and supply chains. 

Now, what has this done, this has made supply chains more fragile, it's meant that companies are unable to meet supply spikes, and to really be responsive to demand in fact. And so what are we seeing, we're seeing a huge move to re-localizations of supply chains, which has wide reaching implications. This will have investment implications across spaces like manufacturing, automation and innovation, as we think about some of the types of things that are coming back to the U.S. and places like transportation as we think about disrupting how we move goods. And also probably means more jobs in the U.S, so this is a theme we're very excited about. It's actually in our opinion, linked very closely to the idea of the energy transformation, they sort of go hand in hand and this is another kind of example of where we see a pretty pretty big investment opportunity that lies in front of us. In fact, just to put some numbers on it for folks, during COVID companies lost something like $3.5 trillion dollars because of their supply chain disruptions, so this is a conversation truly about economics.

Ann Berry: What conversation that was, Yasmine - just incredible to have you on. Yasmine Dayha Bilger, thank you so much for joining Head of ETF at Engine No. 1, your time today was very much appreciated. And folks, Public live will  be back soon with even more news views and trends from the world of ETFs and beyond. See you back here sometime soon.