Engine No. 1 is the fund that forced ExxonMobil to change its approach to sustainability and take it more seriously. It is a hedge fund and a tiny investor in ExxonMobil, so you wouldn’t expect it to be the driver of sustainability of changes; the reputation of hedge funds has been very different. And it is not only about sustainability. Let’s take Facebook, for example. Facebook struggles with its privacy and business ethics issues. Therefore, it’s worth asking whether investors like Engine No. 1 could drive changes in how companies approach certain aspects that involve hard ethical questions? Will we see investors and activists starting to cooperate to get the management to take sustainability, privacy, equality, and ethics more seriously? This probably doesn’t happen only to oil companies; any tech company must also consider its values and moral compass.
Facebook had a challenging week. The services went down a couple of times. Facebook also had to face especially hard the testimony in the US Congress, where the whistleblower told how the company has put profits before the wellbeing of its users and has given misleading user numbers. Earlier, Facebook has had challenges with data privacy issues and how companies like Cambridge Analytica have used its platform to target people. Analysts still see that Mark Zuckerberg has a strong position as the CEO and most investors expect he is the person who can offer future growth. But could some investors be ready to require changes?
Engine No. 1 owned only about 0.02% of ExxonMobil. Its total assets under management were around $250 million. Exxon’s revenue in 2020 was almost $180 billion, and its market cap is $263 billion. But still, this small hedge fund was able to get three new board members onto Exxon’s board. But those board members are experts on how Exxon could transition to more sustainable business and renewable energy sources.
The requirements for the change were not ideological. Exxon’s growth has been weak for years, and it is challenging to see significant growth for its current business in the future. Engine No. 1 convinced more prominent investors like Vanguard and BlackRock to support the board seat election.
The ExxonMobil case has an interesting link to Silicon Valley and the Theranos case too. Theranos’ founder Elizabeth Holmes is in court now. One of the Theranos investors was Partner Fund Management. And Partner’s founder was Chris James, who is also the founder of Engine No. 1. Partner sued Theranos in 2016, claiming that the fund had been misled to invest with “a series of lies and material misstatements.” Theranos and Partner reached a $43 million settlement. Before the Theranos scandal became public, the company could raise new investments after the settlement. Partner was one of the first stakeholders who challenged Theranos and its statements.
In the last few years, we have witnessed how several themes, like Me Too, Black Lives Matter and Climate Change, have shaken old structures and forced businesses to take them seriously. We see that most companies must take sustainability, equality, and ethics more seriously. ESG reporting (environmental, social, and corporate governance) is becoming essential for many companies.
Companies must be able to adapt to the future business environment. As in the Exxon Mobil case, this is not only ideological. It is very much to be relevant to investors but also to their customers. Especially consumer business companies must be able to represent values that are important for their customers. It is often said that younger generations especially want companies to take sustainability and ethics more seriously. However, at the same time, studies show that older generations feel that these considerations significantly impact their purchase behavior.
Startups and new tech companies often represent new things and change. But it is not always that startups are doing better with sustainable business practices, not only on the ecological side but how the business itself, the business models, and the treatment of workers could be more sustainable. Theranos is an extreme example, but we have seen other stories from Uber and WeWork, too. And most probably, they are not the only ones. These examples and how they have been able to collect money are not only exceptions but also tell something about the investment culture. Many investors haven’t been interested in how a company makes money if they can see quick wins.
Personal data collection, privacy, and influence on people are areas social media and data companies (especially Google, Facebook, and Amazon) have had many challenges during recent years. A few giants dominate the personal data market: they not only pose a threat to the privacy of people but also dominate in their business domain. It is relatively easy to see that data and privacy will become a target of activism sooner or later.
We already witness how some luxury brands have started emphasizing privacy to their customers. We don’t see that people immediately leave Facebook. However, we already read in the news that, e.g., most people stopped allowing mobile apps to track all activities when Apple enabled them to do so. People are also thinking more about where they want to allow their data to be used. It is just a question of time when data giants, online marketing agencies, and data traders encounter activists, including activist investors.
Investors are typically in a position to force new things to happen faster than individual consumers. Tobacco, oil, and car companies have been forced to change a lot of their business practices. The same will happen to tech companies that haven’t taken ethics, privacy, and sustainable business practices too seriously. And it is important to remember those who invest in things people appreciate will likely make the best returns on their investments in the future.