ExxonMobil’s governance structure fails energy transition, says Engine No 1

A failing governance structure propagated by a management without a strategy for the energy transition is behind Engine No 1’s quest to bring independence to ExxonMobil’s board, says Chris James, founder of the US-based hedge fund.

Governments, companies and individuals are taking steps to cut their carbon footprint and enable the energy transition that includes electric vehicles (EVs) and renewable energy such as wind turbines and solar.

ExxonMobil has been an outlier in transparency and accountability for its environmental impact, James said at the Reuters Next Conference. “This is a company that has lost its social licence … It needs to look at the energy transition as an opportunity to be part of the solution instead of the problem.”

Three of four people with energy transition experience nominated by Engine No 1 joined ExxonMobil’s board in 2021.

Oil majors such as BP facing mounting pressure from regulators and investors are developing cleaner energy and divesting from fossil fuels, a primary source of greenhouse-gas emissions cause global warming.

ExxonMobil has instead invested in new projects in the oil and gas arena that should not have been approved and wasted capital, James said, adding that it has some of the most talented engineers in the world.

“Management has prevented these engineers from unleashing the power they have to create value in the energy transition,” James said. ExxonMobil has outperformed Chevron since Engine No 1’s intervention.

ExxonMobil’s shares are up about 60% since November 2020 when Engine No 1 bought them compared with roughly 30% for Chevron.

In response to a request for comment, ExxonMobil said: “We evaluate our investments across a range of scenarios — including net-zero pathways — and we look forward to sharing more details in the coming months.

“There is significant growth potential in the low-carbon opportunities where we can leverage our competencies in technology, engineering, and project development,” Exxon’s emailed response said. “This gives ExxonMobil an advantaged position irrespective of the pace of the energy transition.”

Linking sustainability with profitability runs through Engine No 1’s portfolio as a theme, James said, which is why the hedge fund took a stake in General Motors (GM), where the board is fully behind management.

Battery-powered EVs create an opportunity for GM to win an enormous share of the market this decade, James said.

“Japanese automakers have made a bet that plug-in hybrid EVs are the future, not battery EVs, and we believe that is a mistake ... and an opportunity for GM and Ford.

“During my lifetime, GM haven’t had the opportunity to gain as much share as they will in the next 10 years.”