Engine No. 1 Emphasizes Investor Values

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Hello and welcome to The Way Forward. This is Greg Bartolis, editor-in-chief of Wealth and Asset Management at Barron's. Today I have the pleasure of speaking with Yasmin Daya Bilger, head of ETFs at Engine No. 1. An alum of Goldman Sachs and more recently JPMorgan Asset Management, Yasmin has spent her career working across capital markets and asset management businesses. At Engine No. 1, she oversees the firm's client, product, and platform strategy for ETFs. Yasmine, thank you for joining us.

Thanks for having me.

So last month, Engine No. 1 stunned the investment community and corporate America with its campaign to successfully install 3 directors on ExxonMobil's board. And fresh off the heels of that campaign, your firm launched the Engine No. 1 Transform 500 ETF, which sports the memorable and absolutely apt ticker VOTE. Describe the firm's mission, how Vote is different from other ESG products, and why advisors should consider it for their clients.

Yes, definitely. So the market has gotten to know Engine No. 1 through the Exxon campaign, but I should say, you know, when we really think of ourselves, we think of ourselves as a broad impact investment group. And what we're really focused on goes beyond one company, one campaign, one product. It's really about transforming the system. And as a firm, we have a couple core beliefs that really underlies who we are. The first is really about being active owners. This is about changing companies from within. And we have a very broad toolkit to really do that. Secondly, it's also about a view towards the purpose of what we're doing. Really the idea that the issues that we're focusing on, on the environmental and social side, are not just ideological issues, they're economic issues. And that was a core part of what we did with the Exxon campaign there is really making the shareholder case for the change that we were trying to drive for. Now, VOTE, as you, as you mentioned, is our first ETF. The ETF plays a really, I'd say, important strategic role within our broader Engine No. 1 franchise. If you think about it, it's the market cap ETF. It really is a place where we can drive scale in terms of what we're trying to achieve and give us larger sort of voice in market. And it's also the place where the broadest set of investors can access us and really be part of our mission. The ETF itself, the ticker VOTE, and thank you for the compliment on that. We were really excited as well, is very simple on the investment side. It's a low-cost market cap exposure, which is virtually what most investors have at the core of all their portfolios. Where we're different is trying to drive change through the work we do as active owners. The way we vote our shares, the engagements we have with companies, and importantly, the investors that we bring along with us. So we think our product is very simple from an investment perspective, but very rich as it relates to the idea of transformation. And again, I say that word, the words take a seat at the table. That's what we really think it delivers to investors. I think advisors should consider the product because I really do feel it sort of solves some of the core challenges that, that people feel exist in market for, in the market of sustainable ETFs, which I think may be holding it back a bit. Mainly this worry of, is there a financial trade-off? You don't have to think about that with VOTE. It's market cap. And really making the change feel real and tangible for their end investors, which I think we've proven already with the Exxon campaign. And we'll continue to have ongoing stories to bring that to life.

Right. I mean, what's— a couple of things are interesting. One is, first, your approach of not directly owning companies that you deem already ESG-friendly and not per se avoiding those that you do not deem ESG-friendly, but rather engaging and then launching campaigns. So on that level, it's quite differentiated. But how would you— let's say an advisor had a client who was interested in ESG, but perhaps felt more comfortable owning an investment vehicle, seeing solar companies and EV companies in the top holdings, what would be the best argument to say, well, perhaps those are fine, but here's why this is even better? What would you say to them?

Yeah, that's a great question. And you're absolutely right. You know, the overwhelming majority of products that are in market right now really do either one of two things. They either wholesale exclude companies or sectors based on rankings, for example, that they have on ESG criteria, or they reweight companies to lean into the companies, as you mentioned, that maybe score more highly on a particular ESG score. But sort of my bottom line on that one would be, or our view is, you can't really solve a problem by running away from it. And the idea here, and I think we demonstrated that with Exxon, is By leaning into the companies that can have the greatest impact by changing, we're doing, we're really sort of doing the system change we talk about. So that's really where our product sort of flips it on its head. It is about keeping the investment side simple and low cost market cap, but it's changing companies from within. I will say it's worth to sort of bring that to life for an advisor, an investor who was sort of worried about the so what to that, that we have a very broad toolkit of what we can use as active owners to help drive that change. So at the base level, it's really about how we vote our shares. And I think most investors would be surprised to know that many of the sort of simple market cap products that they may own in their portfolios have historically voted against many environmental and social shareholder proposals. But then it's also about the transformational activism like Exxon. As well as even more collaborative engagements. I think that whole toolkit is a really strong value proposition that helps to demonstrate why you'd want to lean into companies to make them better.

Yeah. I mean, I believe your fund in terms of Exxon shares owned about 0.02%. And yet BlackRock, Vanguard, and State Street, they own close to 20%. And they were that went with you, that's something you likely would not have seen in years past. Do you believe this is more than just— I mean, obviously you believe it's not a one-off, but how realistic is it that you may achieve similar success with other companies? And I suppose it depends on the nature of the company that you look at as well.

Right, I think that's a really important point. The nature of the company, nature of the engagement, there's some things that would be maybe more behind the scenes, perhaps more collaborative. Those are certainly things in our toolkit, but you're getting at a really important point, which we all think about a lot here, which is we'll only be as successful as the investors that we can bring along with us. And the campaign was one example of that, but I, I think that that permeates throughout really all that we'll do. And that's just true for public markets investing in general. Now, how, how do you go about doing that? I think the first part, which is really important on that front, is what I mentioned at the onset. It's this belief that the issues that we're focusing on as it relates to environmental and social issues are not just ideological issues, they're economic issues. And it's about making a very well-constructed and well laid out argument for the shareholder case for what we're pushing for. It's the idea that the externalities that companies have, both positive and negative, um, across these environmental and social issues are directly linked to their value. That economic argument, when you lean into that, is I think what really helps to bring investors along. And now that's an interesting point too, because this is a passive product. So one of the questions I've gotten since we've launched is, but wait, you still own the same amount no matter how strong your shareholder case is. And the answer I sort of come back with is what we're talking about. It's the fact that we'll only be successful with bringing people along with us if we can make a strong shareholder case. The second point I would just make on this too is the market cap space as well is enormous. The addressable market we're going after here is very, very large. The largest 3 market cap S&P 500 ETFs are around $900 billion, and that's just those 3. So in terms of being able to speak to a wide audience here and bring investors along with us, we think we also have a very strong case as well.

Right. I mean, what's interesting is that the fund, it basically overlaps in 2 areas. I mean, you mentioned the, S&P 500 index fund investors, obviously, of that as a corollary given the holdings, and then also people who might be interested in investing in more straightforward ESG companies. So in a way, you appeal to both constituencies, but is there one that's a more natural fit, or is it perhaps the S&P 500 one given that the underlying holdings are essentially identical?

I really think it's both, and you pick up on something really important here. A lot of ESG products are ESG by what they own, not what they do. And they sit firmly in this ESG category. And so therefore they're only really speaking to that set of investors. What I think is really interesting about Vote is that by design on the investment side, it's just a low-cost core allocation. And as we've talked about, virtually every investor from the largest institutions to individual investors have that in their portfolios. And I should say, we notably We priced it right in line with where, where those assets really are. So in some ways we really also just see it as a core. And the value proposition that it's bringing there is the, you know, the voting perhaps more in alignment with someone's values and then the engagements. But we're not introducing a whole lot of financial differential in terms of investment performance, which is usually one of the holdups that, that makes these products struggle to really be someone's just general core in their portfolio.

So would you almost characterize it as, um, the equivalent, similar at least to an S&P 500 fund, but with like almost like a call option, if you will, on impact upside kind of that's layered over it almost?

Yeah, I mean, the way I think about it, it— so it tracks a Morningstar index, but that index gives exposure to the largest 500 companies. So very similar. Um, I think it's really about the voting in particular is one that's really interesting. It's really about, um, Maybe more alignment with someone's values. I think most investors would be really surprised to know that they even have a vote in some of these cases, to be honest. And that their vote is being cast on their behalf for and against issues, some of which they may really deeply care about. And so I do believe as there's more investor education and transparency into this topic around voting in particular, you will probably find that investors are waking up to the fact that there's another dimension to think about when it comes to market cap investing. You know, if you look at the majority of just market cap products out there, there's, there's very little differentiation. Um, but, but now as there's more focus, I'd say, on, um, on, on these topics, on these issues, and then as, as we get more transparency around voting, I, I would just say that investors may see this as another way to assess is their money in the right place? And importantly, is their voice being used in the way they want it to be?

Have you noticed since the Exxon news that there has been significant awareness of that, or a lot of people said, "Oh gee, hmm," not realizing that you could have more impact than just one share, one vote, such as the case here?

Like I said, I still think this is a bit of a sleeping giant. I don't think most investors really have have some investors know of course this, but I don't think a lot of investors know this idea around being able to vote for important things like environmental and social issues, board members, the like. Boris Kantov at Betterment, who was one of our early investors and partners in the fund, has written a very interesting op-ed on this very topic that really talks about the need for more real-time reporting around how fund managers are voting. And as you think about more transparency into that topic and more information for investors, I do think that people will probably start to realize that in addition to the sort of investment side of their decision-making, there's also this idea of how their votes are being cast.

Yeah. And you mentioned Betterment, which you have a deal for one of their model portfolios. Are there anything else in the works that you might be able to discuss?

Yeah, no, I'd be thrilled to talk about how we see this landing with investors. So, you know, to start, we were, we were really excited about the early support we received in the fund. Once we launched, we launched with some several institutional investors around $100 million, and we were also announced to be placed in the Betterment and Betterment SRI portfolios, which, you know, we really see as a very like-minded partner given their view on passive investing, low-cost investing, and of course with their SRI portfolio sustainability. I, what I think is really interesting about this fund, and I've launched a number of ETFs over the years, usually, you know, strategies only speak to sort of one type of investor profile, maybe two if you're lucky. But, but this product for me actually transcends investor type and really hits the whole spectrum from the largest institutions in this country to the advisor, to the individual investor. And I think the value proposition is very strong for each one of those categories. You know, for the advisor, What I think is really interesting and important is their end investor more and more is pushing the advisor community towards, well, what are you doing in sustainability? How are you thinking about it? How are you incorporating it in your portfolio? But as an advisor, you're also really struggling with the question of how do I solve that request and need while not sort of deviating from a financial perspective or introducing tracking error and having to apologize for performance, and very importantly, not materially increase the cost of my portfolio. So that to me is a sort of gap in the market that VOTE is slotting very nicely into from an advisor point of view. I also think the value proposition transcends to just the sort of individual self-directed investor as well as institutional. Um, and so from that perspective, from a client point of view, you know, we're, we're talking to a variety of channels and I'd say early feedback has been really strong. About that. Um, what I think most people are excited about and what we're excited about is this idea of sort of coming along for the ride with us, taking the seat at the table, using your voice. And, and I feel like that has actually really resonated with a lot of, a lot of investors. Mm-hmm.

Well, you, you mentioned that advisors and individuals are, um, are markets here for this. Um, are you favoring either one or is it kind of, uh, equal effort?

Well, I'd say, I'd say, um, you know, our bread and butter will really be the advisor community. I hope, uh, we, we bring everyone along with us, but I think that's a really important focus point, mainly because I really see that value proposition very strongly in that community. But, but we are speaking to the full breadth of investors. Now, obviously with an ETF, it's very difficult to reach the individual end investor. Um, but as it relates to institutions and advisors, it's somewhere we've been really excited to be able to sort of tap into. Um, and for, for the individual investor, An example of the Betterment relationship has been a really positive one because of course that gives us a way to access the end investor, but of course with a more sort of focused and targeted fashion.

Within ESG, is the fund leaning on any one of those, be it environmental, social, or governance issues, or is it really all case by case and you'll pivot and the next campaign might be whatever you deem the best? Target, so to speak?

That's a really important point we should talk about is just for how we think about our engagement strategy, broadly speaking. I mentioned, you know, we're active owners, we've got a big toolkit. So where are we going to focus that toolkit? First, I'd say, you know, of course our first campaign was climate. We are going to be focusing on issues across the spectrum of environmental and social. But the way we're approaching it, I would say, is different than you tend to see from large passive providers and much more actually how you would sort of see it from from the activist hedge fund world, which is focus. So from our perspective, the way we really plan on running our engagements is first and foremost having a focus set of themes where we think there's real impact that can be driven by our involvement. Secondly, it's that impact itself, really being able to sort of think about and measure what we believe we can deliver. And then lastly, it's the economic argument I mentioned, even in a passive product like VOTE, as I said, we will only be successful if we've got a strong sort of shareholder case to make. And I think this is one of the great things about being part of the Engine One franchise as an ETF business. We get to be a part of a group of products that are across the spectrum. So focusing on that economic argument will be really important for us too. And you'll see a variety of different types of engagements and campaigns with companies. You'll see the more, let's call it, transformational activism. And even there, very different— Exxon was a very specific example of that. There'll be a variety of different types in that bucket. But again, also more collaborative engagements. And for example, we may be working with a company where we actually think they're doing really well on a certain topic, but perhaps the market hasn't recognized them for that. And can we help them get that acknowledgement? So, um, so there, there'll also be a variety of styles within that as well.

Interesting. So I assume it's premature to name names, correct?

Yes, that would, that would be right. Yeah.

How about the timeline? Uh, week, month, longer, or anything there?

Well, without going into so much detail, um, you know, like I said, we don't— we're not going to measure ourselves on quantity. Um, that's, that's, that's the traditional way I think a lot of, let's call call it stewardship or engagement teams, think about the work they're doing. Do they cover all the ground? And so in our case, for example, we are permanent holders of the largest 500 companies in the US with vote. We will not be meeting all 500 of them, and we won't be rushing around to do so. Instead, we're going to really focus on impact, strong case for it, where we can move the needle. And so I think the timeline as well as the breadth of what we're doing will really reflect reflect that more targeted approach.

In terms of running a campaign, doing the research, and all the attendant work required, that obviously costs some money. And yet the fund is priced very, very, very affordably at 5 basis points. Are there other funds, or can you speak to the issue of cost of campaign, fund fees, assets, et cetera?

Yeah. So let's start with the 5 basis points. I mean, that was obviously very intentional. There's a, in my mind, a very strong belief we needed to meet the market where market cap was. If we were going to launch a market cap fund, we had to be in that range. And that's a strong part of the value proposition of that strategy. It is not asking or requiring investors to make a material increase in their overall costs in their portfolio. But secondarily, I'd say this is where it's the strength of the ETF business being part of the Engine No. 1 franchise altogether. And thinking about the entire platform as it relates to engagements with companies. So that, that is that 5 basis points to me is a reflection of the long-term commitment we have for the ETF business. I mean, we're building this business for the long term and for scale, but we will certainly have additional strategies on the back of that in a variety of different styles.

And, and is there anything you can just divulge about, you know, future products that we might see in the ETF platform for Engine No.

1?

Or—

yeah, you know, we are, um, without going, you know, too much into it, we are, uh, filed for and approved on a climate ETF. It was actually filed within the same filing as our, as our vote ETF. So that's the first strategy that we have out there after vote. But, um, you know, more to come really. I think there's a lot of interesting developments within the ETF market in this space. But the thing I'm most excited about, and I think the thing that investors should really hear from us is everything we bring to market will reflect the engine number one view around active ownership. So we'll have this underlying philosophy and belief and strategy that really taps into this active ownership toolkit. So while there'll be a breadth of what we do, they'll tap into the common core.

Let me just go back a little. So you joined Engine No. 1 this year in January, and you were at JPMorgan for about, what, 7, 8 years before that? What made you— led you to come over?

I was one of the early employees in JPMorgan's ETF business. In fact, I joined when the firm had just launched its first ETF and had about, I think at the time, $25 million in capital. Uh, and when I left, I think the firm was just crossing the $60 billion mark. So for me, it was just a really fun ride to be able to, to build a business from the bottoms up in the ETF space. I really believe in the ETF industry. I think it's provided investors with access to a variety of strategies. And I think there's a real democratization to what ETFs bring to investors' portfolios. For me, making the move, what I was very excited about, I've always been interested in the sustainability space. And I do think while there's been a lot of chatter and focus on sustainability, if you look at it as a percentage of ETF assets, it's still a fraction of what's out there. And so to me, there's so much more to be able to do. And I was just really excited to be able to tackle that at a firm that's really purpose-built to focus just on this. So I love the, I love the opportunity being able to build an ETF business again from the ground up. That's what I am. I'm a I'm a builder, but secondarily, this idea of doing it at a purpose-built firm that's really focused on, let's say, broad-based systems change, just, I jumped at that opportunity. And I do think that's one of the things that will actually, you know, help with our, our mission here is that focus, not only focus on our message, but focus on our product set, creating products that are around active ownership and impact is what we will do in our ETF business and really not have the sort of full toolkit you see in other places beyond that. So I was just really thrilled to have the opportunity to be able to do it with that kind of focused lens.

Well, in terms of active ownership with Exxon, it was clear what the outcome was, right? You added 3 directors to the board. In future cases, I mean, will change or positive impact be generally defined in a similar way, or will you measure positive impact differently?

Is that—

will it manifest itself in different ways?

Well, that's a really interesting question and something that sits across the firm. I mentioned at the onset that we have a strong belief that these issues are not just ideological issues, they're economic issues. Well, you know, we have a framework for how we think about that. And it's really about looking, you know, starting with a firm's sort of shareholder value today and really looking at the positive and negative externalities that a company has across this range of environmental and social issues. So being able to think about measurement and quantification and linking that sort of shareholder value to our view of total value, that's the fuller picture that includes externalities, is something that we are really focused on, both from an investment perspective as well as a data science perspective. I think that's really going to help us actually with bringing the story to life. I think most advisors, would really say that I would— in my conversations, what I hear is, you know, their end investor really struggles with the so what. They struggle with what makes it real. And I think being able to demonstrate through these stories with individual companies and translating that to real tangible impact will help to break down that barrier, um, that again may be holding, as I was mentioning, the space back. Yes, it's growing, but it's still a fraction of what's out there. Uh, I think that storytelling the so what of it will be, will be important. And we plan on working very hard on the quantification elements there.

Right. And I find that's a pretty interesting and important point. I mean, the quantification of it, you have ratings and whatnot, but you'll at times have certain companies appearing in best of lists and worst of lists. And there's a certain almost latent skepticism that you'll hear often from investors where they'll be in principle with the idea, but hesitate. Because there's some niggling doubt over, well, I'm not sure this is really all it's cut out to be, even though, again, fund flows indicate that there is a huge amount of interest. But your approach is, it's definitely a much more either-or binary approach where you have something tangible when you have something or you don't. So I think that's quite interesting. And also the active nature of engaging and not passively holding. Holding merely passive and holding things passively.

I would say, you know, it's funny, just to build upon that, the data piece I think is, is really a challenge for, for the advisor community. Because if you think about it, you know, a lot of, as you mentioned, a lot of these data sets have little correlation with each other. And, um, you know, as you allude to, stocks that could be ranked top quartile by one measure or bottom quartile by another, and it, it It's paralyzing. But what I think is very simple is to show the work you're doing from an active ownership perspective to help to bring that so what to life. And that's a really important part of what we believe and want to focus on as well. It's the transparency in sharing that story with investors. And I've used the phrase take your seat at the table several times because honestly, I think that's one of the core value propositions of Vote is this idea that we're transparently sharing with the market the work that we're doing so that people can be along for that system change with us.

Given that you didn't own that much Exxon, it could have been 0.05 or 0.010 and the net result was the same. So given Engine No. 1's recent success, there's a good chance that there may be imitators waiting in the wings. If there are people who try to emulate your approach, what will you say to investors in terms of explaining why you're the only game in town or the best game in town for this?

Yeah, I mean, we'd love to be the tip of the spear that brings along the rest of the industry with us. I mean, this is about big picture change. So I do think there's this idea that, for example, voting, the more we can sort of move along the rest of the industry with the views we have around where voting's heading, we would be really proud of that accomplishment. What I think is very unique about Engine No. 1 is really two things, its focus and its platform. So, like I said, as a focused provider in the space, we're gonna really be able to sort of win on the idea that You know, this is what we do. This is what we're bringing products to market that reflect that value proposition. Um, and I think that will help a lot with investors sort of understanding what we're trying to achieve. But secondly, it's the breadth of the platform. I think the, uh, the totality of the parts is greater than any individual part itself. I can speak confidently for the ETF business that being part of the broader franchise that has sort of the active ownership team, our data science team, our active investors all just make us better and stronger at being able to get after this change. But like I said at the onset, we, we would like to bring, um, all people with us, investors, stakeholders. So I do feel the more we can help push along the industry, the better, really.

Well, I think we can wrap it up there. Uh, thank you very much, Yasmin. I appreciate you taking the time.

Thank you so much for having me.

Thank you. And thank you for joining us on the latest edition of The Way Forward. This is Greg Bartolis of Barron's.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.