Jennifer Grancio on Passive Index Funds and ETFs

in the financial community. Today, she is the CEO of Engine Number One, which focuses on the fascinating transitions that are taking place in broad strokes across the economy. There are numerous opportunities and energy and climate and robotics and automation, and her firm helps invest in those spaces. Not quite an activist investor, but she has worked with a number of companies like Exxon and General Motors and Occidental where the input of Engine Number One drove significant changes at

those companies. They're a long time investor. They're not a black hat activist where they're looking to buy stock, force an exit of the CEO and sell once the stock pops. Really fascinating story. I found it quite fascinating and I think you will as well. So, with no further ado, my interview with engine number ones Jennifer Grencio. Let's start out talking about the early part of your career. I'm really curious how you ended up in black Rock, but

before that, you're working as a consultant. Yes, I think like a lot of people on Underground actually ended up. I went to Stanford thinking I was going to do genetics and science. UM didn't interns to pivoted, ended up doing international relations. Then, as you had towards the end of college, you figure you're gonna save the world, and I'm gonna go work for the World Bank. World Bank wants you to take out more student debt and get

a master's degree. So, like so many other bright eyed graduates, UM, I trooped off to, you know, one of the traditional professional services professions. UM. The thing it was kind of interesting for me about consulting was this idea that you you almost apprentice with somebody that's senior, and you run around and try to help companies with problems. So seems like a good idea at the time of the time, and that's what I went off to do. So how do you go from that? How do you end up

at a place like black Rock? I share seems to have been almost an accidental business line from them. I'm remembering correctly. That was a post financial crisis Barclays purchase something along exactly, yes, exactly, yeah, So if you go back, So I management consulting, moved back to California, decided I was going to be a California person, not a New Yorker. No offense to New York. Spent a lot, and so I went looking for what I thought would be the

best asset management business. I focused on asset management within the consulting space, like this idea that somehow if you got portfolio construction and savings right, you help people over time. Um, And so I joined what was Barclay's at the time. The asset management business of Barkley's bank was this little firm called Barkley's Global Investors based in San Francisco. And that was not such a little firm at the time. Was now it was growing very quickly, and that business

was an institutional business. So as an institutional business, we did indexing. We thought indexing was cool. Um and the eye shares in the e t F idea came from we just had a fundamental belief it was a better mouse trap. So there's something about an e t F and we could go into that another time. There's something about an e t F that's a better mouse trap than a mutual fund. And so for Barkley's Bank, we pitched, here's a great idea, let's build this e t F

business in the US. And it's a way for Barkley's to build in the United States. And so we launched the business in two thousands. So we launched it right into the dot com crisis. So from the dot com crisis to the global financial crisis, what were the circumstances surrounding black Rock Santa Barclay's, Well, we'll take that little worthless business off your hands for a couple of hours. Yeah, And the interesting thing about an e t F business

is that it takes a long time to build. And so to your question, around that time, going into two thousand and eight, Barclay's need in cash and the index business was starting to take off in the form of ETFs, or at least we thought that, but it was still a relatively small business. Um and So who were the other people that probably looked at that acquisition included other big indexers, big asset managers who weren't sure was indexing going to be a thing or not, because remember at

the time e T S and index were synonymous. But Larry, you know, it was more forward looking, Larry being Larry Fink of black Rock, who arguably, and I know who Larry is. I just want the audience to know, arguably, the purchase of I Shares by black Rock from Barclays could be one of the great opportunistic distress purchases in the middle of a crisis. Ever in financials, what is I shares up to now? Like four trillion dollars something insane enormous. Yeah, So and they picked it up for

a teeny tiny fraction of that. So what was your experience like when black Rock took over I Shares. Yeah, So we we built the ICE Shares business first within Barclays UM and we were a you know, small but mighty team doing e T s and the whole idea remember of ets, is to go and to challenge mutual funds and challenge active management. So that's a big thing to take on. And so as black Rock worked through the acquisition of all of the v g I business,

including I Shares. We spent a couple of years then getting to know black Rock as a little Eye Shares team UM and talking about e t F s and fee based advice and portfolio construction and all these things that we thought were trends could take advantage of and used to build the business. UM. But then the business really just got from strength to strength after that acquisition. We came out of the financial crisis a few rocky years in the e t F industry overall, Vanguard decided

to get into e t s in a serious way. UM. Black Rock and I Shares launched that core series as a competitive business, so kind of responding to what was going on in the market. And the business continue to grow and grow. And then I think from an e t F industry perspective, UM, we did some important work on trying to protect the category of e t F. So we did a lot of work with US regulators, UM, European regulators. I ran the business in Europe for a

while as well. UM. Talking about the differences between a passive index fund, for example, and e t F that's got commodity exposure and E t F that's leveraged or inverse in terms of trying to protect the vehicle and protect the category. And really since then there's just been

continued explosive growth. In your wildest dreams, did you ever imagine back from the sleepy early days of passive and E t F at Barclay's that would grow up to be just the dominant intellectual force and investing and reach the size it's reached. What is even after this year black Rock is something like eight trillion, nine trillion and eight. Yeah,

I mean the numbers are huge. I think we did but maybe that maybe we were naive, but our view was it just it was it was a trend that was going to happen, and if you could own the trend and if you could accelerate the trend, this was a better way to invest. A better way to invest is to have a low cost solution at the core of the portfolio and then hire people that are deeply capable to deliver alpha. So I would say we thought it could be big, but you know, it's pretty amazing.

So you talk about accelerating the trend, what exactly do you do to help accelerate that trend. How do you drive acceptance of both e t f s as a rapper as opposed to the traditional forty act mutual funds and passive US is more traditional stock picking, market timing, active investment. Yeah, I think we when the industry first started, So going back, you know, twenty years now, the two things were synonymous. But you know, let's let's take those

one at a time. So from a passive perspective, the argument we made as an industry selling passive ETFs was you really had to take a look at what the portfolio is doing over time, total cost, total risk exposure. And when you did that, you often found that there was a way to get better long term performance and cheaper by having some index in a portfolio. So that was the story on index saying, and then we kind

of kept driving that into this idea of models. So now you know, we have there's a model a huge amount of money. You know, trillions of dollars sit in models in US wealth. What does that mean? It means a big wirehouse or brokerage puts a model together this much Europe, this much US, this much small cap, and then you can use index products to fill all those allocations. And so that was the kind of the twenty year build of how did passive get so big? UM, and

then E t F is a rapper. It's just it's just a great way to get the price at the moment if you're buying into the public markets. Number one, UM and number two, it's a great way to manage tax where if you buy something now and you sell it in twenty years and the market has gone up, guess what we all have to pay tax on that. But the kind of annual capital gains gift you get from a lot of mutual funds, it can be managed very astutely in the E T F rapper And that's

that's great, Like that's great for all investors. Meaning if you're a mutual fun owner who's not selling, but somebody else sells and generates a capital gain that gets spread around to the other it doesn't make I mean, as somebody that's been doing ETFs for a long time, I say, it doesn't make any sense whatsoever, because there's another way to do it, and we're fine, and we're finally seeing that now we're finally seeing a lot of the big

mutual fund companies start converting into E T s the flows, even in a down year like the flows have all been towards passive, towards e t F, towards low cost. It seems like a much better mass trap. I think it is. I'm not going to get much of an argument from you on that. So you mentioned Vanguard, we're talking about black Rock. Let's talk a little bit about

the role of branding in the industry. How important is that when you're putting out either a low cost, passive et F at three or four BIPs or something more active or thematic on the t F side. Yeah, I mean, the role of brand is pretty critical. And if you think about in the index business, if you're managing it, well, there's not a lot of performances. Are you a tracking the index? Yes or no? And so that power of

the brand is massive. And my observation in the space is that the average investor, the average retail person that's going out and investing or talking to an advisor, they don't necessarily know one product provider or investor versus another, but they definitely know who they do business with or who they buy from. So that retail brokerage brand, their

advisory brand, has a huge impact them. So do your question on Vanguard like Vanguards a brokerage firm, so you kind of know Vanguard Vanguards in your form one K you've heard of Vanguard, and so for other people that enter the industry, and this is certainly what we did in the eye shares business or what we do now at engine. Number one is you really have to be clear on who are you and what is your story

because the brand matters a lot. So you mentioned brokerage firms, and Vanguard does for Owen k broke Ridge, they do all sorts of obviously mutual funds and e t f s. How do you see some of the bigger custodians and actual brokers like Schwab and Fidelity In terms of et F developments, we know it's black Rock, Vanguard and State Street at the top. These guys are no slouches either,

are they now? I mean, I would say if we go back and we look at the history of e t s and how they've developed, we see State Street, Vanguard, black Rock, black Rock Eye Shares as very dominant and they're going to continue to be dominant in passive period. They're they're they're big, They're so big now, Um, and we'll come back to this later. I personally think there's some problems with how big they are, but from an ease of buying decision making perspective, they're big. They're dominant.

The brokerages were late to get in the game, so Fidelity and Schwab got in much later. They didn't They don't charge fees for those products, and so it makes it harder for them as a kind of a corporate organism to you know, have that be a big part of their business. And then what we're very excited about it Engine number one and what you're seeing with the mutual fund conversions, the big ones at d f A,

at Franklin, Templeton, the list goes on. There are many is that we're now ready to move back to funds into the E t F structure, and that I think is very exciting. But that's new. That's a very new development. So let's talk a little bit about Engine number one. First. How did you get there from black Rock? What led that transition? Yeah, so I left black Rocks very large.

I wanted to do a little bit more innovation, and I think sometimes the biggest firms are great, but they can't always lead from an inner vation or change perspective UM. So I spent a couple of years, I built an advisory firm UM and took a couple of years. I decided, you know what what was the next move? And I had some great did some great work with a number of large wealth in r A firms that were going through an M and A or selling themselves process. UM

did some work on impact investing. Actually led me to Ethic and joined the Mankind Board. But decided I was I I was definitely going to be a builder, that there was this opportunity to do something different than traditional mutual fund and passive e T f U, and so I started looking for what would be the thing I wanted to build with partners UM. And then I met Chris James and did you launch engine number one or did you join him when it was already existing? We

launched it together. But Chris is going back, you know, before we started the firm. So Chris James is our founder at and TO number one. And Chris's background is hedge fund and private fund investments, and what he's really known for is he's known for taking an extremely long view on something and doing the work UNTI let's say, where's the opportunity as you go through a huge train, information or transition. So Chris was hard at work on

this and wanted to reach into the wealth space. So rather than just doing products that were private and you could help institutions invest, um, what could we do that was broad and into the wealth space. UM? So I joined him to collaborate given my background on that side of the business, and the idea of Engine number one is just to help people benefit from these huge transitions and transformations that are very much not the backwards looking look.

Google and Amazon got great. You know, our portfolios have a lot of growth in tech great. There's a lot of money to be made in the energy transition, transportation, agriculture, and so really the idea of the firm is to be able to look forward, find miss pricing, and make money as we go through these huge changes. The firm's name is intriguing. Where does Engine number one come from? The first firehouse in San Francisco is actually a couple

of blocks from our office. UM. And in talking about what we were trying to do, which is maybe it's grandios, but if you think about it, like capitalism works, and what we were agitated about is we saw the market you have E s G over here very small. We think old school E s G is not does not work. We have a strong view on that. And come back to that indexing. Too many shares are locked up in indexes.

Index don't vote their shares. And then maybe most important of all, we're going to need a general motors and afford to actually be able to do this huge transition from internal combustion to battery electric vehicles. And so you know, actually the firehouse is the center of the community, right and if you think about how a community survives, the firehouse is the center the community takes care of itself. A well run business really should be as simple as

sort of taking care of the environment. It's in being aware of it. And in public markets that means you also have to be able to adapt and manage their change. So tell us a little bit about the strategies you guys employ. What are your key focuses? How do you deploy capital? Yeah, we as a business, we run an all its business and then we run the e t

F platform. So that if you think about it, very simply, these huge ideas about transition and transformation and how to make money are very common across what we do, but we have two businesses and UM, the big ideas are these transitions and transformations and how do you take advantage. And so when we look at public companies, we look at every single company and we look at what their path is through time. So I think this is one of the problems with a lot of investment strategies right now,

as they're looking too short term UM. And then we build the impact or externality data, we just build it into the financial model, right because the data is out there, particularly on governance, particularly on environmental issues. And when we do that in these sectors that are in transition. Let's take energy for example, if you're an oil and gas company and you don't account for the emissions that you're dealing with and you don't decrease them over time, you're

gonna have a problem. And we saw this when we started building the business that a lot of these companies were heading towards zero terminal value. So let's take X on for sample, where if you take X on and X and keeps doing long dated fossil fuel projects and has no plan to reduce emissions at any point in time,

and has no plans to develop a green business. Well, that's not very good for x on stock when we get to seven or ten years out, and so we see a lot of these opportunities where like it's just math. The capitalist system is supposed to have the company government itself so that it's making money through time, it has a longer duration of business, and it has a higher value. And that's the kind of the way that we work in everything that we do. So you mentioned environmental issues

and impact, you mentioned governance. This sounds a lot like two thirds of E s G. Yeah, we think the way people use that label is a little bit problematic. So people often use that label looking backwards. Flesh that out a little more. When when I hear someone mentioned

E s G, I typically think of an investor. And for the most part, as we go through this generational wealth TRANSFERM you do surveys of investors husband passed away, the wife tends to be much more empathetic with issues of equality and environmental concerns, and the next generation is much more concerned. So it seems like there is a desire to express those beliefs in their portfolios. Why does that not work with the s J. Yeah, I mean our I guess our view on that would be you

can always express values in a portfolio. But if you're going to express values in a portfolio, say that I am expressing my values in the portfolio, which is different than the core concept of managing money over time is generally for the person that's doing the managing is to be a fiduciary and drive good outcomes and strong returns, and for in general for the investor is to drive

returns over time um. And so the way we think about it is, really you can do that, and any business that is going to survive over time time has to be sustainable, has to address or basically cover their impacts right after the cost of capital so that they can be profitable over time. So instead of thinking E s G means its values based I don't like the company, they're bad, I'm going to screen amount of my portfolio. We don't think that's a great way to manage your

core portfolio over time. We think the better way is you simply have to engage with the companies to make sure that their most material impacts. That's financial data, right,

that's risk data. If you don't manage your emissions as an oil and gas company, and so let's build that into just investing to make returns as opposed to this special class which you know it values based in E s G. Tends to kind of infer value over performance, right or divesting from companies that you don't like, and that's we don't think that's a great way to invest. So let me push back a little bit on the

low carbon strategy. It seems like it's uh half of the economic equation because p pool seem to be approaching entities like x on Mobile and others, the suppliers of the carbon based fuel. What is that doing if you're ignoring the other half, the consumers? So every other company that is not a carbon energy producer is likely to be a carbon energy consumer. They're running factories, they're shipping goods, they're having offices. Why focus on one half of the

equation and not the other? Yeah, I mean, I think that's the right question, and we focus on both. And so let's take for a minute the energy industry and then the transportation or auto industry. That's an example of that kind of handshake or handlock. Right, So in the case of the car companies, that's consumption. So if we're consumers and we're driving cars, which we still do when

people are planning to do in the future. The car company can switch from encouraging the behavior of driving internal combustion engines which have very high emissions, or the car company can know that the consumer demand is shifting a little bit and they can build a car that is an awesome battery electric, reasonably priced vehicle, and then they can capture that shift in demand, and that's really good

for the car company. So we actually, we ad percent believe that this has to primarily be driven on the consumer demand sign and on the first piece of that. So if I'm a consumer, i buy a car, you've got to start with the car company. However, if you look at global emissions, you know percent of that today

comes from the energy companies. So at the same time, in parallel, there's still an opportunity to work with those companies on as battery electric comes up, as fossil fuel comes down, how do those companies make a lot of money nine or ten years from now as we go through that transition. Explain that thirty because again it's that someone's a buyer, someone's a seller. They're not burning thirty percent of the fossil fuels, they're selling it to consumers

who who are burning it. Like though there are some low carbon ETFs, I just don't understand. It's why the war on drugs failed. If you're only gonna interdict the supply but ignore the demands, you're not going to be successful. Yeah, that's right, I mean, And we think from an investment perspective, if you want to solve this problem on how do you take emissions down? We think that problem can be solved and you can make money by owning the people that are gonna win. So you asked before, like what

do we do? What strategies do we run? In the e t F business are active team it's it's effectively hedge fund investors. So they're very concentrated portfolios. We believe we're right. It's a handful of names, like under thirty names today in the portfolio um tickers net z, so Climate Transform, Climate net z. And what that portfolio holds

is it holds companies that have emissions. But we believe that the companies in the portfolio are the companies that have the right strategy to if I'm an energy company, I'm producing energy. There's demand for energy. That's what I do. But I'll tell you my emissions, I'll do methane, third party monitoring, I'll do all the right things, so that from a social license to operate perspective, I'm at the

top of my peer group. And in all cases they have a strategy, whereas fossil fuel demand to clients not today but in seven ten years, they have a strategy to actually make money and still have value. So we're picking the top best performing energy companies. We're not seeing energies bad energies essential and we need that energy in the transition. And the portfolio then also holds the car companies that we think when so let's talk about a couple of names. So a couple of energy names from

net Z and a couple of car companies from that six. Yeah, and so one of the names we had in the portfolio, which is actually so highly valued it goes in and out depending on if it's overvalued. It's an active fund um is Occidental and Oxy And that's an example. They were really the leader in the space that they had started to develop greener businesses so that as fossil use comes down, they have another business in their competitive that's

great for long term value of the company. And what are their green businesses, things like solar and wind or they have a range of things that they do in

that space. But think of it as committing early to find ways to make money, having people on staff on the board that know how to run green businesses, and then from a um from an emissions perspective, also, they were very early on telling us being very transparent on Scope one and two and agreeing to oil gas methane partnership emissions with third party monitoring of emissions, which we think is critical because again methane emissions leaking, that's probably

the biggest thing, especially with natural gas, but with pretty any any form of carbon that's capture your carbon um removal from the ground, that's a big risk. Methane is even worse than CEO two and and that's right, and that's some of the active ownership work we did in that portfolio. Or Canoko and Devon are companies that we worked with to join the methane third party verification partnership

this past summer. And that's when we talk about Engine number one as active owners it's not always you know, the black hat activist. We actually haven't done that other than excellent. But the ability to really understand their business and go in and work with them on actually having the methane verified is a big deal because then people understand what you're doing in that part of the business and it gives you license to operate because we need

we need that energy source. What are the car companies that are in netzy UM General Motors is in net z Ford has been. It goes in and out of the portfolio based on how they're doing managing some of their supply chain constraint issues. And then UM Tesla's in the portfolio, but GM's at a much larger weight than Tesla, and then Tesla went out of the portfolio for governance

reasons because Twitter. Because of Twitter. So if you think about so the way that we manage that portfolio, basically what net z is is you're holding some of the biggest emitters and you're holding this one point eight metric tons of emissions a year, so not low carbon, high carbon, and then what we expect is that those companies are going to take that number down to less than half within a decade. And so if you care about impact

or sustainability, yeah, that's great, that's a huge win. You're holding the company's watching them, they're taking amission is down. But if you want to make money, you're holding the companies that are providing energy but doing it in a way that they have a social license to operate. And then so to come back to your test, like example,

all of it starts with governance. And so if a public company is going to make money over years and years, it's it's all about governance and do you understand your markets? Do you understand how things change? And so if you're running Tesla and you have a huge job to do in terms of scaling that business, but you're also doing other things at the same time and saying you don't time to run Tesla, well that's kind of a governance issue.

So when I look at the acquisition of Twitter, which started out as a lark forty four billion, the market drops wild over payment. The bigger issue is if you think about who's Tesla buyers, they seem to not be

the people who Ellen is playing too on Twitter. And in fact, as much as there are a lot of fan boys, and I think you have to give Elon full credit for moving the entire auto wind industry to e v S. I think all the legacy makers looked at him and said, we can't let Ellen do to us what Bezos did to the book industry and the booksellers and a dozen other industries. But it seems like he's alienating that core middle left, all those liberals we're

gonna own on Twitter. He seems to be chasing away a lot of his future buyers of Tesla's He may be that's good news for GM, though, So okay, we're

covered on that one. You don't care and to say nothing about valuation issues and other sort of things, I'm assuming this isn't strictly UH s G checklist you look at We look at the usual things, and that that's maybe our main point, which is the people people get in our industry in particular, they get stuck in old frameworks, right and E t F is an index fund UH and activist is somebody that comes in short term and

fires the CEO. So I think we need to be careful of those quart of short ways and short hand ways of thinking in investments. Our point of view is that there's a lot of data available now, we have a huge amount of data. Take the climate and environmental

related issues. We have a lot of data on carbon and we can estimate carbon prices, and so in a basic fundamental financial model, you can start with your old traditional financial model, but you can add in we do this, we can add in the monetization of those emissions, and then as you build out your financial model, you can look at how the company reduces them over time. And we just we see those as purely financial metrics, right that those a large, large externality for a company is

a risk or financial measure. It's not some separate e s g. Dot bubble rating system. It's just it's their numbers, it's math. It should go into the long term valuation of the business. Let's talk about the x On situation. You accumulated a relatively small number of shares and then reached out to management. Tell us about the process and how they reacted to your overture. Yeah, so from a team perspective, we we've started by making an economic case.

So we did the work on here's what we would do differently, Here's how we think the value of the business would be higher if we did this. And these suggestions on what we would do differently included disclosure of emissions it included better capital allocation decisions between this sort of short term energy transition period and we don't know when it's going to be thanks to you know, putting in the Ukraine longer than we thought a year ago, but at some point we're going to start to really

pivot into an energy transition. And so what what is what's your best thinking x on as a company on what your business looks like, in your capability at a board level to extend the duration of the business, do things that may be renewable or whatever they may be. What is it that you can do that's in that area, um And so those were the things that we requested. They were receptive to that, and they were not receptive to that, But those are the things that were requested,

which is usually how these things start. So point two percent of outstanding shares doesn't exactly put the fear of God into them. Why a toe in the water and not a more substantial stake x on. Going back to when we started the proxy campaign, there they were giants, but also there were a giant in terms of the big asset managers had not been able to get them to pivot from a governance perspective, so there were known concerns about governance. A lot of the big investors take

a slower approach to work with management. Not caused too much change request changes UM and there just hadn't been any progress in this case. So we were able to have conversations and the team did a huge amount of work with investors and passive investors and active investors walking

through our economic case. If these things happen, better governance, better economic performance, and that we think is what allowed us to rally support and as we were rallying support UM as you as you see in this situation, I'm sure Exxon was talking to some of those investors as well. And so as we went through the campaign process, we saw some of these changes on changes in capital allocation

decisions UM and intention to launch a green business. So some of these changes started even before the proxy vote where new directors were directly elected onto the board. So we talk a lot about specific companies. How do you look at the macro environment and geopolitics? You mentioned Putin's invasion of the Russian invasion of Ukraine. Arguably that's going to accelerate the greening of Europe in particular, and the move to alternative energy sources not dependent on Russia, which

is old carbon. Yeah, and I think this is some extent. You can't control what is the moment in time where the energy transition happens. Right, However, now, right, aren't we more or less in the midst of this today? We're in that. We are in the transition absolutely, But we think that if you wanted to not use fossil or carbon intensive now, it wouldn't possibly work. We're not ready

to be transitioned. We are in the transition um. And so the way we think about it is we have to be very savvy about where do you have a brown business, Where can that brown business be gray? Where does it start to use green techniques. Natural gas is a great example. We need natural gas, So how do you move natural gas in a way where you're looking at methane? You don't have methane leagues, you're using green

energy and electric sources to process the natural gas. There are a lot of things we can do even while we're using fossil, to be cleaner and to put the people that are cleaner and doing fossil in a better position to sell versus their competitor. Because we are seeing these changes, and we do have a lot of people looking at carbon footprint as they're buying or investing in companies. So my colleague met Levine mentioned your win and now says when they see you coming, you are no longer

presenting as a scrappy small startup. You're bringing some receipts to the table. Hey, excellent, knuckle down there. Now, let's you and I have a conversation. How has that changed since that win? Yeah, we really started when we started with Exxon effectively, and so I wouldn't say we had um it was the next day. It was a sea change in a positive way. I would say it's complicated because after you've done that, the board in the CEO are a little bit worried about what our intentions are

UM And it takes time to build those relationships. And Chris does a lot of this work directly with the CEOs and the companies that are in the portfolios. UM And it takes time to build trust. But our relationship with them is, you know, basically having modeled their business ourselves and modeled all their competitor businesses and have gone to kind of up and down the supply chains. And once we get to know each other. We're giving them what they find is actually some very helpful point of view.

And if I like at your business, I think this, you know, consumer demand is going to flip sooner you're gonna miss it? Or what's you know? How organized are you on supply chain? What are your bottlenecks? And so it's become really very constructive with a lot of the companies that we work with. It sounds like you're early training in the consultant world. It wasn't for naught. This is almost a hybrid between activists investing and consultants and

just investing right. High quality investing means you really have to understand, um what a company's strategy is and what the what are the what are the bottlenecks, what are the places where they may miss If you understand those, you can make those faster, shorter, better, less risk. Then that's really positive for being more sure that the company increases in value. So let's talk a little bit about

your toolbox. You mentioned proxy voting, you mentioned modeling. What else does engine number one bring to the table as ways to get management to see the world from your perspective? Yeah, And part of it is that the data science work that we do around the sizing of emissions, comparative emissions, monetization of emissions. So we call that our total value

approach to looking at the externalities of these companies. So we bring that we've done the modeling, all the fundamental work that we do, and then this very active engagement where we want to stay engaged and if there's something that's part of where the ALTS business came from, if there's something in the private markets that could work differently to help a big public company move can we make connections, can we help that move along? And then proxy voting

is important. So most of what we do is this kind of very intense active engagement, and we're active owners of the company, not always an activist in the traditional meaning. UM we also launched an index product, so you know, our view is that you really have to hold these companies if you want to own the winners over time, and if you want to drive change, you also have

to hold the companies. You can't divest UM And we see a problem in the dominance of the current index providers is that they're big and it's complicated to vote shares because you have people on different sides of every issue. So we while we're at it, put a new index product out in the market that tickers vote, which is pretty simple. It's literally an index we've with the shares in line without economic outcomes, and we post them as soon as we vote, So a little option for people

that still want to use index instead of actives. That's really interesting. We've talked about x on so far and Tesla and Ford tell us about your involvement in General Motors. What attracted you to the company and what sort of positioning do you have with him? Yeah, it's General Motors and General Motors. It's going to take some time, right, So General Motors has been in the portfolio since we launched, since we launched net Z and still is and has

stayed there. And when we work with General Motors, it's a lot of our work has been about how do we accelerate the transition to battery electric vehicles for them as a manufacturer, and not for an ideological reason, purely because we think the consumer demand is shifting more quickly. That's where the and so this is again this is an economic argument for us and working with General Motors, that the faster you get to all battery electric which

means you need to build the battery plants. You need to build them bigger, you need to build them faster, you need supply agreements locked up for the rare metals, and then you need to work on bringing the cost of batteries down because as all of that happens, GM makes eight to nine million cars a year, and so if those cars are all battery electric vehicles, uh, and

the battery cost comes down, you know what's testas multiple? Right, they can have the opportunity to go from where the GM multiple is today, which is very low, very depressed value stock, all the way up to what producing vivs at scale is going to look like. And that's a huge value creation opportunity. Let's talk about what's going on in in the world of E S G and greenwashing and woke is um. There's so many things happening here and I think people don't really use these buzzwords appropriately.

Let's start out with greenwashing. Tell us your view of it and why it's problematic. Well, I think if you can do everything from scratch. I get this a lot from people that run large asset management companies. You're like, gosh, I wish, I wish I could just start every thing from scratch again in this environment. So I think the reality is if you're running a strategy and you you don't care or you don't have risk metrics on let's say the environment in your strategy, it's very hard to

fit them on top. And I think a lot of people get caught in that from a greenwashing perspective. So if what we what we do is we start from scratch, we think about these material impact things as financial data, and it's just part of our process and so there's

no greenwashing there. But for people that we're investing in something and now want to take advantage of a moment in time, or people that are investing and actually don't really understand how environmental risks fatter into the portfolio, I do think you just have to take a time out and and go back to basics and better articulate what the strategy is and what you're actually doing to the market. And if it's not a green strategy, you kind of have to say that. It seems like a lot of

this is just spin on the hot buzzword of the day. Well, a lot of our society right now is spin on the buzzword of the day. So I think we need to be very careful about that when it comes to investing. So let's talk about woke ism. You're describing E s G As sort of a risk management tool to filter out certain potential problems down the road. But if I pick up the Wall Street Journal or the New York Post and flipped to the editorial section, all I hear

is woke capitalism. And this is what Disney is doing, and this is what Apple is doing, and this is what Nike is doing. Is this really woke capitalism? Tell us what's happening in that space? Yeah, I think we have to remember what capitalism is. And and then I'm not sure what we mean by woke, which is part of the problem. So capitalism is meant to be you in public markets, can you know put that in the private markets as well. It's meant to be you have

a set of financial shareholders, you have other stakeholders. You're making money for the shareholders over time. That's that's the definition of capitalism. Um, it's really hard to make money for shareholders, the financial shareholders over time. If you've and treat your workers well, or you destroy the community in which you live, that's just kind of good business or doing business the right way. I think we sometimes get confused when we talk about values um or practices and

you can't link it directly back to financial returns. So listen. When it comes to climate, we feel like we can do a pretty good job with the data is out there to link how a company handles climate and environment with how they perform as a stock over time. You know, there's not enough data on the social side. The research is spotty. I really hope there's better data. I hope the research gets better. I hope we have causality there. But I think as investors we have to be careful

where we're talking about um. If the company has less emissions, they get credit for trying to do the right thing and the stock price goes up. That's capitalism UM. Where from a values based perspective, we want to ask a company to do something that's a little bit different. So I think that distinction is really important. And there's pretty

robust in on governance. If if you if you elevate women to senior members, if you have people on your board that are diverse, those companies historically have outperformed the companies that have not. Yeah, and and let's talk the board for a minute is another one that it's very hard to reduce into one stat So if you think about all the research that's been done on boards and

an end to number one. We do a lot of work with academics, so we're always trying to look for these places where we've got data and causality and we can link it to economic outcomes, um and when it comes to boards, but a lot of the research would tell us is if a board is deeply non diverse. The first, if you had one diverse person or thinker,

they may actually have worse performance. But if a board starts to have multiple varieties of diversity and the board listens to the diverse points of view, those are the boards where we get the real outperformance. And then remember it's a board, so it's not just diversity of thought. It has to be diversity of capability because as these companies go through change, you know, you need other CEOs

that have been successful through change. You need you know, if you're being an old school media company, you need people on the board that are successful for with where the puck is going. So I think we have to look for both of those kinds of diversity and boards that listen to each other, have diversity and have that important diversity of capability. Absolutely, those are going to be the highest performing ones. So we talked about X and

we talked about GM and Ford and Tesla. What other companies are you looking at as being on the cutting edge of change to take advantage of this transitional moment. Yeah, I mean one of the things we're excited about. I can't talk about the product because we're not through the

sec with it yet although it's in filing. But from a theme perspective, we're super excited for for the U S. From a US competitiveness perspective, what happened during COVID is supply chains were two global, too fragile and they broke. And so what we're already seeing and we're going to see a lot more of this in the next few years, is we're seeing a huge resurgence of manufacturing jobs in the US and it's going to be great for a

lot of these communities. So we see UM semiconductor plan, so we see battery plants Michigan, Tennessee, Kentucky, Arizona, Texas exactly. So it's happening already there's a huge increase in manufacturing. And then as that happens, if you build a manufacturing plant, there's a huge job multiplier. You have people come in to build a plant, the people work in the plant, and people work to move goods in and out of a plant. UM, and we're going to see a huge,

huge growth. We believe in railroads. So if you're going to increase manufacturing in the U in the North America, guess what. You don't need to ship things overseas. You need better and more effective UM Railroad continued to strengthen the lines and the movement of goods around the US. UM and then automation. So good and bad is we have? You know, we have less, we have less birth rate and less people coming to the U s and we're

going to have a huge number of quality jobs. And so companies like Rockwell Automation that high quality jobs and brand new factories with automation to assist in the manufacturing. It's going to be pretty awesome from an investment theme perspective.

So Rockwell just isn't terrifying us with YouTube videos of robots that are coming to kill long Now that the the high quality worker, the high quality, blue collar if you will, workers and all these new plants, they're not going to be enough of them, and they're gonna be happy the robots are there to help them. Really quite interesting. So let's talk a little bit about some of the

political pushback to the sort of investing you do. Maybe Florida is the best example, passing laws to punish a specific company, Disney, who objected to Florida's anti lgbt que sort of UM legislation. Is the environment changing for this sort of um proxy voning and criticism and working with companies or is Florida just Florida and you know it's

kind of a one off um Listen. I think companies, companies have consumers, and so if I'm a company, if I'm Disney, and I have consumers, and I feel like my company needs to stand for something because it allows me to serve my consumers and my consumers to say my brand has value. That's something that Disney is going

to have to push for. So I think, first of all, and when it comes to public companies, some of them have one audience, some of them have another audience, and they may need to behave in ways to make their audience feel good so they can be in business and sell their product. Um. I think separately, if we talk about proxy voting, successful proxy votes should be economic. So back to the kind of fiduciary concept we were talking about earlier. So if a proxy vote says, you know,

can you please disclose more information about your workforce? That's helpful to investors. Great. That often makes sense to us. If the proxy vote says I don't like this thing you do, please don't do it, but there's no economic causality, I think it's hard for that to be a proxy voting issue versus a values based conversation with the company. So our belief is proxy votes matter. We should all use our vote, but proxy voting is a tool to

drive kind of long term economic performance with companies. Sometimes there are just value based issues that that shouldn't be tackled through proxy votes. I know I only have you for a limited amount of time, So let's jump to our favorite questions that we ask all of our guests, starting with tell us about your early mentors who helped to shape your career. Yeah, it's funny, I don't have a lot of mentors. Where it was that one guiding light I found that I picked up a little bits

and pieces from different people. So Um, Condi. Rice was a provost when I was at Stanford, and so it was that inspiration that sort of sent me off down the international relations path. There was just a level of smarts and confidence that I really appreciated that I picked up from her. Um and then a professor in business school who said, women can definitely have it all, but you're kidding yourself if you think you can have it all at the same time. So like pace yourself, like

go go after it, but pace yourself. You can't literally do it all at the same time, which is good advice. And then I think there are a lot of people for me where I learned one or two lessons from different people, and now I do a lot of mentoring of other people. And that that is my overarching suggestion on this is you gotta ask a lot of questions and you don't always have to have a lifetime relationship with everyone. But get any any nugget you can get

and run with it. I like it. Let's talk about books. What are some of your favorites and what are you reading currently? So Um and my angel, who is actually a favorite of mine, I find it relaxing and and out of my you know, it's so different than what I do every day, and kind of American and lyrical. Um, Harry Potter, we have a younger one of our kids is younger. So working our way through Harry Potter and then um the Daniel Kahneman thinking fast and acting slow.

I read that last year. I like that a lot because it's you got to remember sometimes how our brains work, and the fact that we rushed to things and we shortcut and we group things, and so I find that helpful sometimes and just being calm about how else could we solve a problem or why is somebody reacting the

way that they do. What sort of advice would you give to a recent college graduate who is interested in a career in either impact E S G activists, what if we want to call it type investing or E T F and passive investment. Well, first I'd say those are great areas to go into. You should go into it, and definitely, UM, learn how to invest, learn how to be investor. Don't stick to one fat or one mouse trap.

If you can learn how to be an investor or how investors think, UM, that will serve you so well in our business um, and I guess too. New to new graduates, I would say, don't don't give up hope. It's gonna be a bad job market. So take those internships, be a little bit scrappy, and just learn from whatever that first job is two years in, because you'll pick up a phenomenal amount of information and if it's not what you love, great, then go do something else after it.

But it's it's a great it's a great place to build a career. Really interesting. And our final question, what do you know about the world of investing today that you wish you knew thirty or so years ago. I think it's that the overall portfolio construction matters, right, So so as an investor, thinking about when you build, like when we build an ento number one, we build products where we put strategies out into the market. Um, the more you can make them balanced and with some duration.

So if somebody puts something in the portfolio, they sort of understand what it's going to do and what the return stream looks like and what the risk looks like. As we're investing and then selling to other people. I think that ability to build products that are durable and it's clear what they do is really really important. It lets you build your brand, it lets you build trust investors, really really interesting. Thank you Jennifer for being so generous

with your time. We have been speaking with Jennifer Grancio. Sheet is the CEO of Engine Number one. If you enjoy this conversation, well check out any of our previous four hundred and fifty interviews. You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcasts. Sign up from my daily reads at ridults dot com. You can follow me

on Twitter at Ridholtz. Check out all of the Bloomberg podcasts at podcast I would be remiss if I did not thank our correct team who helps put these conversations together each week. Sarah Livesey is my audio engineer. Atika Valbran is my project manager. Sean Russo is my head of research. Paris Wold is my producer. I'm Barry Riholts. You've been listening to Masters in Business on Bloomberg Radio.