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Exxon-Beating Activist Engine No. 1 Plans ETF to Prod Boardrooms

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(Bloomberg) -- The tiny activist fund that recently won at least two seats on Exxon Mobil Corp.’s board is setting its sights on a new challenge -- the $6.3 trillion ETF industry.

Engine No. 1, which shocked investors and analysts last week by taking the board positions at Exxon’s annual shareholder meeting, is now planning to launch its first exchange-traded fund. The Transform 500 ETF’s goal is to encourage changes at the companies it holds through proxy voting, according to a regulatory filing.

“Some people think of ETFs as run by asset managers that passively track indexes and rubber stamp corporate decisions,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research. “While that narrative isn’t based on reality, this pending ETF will provide those investors an alternative in hopes of changing corporate behavior.”

With the new fund, Engine No. 1 will aim to measure how companies are investing in their employees and the environment, using metrics like workforce diversity, employee health and safety, carbon emissions and land use. It will use a passive strategy involving companies in the Morningstar U.S. Large Cap Select Index.

Officials at the firm haven’t responded to a request for comment.

“Engine No. 1 hired some superstars from JPMorgan and BlackRock, and is now looking to become a force in the ETF marketplace,” said Mohit Bajaj, director of ETFs at WallachBeth Capital.

Hedge-fund veteran Chris James founded Engine No. 1 late last year, with a goal of pressing for change in the public and private companies it invests in. The San Francisco-based firm had about $250 million of internal money at its start, and plans to raise capital from retail as well as institutional investors.

It may face an uphill battle in the ETF realm. There are currently more than 2,400 products in the U.S. market, with about 90 of them focused on environmental, social and governance investing. Inflows into equity-focused ESG ETFs have already reached almost $15 billion this year. If that pace keeps up, it could break 2020’s record of $31.1 billion.

Still, ESG advocates are heralding Engine No. 1’s recent victory as a sign that climate sustainability issues are becoming impossible to ignore. That’s bringing increased name recognition to the once-unknown firm.

Engine No. 1 owns only about 0.02% of Exxon’s shares, but it was able to win support from the three largest U.S. investment firms—BlackRock Inc., Vanguard Group and State Street Corp., as well as the nation’s three biggest pension funds—to overhaul the oil giant’s board.

The win “marks the first successful proxy fight with a focus on environmental or social issues,” Rob Du Boff, an analyst at Bloomberg Intelligence, wrote in a note published last week. “This is key not just for Exxon and other oil majors, but for ESG investors at large.”

(Adds details about Engine No. 1’s victory in 10th paragraph.)

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