Michelle Dunstan and Jeremy Taylor, co-managers of the AllianceBernstein Global ESG Improver Strategy were confident that their new approach would succeed. It filled a void in the market and gave them a promising path for beating competitors on ESG. Yet, already they were feeling pushback from a big potential customer. It was spring of 2018 and a pension fund in the Netherlands wanted to invest. But only if Dunstan and Taylor would agree that there will be no fossil fuel companies, no oil producers, no miners in their ESG Improvers Strategy. That request presented a dilemma. Dunstan and Taylor saw their willingness to bet on fossil fuel producers as a way of distinguishing their ESG strategy from others who considered environmental, social, and governance factors. Plus, Taylor had specific expertise in the oil and gas industry. He was an engineer by training. He previously been a product manager for a major petrochemical company. Yet, the requests from the Dutch Pension couldn't simply be dismissed. The reputation of an outfit like them would help AllianceBernstein persuade other investors to bet on Dunstan and Taylor's strategy. Pension managers are sophisticated investment professionals, and their approval can signal quality to less sophisticated peers. What's more, Europeans have long been committed to ESG investing, so a European pensions participation would be a significant endorsement. Conversely, if the Dutch Pension Fund was skeptical and passed on investing in AllianceBernstein, other potential investors might as well. Dunstan and Taylor we're already building out their portfolio, buying stocks they believed had the best chance to deliver excellent long-term financial results and improve their ESG performance. But now their work was becoming more complicated. They had to decide whether to forge ahead with their belief that they should as Dunstan explained, invest in any industry that's necessary to the world today and tomorrow, or should they accede to the Dutch Pension Fund's request and divest from oil gas and mining. The decision wasn't just a philosophical one, it had immediate practical implications. Dunstan and Taylor were considering two stocks, Royal Dutch Shell and [inaudible]. Dunstan and Taylor were considering one specific stock, Royal Dutch Shell, one of the world's largest oil companies that would test not only their processes for picking ESG Improvers, but also their conviction and their strategy. They believed Shell stock held promise. It had begun to green its oil and gas heavy operations, but it also posed real risks. Many ESG oriented investors were skeptical on the ability of an oil super major like Shell to change or be part of the energy transition. From a marketing perspective, Dunstan and Taylor's strategy made a lot of sense. It capitalized, not only on a surging trend in the money management industry, the surge of interest in ESG investing, but also the strengths of its parent company, AllianceBernstein. Measured by assets under management, ESG funds made a small part of the total investment space, but during the last 10 years, their growth that accelerated with money gushing in. According to one study, investments and so-called sustainable assets had doubled from 2012 to 2018. AllianceBernstein, for its part, had long been dedicated to the active management of its client's money, and its portfolio managers and analysts had distinguished themselves with their deep detailed research. In contrast to the trend towards low fee passively-managed funds, AllianceBernstein remain committed to digging into stocks, uncovering the sources of their value potential growth that other investors had overlooked. The firm's portfolio managers and analysts didn't want to just match the market, they aim to beat it. "Our mindset, at AllianceBernstein, is that we want to take ESG from just being a checkbox to being a competitive advantage of our research," said Ali Dibadj, AllianceBernstein's Head of Finance and Strategy. Some ESG funds just screen out bad ESG performers, use metrics compiled by other providers, that left them with portfolios full of companies that they could portray as exemplary in their ESG practices. Unlike those competitors, Dunstan and Taylor weren't seeking to purchase the best ESG stocks. Their view was that the market already appreciated, and for the most part, appropriately evaluated the high ESG performers. Rather, Dunstan and Taylor wanted to identify the companies with unrealized financial and ESG potential. That's what would distinguish their strategy from other ESG funds, and according to their research, give them the best chance to outperform. They found that companies whose ESG performance was upgraded by the analytics went on to beat those whose performance was already solid but stable. Dunstan and Taylor also didn't want to rule out big swaths of the economy in setting their investment criteria. They decided to shun only a few harmful industries in defining their pool of potential stocks. "If it would be a net benefit for the world not to have a product to service, we wouldn't invest," Dunstan said. Take tobacco. If Tobacco went away tomorrow, you'd have some unhappy people and some jobs would be lost, but the world would overall be a better place. "We won't do gambling stocks either," Dunstan explained. But some ESG funds refused to consider fossil fuel or mining companies because those products contributed to climate change. As a result, many ESG funds looked really similar, holding big slugs of technology and health care stocks. Dunstan and Taylor believed that by doing that, the funds not only were missing out on good investments but also passing up the opportunity to improve ESG practices in industries like oil, gas, and mining. "Only 30 percent of the world's oil and gas goes into passenger vehicles. Even if you moved into 100 percent electric vehicles tomorrow," Dunstan explained, "You'd still need a lot of oil." At what power is your electrics? Mined commodities like lithium, cobalt, nickel, and copper. Without those minerals, the batteries in an electric vehicle won't work. Even an aggressive path to net-zero, to decarbonization, we're still going to be consuming oil for several decades. The ability of portfolio managers to engage with companies in the oil, gas, and mining sector was central to the improvers strategy. Managers of many actively-managed investment funds, claim that they interact with corporate executives to encourage better ESG. But a fund that only holds the top ESG performers, Alphabet, Microsoft, or other tech companies, there's little room for those companies to improve or to impact climate. In contrast, if you can get an oil super major like Shell or ExxonMobil to better handle natural gasses escaping from its wells, if you can get these companies to better shift towards the climate transition, then you can really have an impact on the climate transition and deliver a hefty financial return. Dunstan and Taylor's approach and that of AllianceBernstein more broadly, was to use research to show managers that better ESG practices could lead to higher shareholder value. In their view, good ESG practices which is good management, "We always tie our engagement," they said, "With the company's back to value creation for the shareholders." Shell was a tough sell, though. It had a history of conflict with environmentalists, starting with the disposal of the Brent Spar North Sea Oil Platform. Also, over the untreated oil spills in the Niger Delta and a commitment to drill in the Arctic as well as human rights and civil society activists over its complicity in the assassination of Ogoni activist, Ken Saro-Wiwa in the Niger Delta. On the other hand, under Chief Executive Ben van Beurden, whose tenure had begun in 2014, Shell had committed to reduce its dependence on fossil fuels emissions, and to acquire more renewable energy assets. In 2017, it was the first major oil company to announce an intention to shrink its net carbon footprint. By the end of 2018, it would enter into an agreement with Climate Action 100, a group of institutional investors including AllianceBernstein concerned about climate change. In this agreement it committed to having its climate impact by 2050 and reducing it by 20 percent by 2035. Shell also had a strong position in the market for liquefied natural gas, which while still a fossil fuel could be an important bridge in the climate transition. Finally, the company was beginning to remake itself as an energy trader that would eventually satisfy a variety of energy needs for its vast network of business and retail customers. On the retail side, Shell had its service stations, and partly as a result, a visible and well-known brand, including in the fast-growing developing world. It planned to leverage that brand as a stepping stone into new businesses like the provision of electric vehicle charging stations. On the corporate side, it had deeper relationships with customers than a typical electricity or gas utility because it often sold customers a variety of complex products such as oil, gas, aviation fuel, chemicals, lubricants, and more. Adding renewably produced power and bio fuel to that mix was a logical extension of its existing business. The CEO of Shell has said that they're not going to be in the business of building wind farms and finding customers for them. They're going to be in the business of developing customer's demands for green energy, and then sourcing that demand. Sometimes Shell would generate that energy, sometimes they'll source it from others. Was Shell a good bet? Were they a good value-based investment, whose stock was undervalued given its commitment to the climate transition? Or was it a dinosaur soon to be displaced by alternative energy providers? That was the question that Michelle Dunstan and Jeremy Taylor had to interrogate the data to answer. They relied heavily on Jeremy's deep industry knowledge to come to their conclusion. In the end, their deep industry-specific knowledge, their understanding of the strategic value of distribution assets and more led them to the conclusion to favor, including Shell, in their ESG Improvers Strategy. To pursue a value-based logic, to looking at Shell as a bet on the future of climate transition, not a dinosaur from the past.