UPDATE 4-Exxon under pressure as ISS backs Engine No. 1 nominees in board fight

* ISS says dissident directors add industry expertise

* Says Engine No.1 can take some credit for Exxon share gains

* Exxon CEO says activists proposals threaten firm's future (Adds Exxon comment, updates shares)

By Svea Herbst-Bayliss

BOSTON, May 14 (Reuters) - Influential proxy advisor Institutional Shareholder Services (ISS) on Friday threw its weight behind a small hedge fund's nominations for Exxon Mobil's board in a decision that could affect the outcome of a bitter corporate battle.

Activist fund Engine No.1 has taken aim at Exxon's board and decision making in the first major shareholder contest to make climate change the leading issue for choosing directors. The fund has criticized Exxon for a lagging approach to lower-carbon energy and poor returns on past fossil fuel investments.

The ISS recommendation in favor of three of the four directors put forward by Engine No.1 is the second from a proxy adviser. Pensions & Investment Research Consultants (PIRC) published its view on Wednesday, backing all four Engine No.1 candidates.

ISS recommended that shareholders vote for former oil industry executives Gregory Goff and Kaisa Hietala and for former U.S. government energy official Alexander Karsner. The three “address the need for independent industry expertise … (and) “elevate the board’s ability to assess the energy transition,” ISS said.

Exxon Chief Executive Darren Woods said he disagreed with the recommendations and believes the activist puts "the company's future and the dividend in jeopardy."

"We feel very strongly that the board will drive success in today's environment and position the company for success as the industry transitions," Woods said.

The ISS and PIRC recommendations carry weight among institutional investors and often guide how they vote at corporate meetings. Exxon's shareholders will vote on May 26.

Exxon's stock price climbed 2% in trading on Friday and has risen over 40% since the start of 2021. Engine No.1 can credibly claim a portion of the credit for that, ISS said in its report.

"ISS’ recommendation is further validation of our belief that addressing the fundamental issues at Exxon Mobil requires a Board that includes individuals with relevant energy industry experience and skills," Engine No. 1 said in a statement.

Exxon and Engine No.1 are spending at least $65 million in the fight for Exxon's future direction. The $250 million California-based hedge fund has called for spending and pay cuts, a board shake-up and shift to cleaner fuels that it describes as "existential" for the oil giant.

Its views are supported by New York and California pension funds and British investor Legal & General Investment Management, all of which hold Exxon shares.

Exxon has fought to reelect its board arguing they have developed a strong plan to address future lower carbon demands, including a proposal for a massive carbon capture and sequestration project.

ISS's report said it is “unclear how committed” Exxon is to its energy transition strategy. Its proposal “appears to be based in significant part on future government support.”

Exxon, valued at $264 billion, has fended off past challenges seeking big change to its policies and leadership. As pressure from shareholders mounted this year, Exxon made a number of changes, including adding activist investor Jeffrey Ubben, former Comcast Corp executive Michael Angelakis and former Petronas CEO Tan Sri Wan Zulkiflee Wan Ariffin to the board. (Reporting by Svea Herbst-Bayliss; additional reporting by Jennifer Hiller; Editing by Gary McWilliams, Jan Harvey and Elaine Hardcastle)