By: Katherine Davidson, Global Sustainable Growth Portfolio Manager, Schroders
Sustainability used to be a niche preoccupation but it is now discussed everywhere. From ‘flight shame’ to the gender pay gap, issues related to sustainability have become part of our everyday conversation.
Many of us are trying to do more to live more sustainable lives but what about our investments? I believe that money managers can help by directing more capital to sustainably run companies and by engaging with the companies they own.
In my view, the key to sustainable investing is to look at how a company deals with its stakeholders. Companies that are run with consideration for all their stakeholders can deliver better long-term returns and be less likely to experience expensive – even existential – controversies.
The concept of ‘shareholder primacy’ took hold in the 1970s. This is the theory that shareholder interests should be the top priority, over other stakeholders, which led to companies maximising profits for shareholders, regardless of the wider impact.
This way of thinking is becoming increasingly outdated. Maximising shareholder returns while damaging the environment, for example, is increasingly unacceptable. This reputational damage could deter customers – resulting in a loss of market share – and make it hard to recruit and retain workers. It could also lead to regulators imposing stricter standards or levying fines.
Stakeholder relations in the real world
Moving beyond the hypothetical, there have been numerous examples in recent years of companies where mistreatment of stakeholders has had wider ramifications.
In the UK, retailer Sports Direct, became infamous in 2016 after reports emerged of ‘inhumane’ working conditions in its warehouses. Consumers boycotted the stores, resulting in a sharp deterioration in sales and profits, and the share price reached a low of 70% below its 2015 peak.*
In the US, Wells Fargo hit the headlines in 2016-17 over account fraud. The result was billions of dollars in fines and litigation, widespread branch closures, and a significant loss of business. The company’s shares have been broadly flat since the scandal broke, underperforming broader US banks by more than 60%. **
We can also point to companies that have borne the cost of environmental disasters – BP’s Deepwater Horizon explosion and oil spill or the catastrophic collapse of a Vale tailing dam in Brazil last year.
Positive examples rarely hit the headlines, so are harder to illustrate. But there are many examples of companies where, for instance, exemplary treatment of employees has resulted in long-tenured, deeply committed workers, boosting productivity and reducing costs associated with staff turnover.
For example, UK engineering firm Spirax Sarco spends more than all its competitors combined on training, resulting in a trebling of sales productivity for the average recruit during their first five years at the company. ***
There are also examples where charitable projects and local investments have drawn support from the local community and authorities; and where a reputation for environmental stewardship is strengthening a brand and drawing in new customers.
Sustainable businesses can thrive in the long term
These examples illustrate that there is a symbiotic relationship between a company and its stakeholders: I like to think of it as a kind of ‘corporate karma’.
However, financial markets still tend to be very focused on the short term. Analysis of many companies tends to focus on their prospects for at most the next two or three years, if not just the next couple of quarters. Conventional financial analysis also struggles to capture non-financial factors, such as corporate culture and stakeholder relations.
This means that the wider market often underestimates and undervalues the resilience of growth and returns that sustainable companies can deliver. I find this very exciting, as it offers an opportunity for investors to exploit mispricing in the market, and reap the benefit when those sustainable companies beat market expectations.
*Bloomberg. Stock peaked at 809p on 10 August 2015 and troughed at 252p on 26 July 2016
**Bloomberg, total return vs S&P 500 Banks Index since September 2016
***Company meetings and Schroders analysis
Schroders Investment Management Ltd registration number: 01893220 (Incorporated in England and Wales) is authorised and regulated in the UK by the Financial Conduct Authority and an authorised financial services provider in South Africa FSP No: 48998