Why ‘corporate karma’ is crucial for your investment returns

By: Katherine Davidson, Global Sustainable Growth Portfolio Manager, Schroders

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.

Shareholder primacy

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This way of thinking is becoming increasingly outdated.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



Latest


28 Sep 2020
An agile workforce is key to navigating the pandemic

By: Donné Nieman, Commercial Manager at Workforce Staffing Applications for the UIF/Temporary Employment Services (TES) grant to alleviate employee layoffs…

An agile workforce is key to navigating the pandemic

By: Donné Nieman, Commercial Manager at Workforce Staffing Applications for the UIF/Temporary Employment Services (TES) grant to alleviate employee layoffs has closed. But this was always going to be a temporary measure. The long-term implications of the COVID-19 pandemic on our economy will continue to resonate and be a permanent…

28 Sep 2020
The real reason you should be investing offshore

By: Chris Potgieter, Managing Director of Old Mutual Wealth Private Client Securities Discounting for a moment the state of the…

The real reason you should be investing offshore

By: Chris Potgieter, Managing Director of Old Mutual Wealth Private Client Securities Discounting for a moment the state of the local economy and one’s particular socio-political view, the key motivation for any investor to invest offshore should be to have appropriately diversified wealth in pursuit of real capital growth at…

21 Sep 2020
Women are lagging in retirement savings and are debilitated by stress

In a recent study of their client base, Momentum Corporate revealed that almost half (41%) of the employees on the…

Women are lagging in retirement savings and are debilitated by stress

In a recent study of their client base, Momentum Corporate revealed that almost half (41%) of the employees on the FundsAtWork Umbrella Funds are women. With an almost 50/50 gender split across the client base, a one-size-fits-all approach to advice on employee benefits simply won’t cut it. This is according…

15 Sep 2020
Despite COVID-19, SA investors expect higher future returns

Even as COVID-19 halted the longest economic expansion on record and plunged the world into deep recession, South African investors…

Despite COVID-19, SA investors expect higher future returns

Even as COVID-19 halted the longest economic expansion on record and plunged the world into deep recession, South African investors expect to make an average annual total return of 12.67% – almost 2% higher than the global average predicted returns of 10.9%. This was revealed in the recently released Schroders’…


Top stories


10 Apr 2020
When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved…

When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved to be most enterprising in acclimatising to challenges as they arise.

10 Sep 2020
How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key…

How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key that dubbed America “The land of the free”, which stuck, to the unforgettable Mel Gibson monologue where an army of painted Scots were willing to trade their lives for the…

13 Apr 2020
Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19…

Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19 environment and what form a global market recovery will take.

13 Apr 2020
SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The…

SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The draft Bill, together with its explanatory memorandum, provides clarity with regards the tax relief measures President Cyril Ramaphosa announced on 23 March.


Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za