Unilever, the Anglo-Dutch household goods giant famous for brands such as Ben and Jerrys, Dove and Magnum and a stalwart of the FTSE 100 index, has often been a star performer when it comes to ESG scores, appearing in many ESG portfolios. Not only has it done great work in terms of packaging and energy consumption, but it has shown determination in tackling some of the issues that fall under the social category of ESG investing. It now has a 50/50 gender representation at senior management level hitting the target a year earlier than it had planned (Campaign). This has been achieved in large part due to the company’s determination to tackle a lack of gender diversity in typically male dominated departments of its business, with amazing results.
Morrisons supermarket, another well-known British company, is trying to use its buying power for good. Bananas sold by Morrisons are Rainforest Alliance or Fairtrade Certified and sourced from independent growers with 50% of the volume supplied through direct grower relationships. The company intends to increase this to 80% by 2021 (Ethical Screening, June 2020). Morrisons values it direct grower relationships extremely highly, this was demonstrated by the way in which it treated British farmers during the COVID19 lockdown. 1,750 British farmers that supply Morrisons were paid early in order to help these businesses with their cashflow as the full impact of the pandemic was still unknown (Farming UK), it is these kinds of decisions that make Morrisons stand out for us when considering the social element of the ESG criteria.
A major point which falls under the G (governance) category of ESG investing is making sure that pay and performance are intrinsically linked. Long term pay rewards, where shares become available after a number of years, forces executives to make decisions over extended time horizons, which often means better strategic decisions are made. Alignment of interests is also important. Diageo is an example of a company with a strong stance in this regard. It has a minimum shareholding requirement within five years of appointment for the CEO (500% of salary) and CFO (480% of salary) (Ethical Screening, June 2020), making sure investors and the executive teams’ interests are aligned. Studies have proved that managers that have “skin in the game” tend to perform much stronger over time.
To conclude, it is important to recognise that no perfect ESG business exists. All the companies mentioned still have areas across the ESG spectrum for improvement. ESG investing, rather than finding the perfect scoring company to invest in, is very much about driving change from within as a shareholder. But as it is important to highlight where businesses can improve it is also important to highlight successes as it proves that investors can make a difference in using their capital to tackle some of the world’s biggest challenges. It is also important to look closely at a company’s ESG credentials before deciding to invest. Of course, many investors will not have the time or resources to do their own research, which is where active managers could add real value. A discretionary manager can do the heavy lifting when it comes to ESG research, analysing both funds and direct equities against a variety of ESG criteria.
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