Protecting the 3ps - People, Planet & Profit

Learning the lessons from the GFC

The collapse of Lehman Brothers 10 years ago, still serves as a monument to the pitfalls of pursuing growth at any cost. One can debate whether the lessons of the global financial crisis (GFC) have really been learned, but few would dispute that the conversation for many corporates has changed. Short-termism may be hard to expunge, but there’s a growing understanding that businesses need to be managed with a much more holistic – and long-term – view, mindful of the interests of all stakeholders.

Companies that ignore material environmental, social and governance (ESG) issues are courting real risks, as well as potentially missing out on opportunities to widen their competitive moats. And from a dividend growth and safety perspective, this is of real consequence.

The ‘Triple Bottom Line’

Poor governance (aggressive sales cultures, misaligned incentives and poor risk management) was a central cause of the GFC, but this turbulent episode has also helped throw the light on sustainability more broadly.

Indeed, a key reason we place such a heavy emphasis on the ‘G’ in ESG, is that we have found this to be a very good proxy for a company’s performance in the E and S categories. In other words, governance problems are often symptoms of broader issues and misplaced priorities.

The idea of the Triple Bottom Line – People, Planet and Profit – has been around since the 1990s. However, it's only really in recent times that this concept of measuring a company’s social and environmental impacts alongside its profit & loss account has found its way into corporate disclosure.

This has been helped by the efforts of organisations such as the International Integrated Reporting Council (IIRC – which we are supporters of) and the Sustainable Accounting Standards Board (SASB). The goal is creating a more complete picture of the true cost of doing business, and therefore whether the company is generating real long-term value for shareholders.

Sustainability is a growth driver

Research shows that companies with better sustainability practices tend to demonstrate better operational performance, which ultimately translates into cash flows and dividends.

And, it is getting external validation for its efforts (it was recently named on Fortune’s Change the World list for the third-year running).

For DSM, ESG themes, such as the move to a more sustainable way of living, are closely aligned with its focus on nutrition and health, as it capitalises on the structural growth opportunities presented by changing global dietary patterns – for example in the push towards more personalised human nutrition, or the requirement for higher-quality ingredients for animal feed, to produce healthier animals and therefore better-quality meat or eggs.

The link to the GFC may, at first sight, seem tenuous, but it is part of the wider sustainability narrative, as asset owners and investors increasingly put a premium on the type of long-term thinking displayed by businesses such as DSM.

The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.