Protecting the 3ps - People, Planet & Profit
Companies that ignore material ESG issues are courting real risks as well as missing out on opportunities to widen their competitive moats.
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.
Poor governance was a central cause of the Global Financial Crisis, this has helped throw the light on sustainability.
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
One particularly good example is the Dutch
health, nutrition and materials business DSM (held in
the portfolio), which has made real strides in embedding
sustainability into its operations and strategy – treating it as
a real growth driver.
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.