the pivotal role of stewardship in creating lasting value

The pivotal role of stewardship in creating lasting value

Yolanda Courtines, CFA, Equity Portfolio Manager
Alex Davis, Investment Specialist
2023-10-31
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This is a marketing communication. Please refer to the prospectus of the Fund and to the KIID and / or offering documents before making any final investment decisions.The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. Past performance does not predict future returns. For professional, institutional, or accredited investors only. Capital at risk.

In our view, stewardship is at the heart of long-term financial and sustainable excellence. A stewardship-led investment approach can help uncover and foster companies that are what we call “good stewards”, and these can be found in the most unexpected places as our two case studies demonstrate.

We put this belief about the importance of stewardship into practice in the Wellington Global Stewards Fund, which aims to outperform the broader equity markets (as represented by the MSCI All Country World Index) by investing in companies that we believe are true stewardship leaders, balancing their impact on people, the planet and profits to build long-term advantage. Typically, such companies seek to: 

  • Invest in people, including employees, suppliers, customers and the community at large, leading to lower employee turnover, greater loyalty, a stronger culture and greater diversity;
  • Respect the planet and build resilience by shrinking their environmental footprint, taking steps to make better use of finite resources and engaging proactively on climate change; and
  • Boost profit by being disciplined capital allocators — balancing shareholder returns today with investment in innovation, business and people for tomorrow.

Clearly, even stewardship leaders are still on a journey, and we seek to accelerate progress through robust engagement. This is particularly the case when companies operate in higher-risk areas, as we illustrate below with a discussion on supply-chain issues and environmental sustainability for two key holdings: Michelin, a leading tyre manufacturer, and Colgate, a global producer of household and consumer goods.

Driving responsible supply chains and sourcing

We view Michelin as a stewardship leader because of its integrated strategy focused on returns and sustainability. As a premium player in a highly competitive sector, we expect it to benefit from the increasing focus on durability and the growing prominence of electric vehicles. In the meantime, we like the company’s conservative financial and operating profile and its drive to improve efficiency. 

Within our Global Stewards portfolio, the company stands out within its sector for best-in-class “traceability” efforts relating to the raw materials it sources. Successful supply-chain oversight requires companies to trace their supply chain beyond Tier 1 (those suppliers with whom they have direct contractual relationships). Companies should not simply assume that each tier of suppliers will manage the oversight of the next tier down. Supply-chain visibility generally diminishes when moving beyond Tier 1 suppliers, and this is where the incidence of modern slavery is highest. Companies that can track inputs as far down the chain as possible increase the likelihood that suppliers follow codes of conduct, including those on modern slavery. 

Responsible sourcing can also go a long way towards mitigating supply-chain risk, and through our stewardship dialogue, we encourage companies to address this risk consistently. For tyre makers, natural rubber typically constitutes the largest sourcing risk. Michelin goes to great lengths to farm rubber responsibly, including training 100,000 farmers annually, engaging actively to reduce deforestation and controlling the impact of rubber cultivation on local biodiversity and ecosystems. It traces its highly complex rubber value chain using a mobile application that aggregates stakeholder information about their practices. So far, the company has already gathered information from over 42,000 rubber-tree farmers on issues including working conditions and child labour practices. Its aim is to map 80% of natural rubber volumes by the end of this year. This visibility is crucial to Michelin’s ability to manage its inputs and take action to ensure enhanced resilience. 

Driving environmental sustainability

We identified Colgate as an exemplary steward because of its very impressive track record of high returns on capital and good growth outside of its home market. One of our concerns has been that success can breed complacency, but this company has a thoughtful and deliberate plan to innovate, reinvest and selectively acquire. Its leadership team is long-tenured but proactive in gaining an outside perspective. 

We are also pleased with its progress on environmental sustainability. Colgate formalised science-based targets in mid-2020, committing to reduce Scope 1 and 2 emissions by 50% by 2030 (from a 2018 base) and to actively address Scope 3. It plans to deliver a 30%-plus reduction in greenhouse gas emissions from suppliers from 2018 to 2025, building lower emissions requirements into supplier negotiations and evolving auditing and monitoring practices, while encouraging suppliers to measure, externally validate and disclose emissions. The company is also engaged in industry-wide efforts to better map sustainable palm-oil efforts, working closely to share data with other consumer-goods leaders. Its efforts are equally robust on shifting consumer preferences, including significant product and packaging innovation. That said, we still seek improvements in disclosure, board and management access and speed of change. 

The specific securities identified are not representative of all securities purchased, sold or recommended for clients. The specific securities presented are for illustrative purposes only and should not be viewed as representative of actual holdings. The engagement case studies chosen are based on meetings held and focus on topics we think are important to stewardship, giving insight into our process. There can be no assurance the approach would hold companies such as these or that they would be profitable in the future.

Please refer to the sustainability related disclosures for information on the commitments of the portfolio. A decision to invest should take into account all characteristics and objectives as described in the prospectus and KIID.

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