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
2023-11-30
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The views expressed are those of the author 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.

We believe that stewardship is at the heart of long-term financial and sustainable excellence. A stewardship-led investment approach combines responsible investing with the search for competitive long-term returns by uncovering and fostering companies that are what we call “good stewards”. These can be found in the most unexpected places as our two case studies demonstrate.

We define stewardship as how companies balance the interests of all stakeholders — such as customers, employees, communities, supply chains and the environment — in their pursuit of profits and how they incorporate material ESG risks and opportunities into their corporate strategy. In our view, stewardship can be assessed by how successfully company boards and managers balance people, the planet and profits when building long-term advantage by:

  • Investing in PEOPLE, including employees, suppliers, customers and the community at large, leading to lower employee turnover, greater loyalty, a stronger culture and greater diversity;
  • Respecting the PLANET and building resilience by shrinking their environmental footprint, taking steps to make better use of finite resources and engaging proactively on climate change; and
  • Boosting 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 at Wellington, in our products that consider stewardship, we seek to accelerate progress through robust engagement. Engagement enables us to hold management teams and boards accountable for their actions and to support or influence decisions that can maximise companies’ long-term value. Importantly, developing strong relationships with companies gives us the opportunity to champion and support long-termism as well as challenge insular thinking. 

Engagement is even more critical when companies operate in higher-risk areas, as we illustrate below with a discussion on supply-chain issues at a leading tyre manufacturer and environmental sustainability at a global producer of household and consumer goods.

Driving responsible supply chains and sourcing

We view this tyre manufacturer 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. 

In our view, 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. For tyre makers, natural rubber typically constitutes the largest sourcing risk. This tyre manufacturer 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 the company’s ability to manage its inputs and take action to ensure enhanced resilience. 

Driving environmental sustainability

We consider this global producer of household and consumer goods an exemplary steward because of its impressive track record of high returns on capital and good growth outside of its home market combined with its strong progress on environmental sustainability. One of our concerns had 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 also commend the company’s evolution in the area of environmental sustainability. It 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. 

In our view, these and other good stewards have the potential to move from delivering a high return on investment over a short time frame to achieving high returns over the longer term and being great compounders of value. In turn, these high, stable returns potentially allow good stewards to further increase their focus on stewardship, creating a virtuous circle that can sustain and improve financial returns and stewardship over time.

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