How ESG and stewardship drive investment value

Thomas Mucha, Geopolitical Strategist
Yolanda Courtines, CFA, Equity Portfolio Manager
2023-03-09T12:00:00-05:00  | S2:E4  | 19:26

The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.

Episode notes

Portfolio Manager Yolanda Courtines joins host Thomas Mucha to discuss stewardship investing and how the key fundamental issues that matter to investors map over to the ESG context. 

2:15 – How ESG drives investment value

4:20 – Intellectual capital and natural capital

5:45 – The impact of stewardship on returns

7:00 – Proxy voting and engagement

8:30 – Wellington’s Investment Stewardship Committee

10:40 – ESG in today's political and regulatory environment

12:00 – Stewardship in a shifting geopolitical landscape

13:45 – Modern slavery and labor rights

16:15 – Personal observations


OPEN (YOLANDA COURTINES): For a company to come out ahead, they have to be frontrunners here. They have to be setting the standards before regulation gets there. Once regulation gets there, the risk is that you have to adapt practices too quickly, and that that’s costly, and that negatively impacts the value of your stock. 

THOMAS MUCHA:  Steve Jobs once said, “if you really look closely, most overnight successes took a long time.” Building sustainability into a business isn’t a new idea, nor is it something that has suddenly become attractive to investors. Successful companies find ways to create lasting competitive advantages, and increase their value for years on end. So why is the focus on sustainability and ESG, environmental, social, and governance issues, drawing so much attention? Well to help sort out what ESG means in the investment context is Yolanda Courtines, an equity portfolio manager, and chair of Wellington’s Investment Stewardship Committee. She joins us from our London office. So Yolanda, thanks for being here, and welcome to WellSaid.

YOLANDA COURTINES:  Thank you Thomas, it’s great to be here. 

THOMAS MUCHA:  So, one potentially confusing aspect of ESG, at least for the uninitiated, has to do with the terminology. As I just noted, even the word sustainability carries several different meanings, so I want to start with terms that may seem loaded in the ESG context, but are really just shades of common investment concepts. Let’s start with value. Now in the traditional sense, business value is about profits, cashflow, return on equity, all that stuff. And of course, how much an investor pays to own a share of all that. But increasingly, it seems to me that markets perceive value in a broader sense. So Yolanda, what else contributes to, or detracts from, the value of an asset?

YOLANDA COURTINES:  Well I love how you’re linking this concept of ESG to the value of an asset. I think it’s the right way to frame the debate, and I think it’s important to tie it back to all of those fundamental metrics that you spoke about to start with. I think there are a lot of underappreciated sources of competitive advantage that kind of fall under that ESG rubric. It might be that a company that has the right environmental and social practices can really strengthen their brand and reputation, and that gets folded into the value of a stock. So, you know, today recyclable packaging and resourcing responsibly may not give you an advantage in the price on the shelf, but it might help you win customers, and tomorrow it might help give you a pricing advantage as well. And I think that’s the type of thing that’s important to focus in on. It might be investing in talent. If you think about, for example, in the consulting business, there’s been huge turnover in India, in headcount. And so, if one company can do a better job of attracting and retaining talent, and lowering turnover, well then they might have a competitive edge versus their peers. And it may be just investing in R&D, in the pharma space, and those companies that maybe compromise near-term returns by putting more into R&D can win more confidence in those future cashflow streams. And so, it really comes down to thinking about the right environmental, social, and governance practices feeding into the value of cashflows in the future. And so, in a world where there’s more regulatory and public scrutiny happening today, in a digital era where we can see so much more instantly of what’s going on around the world, we need to firmly address these challenges, and we need to think about things like finite natural resources, and all that comes into the value of a stock.

THOMAS MUCHA:  So lots of dimensions to this, a shifting backdrop. Related to this concept of value of course is capital. And traditionally, business capital refers to the financial assets, the physical assets that a company has. But what about a company’s social capital, or natural capital? How should we think about that? 

YOLANDA COURTINES:  Well Thomas you, you certainly have heard other leaders at Wellington often talk about the fact that our assets walk out the door every night, right? So that’s one way to think about it, how important is the value of that intellectual capital to a company? Particularly those with large workforces. That needs to be nurtured and valued, and you do get a return on that investment. I think similarly, you can talk about in the natural world, well, we only have one planet and responsible use of natural resources is going to be necessary for a sustainable future. So we put a price on some natural resources, right? You can have mined the materials as an example. There’s a lot we don’t put a price on yet, which is, you know, water, air, as examples, and if companies fail to protect these natural resources, they’re finite, those input costs are going to rise, and the availability is going to diminish. And so, it could be as simple as recycling the water in your plant or contributing to the creation of a recyclable toothpaste tube. And it might be investing in biofuels. But all of these are ways to get good returns on natural capital. 

THOMAS MUCHA:  So one last vocabulary point here. Now stewardship has several distinct meanings, depending on whether the context is about the investee company, or the active investor. First, what makes, from your perspective, a company a good steward? And how does that translate to its ability to increase return on equity, build competitive advantages that you mentioned, and improve its odds of outperforming? 

YOLANDA COURTINES: You’re right, there’s no clear and universal definition of stewardship, but at the heart of it for a company, it’s about long-termism, and preserving and growing the value for future generations. Companies that demonstrate strong stewardship have a number of common traits. We like to think about that as starting with a strong management team. We want companies to have empowered and independent boards that can provide challenge, or that can look around corners. And importantly, boards outlast CEOs. They’re a really core piece of stewardship. They are strong capital allocators with a focus on balancing the needs of all stakeholders. And honestly today, the larger a company is, the more they need a social license to operate. So, it really takes a stakeholder mindset and a focus on the long-term. So, these are all examples of stewardship qualities that help sustain returns, improve adaptability, and ideally, lower the volatility of earnings.

THOMAS MUCHA:  But why is investor stewardship, you know, proxy voting, regular company engagement, why is that so important? And not just for ESG-focused investors, but for any investor? I mean after all, diligent investors have been engaging and voting proxies to drive behaviors that increase shareholder value for a very long time.

YOLANDA COURTINES:  So, we talk about stewardship at the company level, and that’s a duty of care to the stakeholders of that company. In the same way, we as investors owe a duty of care to our clients in how we’re managing their assets, and that includes proxy voting, and engaging, and that allows us, as investors, to encourage positive stewardship outcomes. So, I think about our ability to vote against overboarded directors, and that means that hopefully, the board has directors that have more capacity to take care and focus on the company at hand. We can call for the separation of chair and CEO and that should hopefully drive a stronger and more empowered board. We might vote against an executive compensation plan where the interests are not aligned. And we can challenge managements to look inward at their practices. There’s been examples where we’ve supported shareholder proposals to call for supply chain or racial audits. And all of that collectively, together with engagement, really helps us influence and drive better governance outcomes and better oversight. 

THOMAS MUCHA:  Is there anything about the shifting policy environment in the US or globally that’s changing the focus on this aspect? 

YOLANDA COURTINES:  I think it should always be at the core of our fiduciary responsibility to be thoughtful about proxy voting. Governance trends do move, but it’s towards best practice, and I think it’s really important that we stay at the forefront of those practices. 

THOMAS MUCHA:  So then, let’s move to the asset management perspective of this concept. So, you’re chair of Wellington’s Investment Stewardship Committee. So briefly, you know, share with us the purpose of the ISC. 

YOLANDA COURTINES:  The Investment Stewardship Committee oversees and its sets the strategic direction for stewardship practices across the firm. We oversee the evolution of proxy voting policy and we’re pushing for best practice. We oversee engagement practices and ensure that companies are really being held to account. So this is a firm with no CIO. Each investment strategy is looking to be authentic in executing its philosophy and process. So, it’s really important that we come together as a committee to set principles that each individual investment strategy can look for to guide how to best vote their proxies. 

THOMAS MUCHA:  And Yolanda, you spent a significant portion of your career as a global industry analyst, you were focused on the banking and finance sector. So what led you to shift your focus to ESG and stewardship? And how does your experience researching, you know, a traditional value sector like that, help you do your job today? 

YOLANDA COURTINES:  Well banks are black boxes at the best of times, so in the middle of the global financial crisis there was an extraordinary amount of stress on the sector, and visibility was very, very low. So, income statements and balance sheets only tell you so much, and I found in the global financial crisis that leaning into understanding the risk culture of a bank, so, how did they think about underwriting risk through a cycle, or were they holding excess capital as being really important? Equally, conduct and thinking about how sales were incentivized, so were they pushing product, or were they really trying to work with their customers to create long-term, viable solutions? And if I focused in on that, it really helped me differentiate good from bad investments. And it helped drive alpha for my investments in the banking sector. And so that really further solidified the importance of governance and social considerations. And that’s been core to my evolution as an investor. 

THOMAS MUCHA:  So as investors, we have to live in the real world. Politics and political opinions are part of that real world. So, how do you balance growing client demand, and you know, regulatory requirements for a greater focus on ESG in some regions, with let’s call it hesitancy or even skepticism in other regions, where ESG is still in the early stages? 

YOLANDA COURTINES:  It’s a great question, and I think we just can’t overthink the pace of change in different markets. Europe, the climate agenda is just going to be much more fully aligned with the political and economic will. You want to create an independent energy policy in the back of the Ukraine War. The US is a lot more conflicted, right? You’ve got jobs at risk, and the US energy market is still grappling with the role of natural gas as a bridge fuel. So, they’re going to be behind. So stewardship investing can’t be about box ticking an environmental or social metric or even meeting a particular requirement. It needs to be much more holistic. The most important role we can play here is to stay consistent and be good fiduciaries. So in my case, the commitment to favorable long-term investment outcomes and a focus on value over values, with a lens toward really, those difficult stakeholder tradeoffs that you’re seeing in markets like Europe and the US. 

THOMAS MUCHA:  Now you’re speaking with Wellington’s geopolitical strategist, you just triggered me by mentioning Ukraine. So let me, let me jump into that for a second. Now, we’ve seen some industry watchers say that, you know, there’s a new G issue for many boards, geopolitics, of course. Particularly in the light of the Ukraine War, we’ve got growing concerns about labor exploitation, modern slavery, etc., etc. So from your perspective, Yolanda, how do these geopolitical fault lines factor into ESG investing? 

YOLANDA COURTINES:  Well, I think board diversity is important precisely because geopolitics can be so difficult to navigate. You want different cultural perspectives in the room. You want different skill sets, and those individuals should help a board navigate the ebbs and flows of the tensions with China, or the war in the Ukraine, and help build the adaptability and resilience that a company needs in that kind of an environment. So, today it’s about less just in time inventories, it’s about more supply chain diversification, it’s about more engagement on traceability and transparency. And strong boards can really help companies prepare for these potential disruptions, and think about things like reputational risk, or possible employee or customer stress. I think companies today really, more than ever, need to recognize the growing need for a social license to operate. And that accountability has to go from the raw material stage, all the way through to end of life. And you think about an event like what we saw in Rana Plaza, back in 2013, you had 1,100 garment factory workers that unfortunately lost their lives as a result of that event and I think that fallout is no longer externalized. Large multinational companies need to own their role in these events, and so supply chain audits, engagement, and remediation, are key towards that long-term resilience, and to get there we just need to have open, honest, and respectful debates across geographies.

THOMAS MUCHA:  Yeah, one of my key messages as geopolitical strategist to investors at Wellington, to our clients, to anyone who will listen, is that these geopolitical factors are increasingly important to our investment decisions. So I’m grateful that you’re out there, you know, flying the ESG flag in this context. It’s really, it’s helpful. Now Yolanda, you’re an expert on labor rights modern slavery issues. So from your perspective, what are some of the key factors that investors should be paying attention to with this issue? 

YOLANDA COURTINES:  Well, I think it’s really exciting that today, companies own their supply chain to a much greater degree than they did historically. So you can’t just know your tier one suppliers, you have to know your tier two and your tier three suppliers. And you have to know where your ultimate raw materials are coming from. And the further you go down the supply chain, and the closer you go to the raw material stage, the higher the risk of modern slavery. And so, it really is about recognizing that risk, doing the appropriate on the ground assessment, and not just relying on surveys and the like. I think one of the biggest flags for us is when a company says it doesn’t have any evidence of modern slavery, and therefore walks away and says, “We’re fine.” What I much prefer to see is a company that says, these are the places that we’ve found examples of modern slavery, and these are the remediation actions we are taking. And I think that lets a company show up in a much more resilient and strong way. 

THOMAS MUCHA:  So it’s about accountability, it’s about taking positive actions?

YOLANDA COURTINES:  A hundred percent. 

THOMAS MUCHA:  So beyond labor rights, beyond modern slavery, what other issues are you increasingly focused on? 

YOLANDA COURTINES:  I think we’re coming out of a higher inflationary era, and the power of labor is back on center stage, and I do think it’s not just wages, it’s working conditions, it’s a complex world. The more digital we get, the more demanding we get, that labor has to be appropriately cared for and nurtured. But equally, we’re focused on things like biodiversity, which is going to be the next step after environment. So climate change matters, and reducing greenhouse gas matters, but the next step is going to be really focusing on practices around forestry, around water, around renewable agriculture. 

THOMAS MUCHA:  And policymakers have to get right. These are increasingly the topics of my conversation with national security professionals, as well. 

YOLANDA COURTINES:  But really importantly, for a company to come out ahead, they have to be frontrunners here. They have to be setting the standards before regulation gets there. Once regulation gets there, the risk is that you have to adapt practices too quickly, and that that’s costly, and that negatively impacts the value of your stock. 

THOMAS MUCHA: So let me end here, Yolanda, with a couple of questions about sort of your personal approach, and you know, how you think about investing. So what’s one great piece of advice that you’ve gotten during your career at Wellington? And how do you apply that to your work here? 

YOLANDA COURTINES:  I think one of the best pieces of advice I got was just not to anchor to the past. So for investing, that means coming in with a fresh set of eyes every day, and looking at your portfolio, and thinking about whether you would own each and every one of those names if you started with a clean sheet of paper that day. And I think when we don’t anchor to the past, there’s a lot more capacity to grow, to evolve, to challenge. And that suits me, I’m an optimist. So I always like to look forward, and importantly ESG is not static. So, I think there’s lots to keep my job interesting and exciting every day. 

THOMAS MUCHA:  Like evolving from a banking analyst to a -- 

YOLANDA COURTINES:  Exactly! (laughs) 

THOMAS MUCHA:  Stewardship expert, yes. All right, last question. And this is one of our favorite questions to people across Wellington. So if you weren’t a sustainability investor here at Wellington, what career would you like to have? What else would you be doing? 

YOLANDA COURTINES:  Such a tough question. I love what I do, but I suppose if I wasn’t here, you might find me somewhere taking pictures in nature, of cultures, I’ve always loved photography. Otherwise I’d be a professor of linguistics. I always thought the history of languages was really, really interesting. It’s probably not one you get very often. But you know, if you asked me tomorrow, I might change my mind, so. (laughs)

THOMAS MUCHA:  Yeah that’s the first philologist answer that we’ve had. Yeah, so excellent, well listen, thank you so much, Yolanda. Yolanda Courtines, an equity portfolio manager and chair of Wellington’s Investment Stewardship Committee, thanks for joining us.




Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For  professional/institutional investors only. Your capital may be at risk. Podcast produced March 2023.

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