ESG Is Good for Business: Companies Need to Let the World Know Through Their Actions
By Scott Glasser, Co-Chief Investment Officer at ClearBridge Investments
I am among the many engaged investors who welcomed last month’s statement by the Business Roundtable, an association of chief executive officers of America’s leading companies, redefining the purpose of a corporation to promote “An Economy That Serves All Americans.”
They committed to: deliver value to customers; invest in employees; deal fairly and ethically with suppliers; support their communities; and, yes, generate long-term value for shareholders. This is environmental, social responsibility and governance (ESG) at its best.
Achieving success for shareholders by making businesses more sustainable is an enlightened view that we hope will prove influential. These policies are critical to surviving economic ups and downs and earning excess returns over long periods.
While many companies have made good progress on issues beyond maximizing shareholder returns, there remains plenty of room for improvement. Every investor interested in ESG wants more and better information; indeed, we want companies to succeed as a result of their ESG practices.
There are three easy ways for companies to start moving the needle. We offer here cogent examples from corporations we have worked with who have undertaken ESG initiatives to deliver value to all stakeholders. These strategies are:
Integrate ESG into Core Business Strategies and Reporting
Actions that benefit employees, suppliers and other stakeholders can promote better operating conditions and create sustained value.
Keurig Dr Pepper (NYSE: KDP) recognized through survey data that their single use “K-Cup” pods were perceived to be wasteful and a barrier to demand for the Keurig system. They committed to making their pods fully recyclable by 2020, removing that environmental barrier. Partially as a result, household penetration of Keurig brewers has been growing 6-8% per year.
Trex (NYSE: TREX), a manufacturer of wood-alternative decking and railings, produces high-quality, durable products that keeps waste out of landfills. Their recycling focus has enabled Trex to deliver double-digit revenue growth that is expected to continue well into the future as it gains market share from natural lumber. Sourcing raw materials that would otherwise be discarded, coupled with an efficient production process, has also led to high margins and returns on invested capital.
Yet their ESG scores from third-party organizations were low, due to lack of disclosure. By providing more detailed data on recycling, energy and water management, as well as board member tenure and diversity, Trex has helped raise its ESG profile to a deservedly high level with investors.
Establish Strong Oversight of Global Supply Chains
Companies must manage the reputational, regulatory and litigation risks on issues such as forced and child labor, cruel or degrading treatment, corruption and degrading fragile ecosystems.
Umicore (OTCMKTS: UMICY) increased production capacity of battery materials in plants in China, Korea and Europe. They were concerned about sustainable procurement and ethical sourcing of raw materials, specifically cobalt. By committing to due diligence practices audited by independent third parties, Umicore’s disclosures and policies on sourcing cobalt and other comparatively scarce raw materials became best-in-class in the industry.
As the largest U.S. home improvement retailer, Home Depot (NYSE: HD) has long recognized the unique role it can play in reducing carbon emissions. Since 2007, the company has internally tracked environmentally friendly items available in their stores and has ambitious plans to reduce scope 3 emissions – from their supply chain and from the products they sell.
Adopt Transparent, Meaningful Targets around Diversity, Compensation and Environmental Concerns
Setting targets and providing clear reporting on progress keep businesses accountable.
When an activist investor in Sempra Energy (NYSE: SRE) issued a report alleging excessive compensation to a former CEO and expressing concerns over the company’s board structure, Sempra did not hide. They instead provided an abundance of previously unreleased salient data which showed a large portion of management compensation was tied directly to the stock’s market value. This eased the minds of investors and let the company get back on track.
ClearBridge has promoted the commitment of public corporations to serve all stakeholders for many years with our portfolio companies. The integration of ESG factors is an important part of our analytical process. How companies treat their employees, monitor global supply chains and contribute to the communities where they operate contribute to delivering consistent returns for shareholders.
We applaud the Business Roundtable for acknowledging this broader mission.
Scott Glasser is Co-Chief Investment Officer at ClearBridge Investments, a subsidiary of Legg Mason. His opinions are not meant to be viewed as investment advice or a solicitation for investment.
Scott Glasser, Co-Chief Investment Officer, ClearBridge Investments
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