The following was adapted from Equity Analyst Stephen Boland’s Annual Address presentation, available here.
Jackie Robinson was a terrific ball player: a league MVP, a six-time All-Star and a World Series champion. But what he’s best known for is breaking the colour barrier. In 1947, he became the first African American to play Major League baseball in the modern era. His commemorative statue outside Dodger Stadium includes the following quote: “A life is not important except in the impact it has on other lives.”
It’s an inspirational notion on a personal level and applies to companies too. Businesses have a tremendous impact on others. They impact their employees, shareholders, the communities in which they operate and the environment. This impact gets considered in ESG investing, which stands for Environmental, Social and Governance. ESG investing has gained prevalence, and it essentially looks at whether a company is a good corporate citizen.
More and more, we’re asked if we at Odlum Brown consider ESG factors when making investment recommendations. The answer is yes! We have to when making long-term decisions. If someone buys a stock and plans to sell it in six months, they may not be interested in how that company behaves because they probably won’t be around to see the consequences. As long-term investors, we tend to own companies for five or 10 years, sometimes more, and are therefore more likely to experience the impact – good or bad – of a company’s actions.
We don’t want a company dumping chemicals in a lake; eventually, they’re going to have to clean it up. We don’t want a company mistreating its employees; turnover is costly, and so is bad morale. We don’t want a company cutting corners on safety.
Remember the BP oil spill? In 2010, an oil rig exploded in the Gulf of Mexico. Eleven people died, a hundred million gallons of oil leaked and a thousand miles of coastline was damaged. An independent report on the incident found that the disaster was preventable, but BP “did not possess a functional safety culture.” Simply put, the company was too focused on short-term profit. BP’s stock was cut in half following the explosion. Since then, the company has paid $70 billion in lawsuits, fines, remediation and other costs. To put that into perspective, BP’s market cap today is $75 billion.
Bad behaviour can have terrible consequences. On the other hand, being a good corporate citizen can pay off. Starbucks, for example, has long put corporate responsibility and humanity at the heart of everything it does.
When we started learning about Starbucks, we could see it was a fast-growing, profitable coffee chain. However, we ultimately learned more about what makes it special. For example, Starbucks was the first company in America to provide comprehensive health insurance to all employees – including part-timers. Howard Schultz, long-time Starbucks CEO (now retired), once recounted the time he visited a store and a barista broke down in tears as she told him her story. She had been living in her car when she applied for a part-time job at Starbucks. Her husband was sick, and they couldn’t afford his medical bills. Getting the job at Starbucks, with comprehensive health insurance, changed their lives. She went on to become a district manager and buy a home.
Taking care of employees is a core value of Starbucks. The result is that employees are more likely to take care of customers, and that connection between a customer and an employee is key to the overall experience. If it goes well, the customer is more likely to come back, and more willing to pay a premium. It becomes a cycle – this customer retention helps Starbucks earn a good profit, which allows it to keep supporting employees. Case in point, during COVID-19 lockdowns last spring, baristas were paid whether their stores were open or not.
Unilever is another prime example that being a good corporate citizen can be profitable. Unilever is the parent company behind Dove soap, Degree deodorant and other well-known household brands. Ten years ago, the company created a Sustainable Living Plan, a set of targets and strategies to grow the business and reduce its environmental footprint. Unilever was one of the first big consumer product companies to truly consider the environment in a meaningful way. They were criticized for it at the time: investors wanted them to focus on profits, not the environment. Unilever proved they could do both by creating win-win solutions.
For example, packaging. Unilever found a way to put the same amount of deodorant in a smaller can and created concentrated cleaning products so consumers could buy a smaller bottle and add water at home. Unilever wins – they spend less on packaging and transport because the product is smaller and lighter to ship – and the environment wins. Over the last decade, Unilever has cut waste per consumer use by one-third. The Sustainable Living Plan is now core to the company, and its scope has expanded beyond just looking after the environment.
For years, Dove has aimed to promote better self-esteem. They’ve partnered with psychologists to create self-esteem workshops that have reached 60 million young people. Dove runs campaigns to challenge the negative views people have about the way they look. One such campaign is called “Change One Thing.” The camera opens with a curly-haired girl who confesses she’d like to have straight hair. Then appears a straight-haired girl who wishes she was blonde. Then a blonde child who wants freckles, and so on and so on, until the last child wants curly hair and we’re back to the beginning. The campaign ends by asking why we all want to look like someone else. It’s a powerful message – and another win-win. When a brand stands for something positive, it often sells better. Dove’s revenue has been growing by 7% a year, which is almost unheard of for a brand of its size.
Corporate responsibility runs deep at these companies; it’s in their DNA. And more companies are moving in similar directions. General Motors is transitioning to electric vehicles. Utility company Algonquin Power is moving toward renewable energy. CCL Industries, maker of product labels for companies like Unilever and Heineken, is investing tens of millions of dollars to create labels that can be easily removed from plastic bottles, making them easier to recycle. It’s hard to eliminate plastic, but there’s an enormous opportunity to recycle more of it, and that should create demand for CCL’s solution.
Some of this may sound like feel-good corporate promotion. Some companies are more genuine than others, but ultimately corporate responsibility matters. Our awareness and sense of responsibility as a society continues to grow too. More and more consumers are supporting businesses that have a positive impact on the world, and shunning those that don’t. The world is more connected than ever, and companies can’t hide bad behaviour like they used to.
Still, there are shades of grey. We all know companies that are bad corporate citizens but have excellent shareholder returns. And there are many well-intentioned companies that make poor investments. Just like people, no company is perfect. Our Research Department may at times even recommend a company that’s done something questionable on the expectation of improvement. There will always be room for debate – we all have our own views and priorities – and you can work with your Odlum Brown Investment Advisor or Portfolio Manager to build a portfolio that you feel good about.
Jackie Robinson was a great ball player, and he moved the world forward. Not all of our recommendations will have that profound an impact, but, generally speaking, doing good is good business, and we will continue to seek companies that step up to the plate and embrace that philosophy.
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