Why "corporate karma" is crucial for your investment returns

Sustainability used to be a niche preoccupation, but it is now discussed everywhere. From “flight shame” to the gender pay gap, issues related to sustainability have become part of our everyday conversation.

Many of us are trying to do more at a personal level to live more sustainable lives, such as cutting down on single use plastic. But what about our investments?

Our 2021 Schroders Global Investor Study shows social and environmental issues have become more important to people as a result of the pandemic, and that a growing number of investors are finding sustainable investment funds to be more attractive than ever. 

We believe money managers like ourselves have a moral imperative to help drive the transition to a sustainable economy, and we can do this by directing more capital to sustainably-run companies and by engaging with the companies we own.

Many investors think there has to be a trade-off between sustainable investing and generating market-beating returns. We disagree. In fact, we believe that it is only by investing in truly sustainable businesses that we can achieve consistent investment returns over the long run.

In our view, the key to sustainable investing is to look at how a company deals with its stakeholders. Companies that are run with consideration for all their stakeholders can deliver better long-term returns and be less likely to experience expensive – even existential - controversies. 

What do we mean by stakeholders?

Stakeholders are — as the name implies — any party that has an interest in something, in this case a business. 

The chart below shows the range of stakeholders in any company; their relative importance will vary depending on the nature of the business. Shareholders are a stakeholder, but just one among many.

The concept of “shareholder primacy” is one that really took hold in the 1970s. This is the theory that shareholder interests should be the top priority for companies, over and above their other stakeholders. This led to a prevailing assumption that companies should be run to maximise profits for shareholders, regardless of the wider impact.

This way of thinking is becoming increasingly outdated. Maximising shareholder returns while damaging the environment, for example, is increasingly unacceptable to employees, customers and wider public opinion. 

This reputational damage could deter customers — resulting in a loss of market share — and make it hard to recruit and retain workers. It could also lead to regulators imposing stricter standards or levying fines.

This is by no means an exhaustive list of potential consequences. Clearly all of these outcomes would impact a company’s profits — ultimately harming shareholders as well.

Stakeholder relations in the real world

Moving beyond the hypothetical, there have been numerous examples in recent years of companies where mistreatment of stakeholders has had wider ramifications.

A familiar case in the UK is retailer Sports Direct, which became infamous in 2016 after reports emerged of “inhumane” working conditions in its warehouses. Consumers boycotted the stores, resulting in a sharp deterioration in sales and profits, and the share price reached a low of 70% below its 2015 peak, according to Bloomberg data.

In a more recent case, leading UK ferry operator P&O Ferries sacked 800 British based employees without warning in March 2022, replacing them with agency staff who are paid well below UK minimum wage to operate its ships. The consequences so far have included widespread consumer backlash, unions demanding reinstatement of sacked crew, and the UK government confirming that it was reviewing its contracts with DP World (owners of P&O Ferries) and P&O Ferries, and that legal action is being considered over the layoffs. 

We can also point to companies that have borne the cost of environmental disasters – BP’s Deepwater Horizon explosion and oil spill, for example, or the catastrophic collapse of a Vale tailing dam in Brazil, killing 270 people in 2019. 

And those that have incurred reputational and economic damage from customer boycotts over unpaid tax (such as Starbucks in the UK), showing that customers are prepared to hold companies accountable for their responsibilities to wider society.

Positive examples rarely hit the headlines, and so are harder to illustrate. But there are many examples of companies where, for instance, exemplary treatment of employees has resulted in long-tenured, deeply committed workers, boosting productivity and reducing costs associated with staff turnover.

For example, UK engineering firm Spirax Sarco spends more than all its competitors combined on training. This resulted in a trebling of sales productivity for the average recruit during their first five years at the company, based on company meetings and Schroders’ analysis.

Here in Asia, Japanese company Recruit, whose largest assets are the job recruitment sites Glassdoor and Indeed, stands out both on its relationship with key stakeholders and its wider commitment to corporate social responsibility, which is quite unusual in the Japanese market in particular. The company's mission is to prioritise social value by removing frictions in the labour market and encouraging diversity hiring. Their entrepreneurial culture is also what we find impressive.

We can also think of examples where charitable projects and local investments have drawn support from the local community and authorities; and where a reputation for environmental stewardship is strengthening a brand and drawing in new customers.

Sustainable businesses can thrive in the long term

These examples illustrate that there is a symbiotic relationship between a company and its stakeholders, which we like to think of as a kind of “corporate karma”.

However, financial markets still tend to be very focused on the short term. Analysis of many companies tends to focus on their prospects for at most the next two or three years, if not just the next couple of quarters. 

Conventional financial analysis also struggles to capture non-financial factors, such as corporate culture and stakeholder relations.

This means the wider market often underestimates and undervalues the resilience of growth and returns that sustainable companies can deliver. We find this very exciting, as it offers an opportunity for investors to exploit mispricing in the market and reap the benefit when those sustainable companies keep beating market expectations. 

As investors, we can do our part to encourage companies to be more sustainable — improving outcomes for both our clients and wider society. 

We engage with companies proactively via conversations with management when we have concerns over the treatment of stakeholders. This includes voting at companies’ annual general meetings to signal our agreement or disagreement with management’s policies. 

The Schroders Sustainable Investment Team voted on 1,039 meetings in the fourth quarter of 2021, with 11% of these votes cast against management.

This article was originally published by Schroders.

As a global investment manager, Schroders recognises its role in shaping the futures of all its stakeholders. Commitment to delivering positive outcomes for clients, employees and wider society lies at the centre of the firm’s culture. Schroders actively and responsibly manages US$990.9 billion (as at 31 Dec 2021) of assets for a wide range of institutions and individuals to help meet their financial goals.

Endowus has 11 funds from Schroders (as of 27 July 2022), including the ISF Global Sustainable Growth Fund, ISF Global Climate Change Fund, and Multi-Asset Revolution.

Get started building your own portfolio with these funds on the Endowus Fund Smart platform.

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Schroders disclaimer

Any securities, sectors, or countries mentioned are for illustrative purposes only and do not constitute any recommendations to invest in the above-mentioned security, sector, or country. 

This advertisement has not been reviewed by the Monetary Authority of Singapore. This is prepared by Schroders for information and general circulation only and the opinions expressed are subject to change without notice. It does not constitute an offer or solicitation to deal in units of any Schroders fund and does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this.

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