So how can investors identify social risks and opportunities?
For a retailer with overseas manufacturing, as an example, fund managers might meet with management and visit operations to understand how direct-sourcing relationships are managed, gaining comfort on supply-chain visibility and control. Is the retailer sourcing its products from sustainable factories with positive labour outcomes?
We believe Kathmandu is a good example of a company delivering positive social outcomes, with management improving its design, manufacturing and sourcing practices. Last year Kathmandu became the southern hemisphere’s first apparel and footwear brand to be accredited by the Fair Labor Association, a global not-for-profit representing 5.5 million factory workers around the world.
Kathmandu’s focus on supply-chain risk is underpinned by comprehensive responsible sourcing, with the company screening all new suppliers using social criteria. Ranked second of 19 global outdoor brands for its use of sustainable materials in the past two years, the company is closing in on its goal of using 100 per cent sustainably grown cotton next year.
Significant value
Other sectors are now firmly in the spotlight. Just as the financial services royal commission has raised challenging questions for Australia’s banks, the royal commission into aged care quality and safety signals a difficult period ahead for the listed players. Kicking off today, and with the number of submissions rumoured to be more than 30,000 (which is three times the number received for the financial services royal commission), social outcomes will clearly be in focus.
What do recent federal government funding cuts mean for future profitability? Can cost-reduction programs that focus on staffing – the largest variable cost line – be achieved without compromising resident care? Sentiment towards the industry has shifted.
Aged care is not alone, with social issues pressuring share prices across a range of industries: franchise operators (labour issues), banks (customer behaviour) and consumer payment technology providers (responsible lending) are coming into focus for many investors.
Finding companies with strong social outcomes can be just as important as avoiding the losers, particularly as more of the industry incorporates environmental, social and governance screening into its investment approach. ESG funds have risen 60 per cent since 2012 to more than $1 trillion, a sign of the rapacious interest in corporate responsibility.
For fund managers focused on the long term and prepared to research these potential risks, the rewards are apparent over time. Not only can this process add significant value to portfolios – by highlighting likely winners – it also helps to identify risks that might not become apparent until disaster strikes. Avoiding blow-ups becomes much more likely.
As intangible assets – including brands, R&D and even corporate culture – grow to an increasingly high proportion of company value, an investment process that identifies and values social-risk factors will enhance the ability to deliver long-term outperformance.
Katie Hudson is a portfolio manager and head of Australian equities research at Yarra Capital Management.
from A Viral Update http://bit.ly/2VZ0BEg
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