Market update – 20th July 2020

A crying shame

A big thank you to everyone who joined us on last week’s video conferences. The level of engagement that we have had has actually caught us slightly off guard, but it reinforces the truism that little catches investors’ attention quite like sustainability.

I want to tackle a couple of the central issues this morning (‘a couple’ is a euphemism for ‘as many as I can fit into two columns’). The first of these is engagement. The issue is raised by the events surrounding boohoo. The trendily lower case fast fashion retailer has been in the spotlight rather too much for its own good over the past fortnight. The issue has been that it was found out that one or more of its suppliers were accused of paying less than minimum wage.

If we moved back in time by a couple of years, few would have blinked an eyelid. The world, however, has changed. An accusation of being involved with ‘modern slavery’ is of huge significance. This is not only of boohoo, but of almost everyone associated with it. Its trading partners were lining up to let it be known that they would no longer deal with boohoo, or at least until the issues were sorted out. The share price almost halved in a matter of days.

ESG matters, as boohoo has found out to its cost. The issues of whether or not there was ‘slavery’ at work in its supply chain, and whether or not management at the company knew this, are only part of the complex equations here. What should shareholders do? It is quite right that investors in any business should rail at such things, but what should they actually do? Should they sell their shares in horror?

Well, it all depends. On the one hand, perhaps they should. If the shares were held by a fund professing that it screens out businesses that may abuse modern slavery, then selling them is probably the right thing to do, together with a mea culpa for having bought them in the first place.

The trouble with this is that it merely passes the shares onto another investor. Said investor must either be ignorant of the accusation, or else not be bothered. It is too easy to lose sight of the core problem, which is that there are workers in Leicester allegedly being paid £3.50 per hour to produce the latest range of fast fashions. It is they who are the victims in this. There is therefore another line of reasoning that says that the right thing for investors to do is to engage with the company’s management and to make it clear that things have to change.

This in turn has its own complications. Should boohoo simply cancel its contracts, letting the supplier either go bust or to supply to another unknowing purchaser? Or should boohoo engage with the accused sweat shops to change how they operate?

It has become thankfully rare for us to be asked ‘is ESG just a fad?’ To ask this is to misunderstand what ESG is. It is not just an investment style. ESG is a means of thinking and working based on the principle that all stakeholders in a business are in it together. What is good for the shareholders should also be good for the workers in Leicester sewing the dresses together. ESG is the concept that the interests of all the stakeholders are genuinely mutual. It is about better ways of doing business.

Let us move onto Dominion Energy, Berkshire Hathaway and the hydrocarbon industry. You may not be familiar with Dominion, but it has very recently sold some gas transmission and storage facilities to Berkshire Hathaway for the thick end of $10bn. That is a big deal by anyone’s standards. Dominion is trying to change from being a dirty business to being a clean one, in shape for the future zero carbon world. It even cited ‘ESG’ as one of the reasons for the sale.

On the flip side of the coin, Berkshire Hathaway saw what it believed to be some high quality assets up for sale at a decent price. Who is right and wrong in this? Dominion is an energy business planning for a renewable and sustainable future. Berkshire Hathaway is an investor seeing what it thinks is a bargain. It is also a business that is not going to be punished by the markets for buying some gas assets that will produce cash flows for decades to come. Dominion thought differently. Different rules apply to different business. As Orwell’s pigs said, some are more equal than others, even in the world of ESG.

Jim Wood-Smith – CIO Private Clients & Head of Research

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