Perspective

How does ESG and financial performance stack up?


The debate around ESG and financial performance has always been of great importance. A recent study from the New York Stern School for Sustainable Business looked at over 1,000 individual papers published over the last five years. They found that more than 60% of these papers report a positive relationship between ESG and financial performance.

This is consistent with our concept of “corporate karma”, the way we refer to the symbiotic relationship between a company and its stakeholders, and shows that investing in sustainability can deliver higher growth and returns through innovation, higher operational efficiency and better risk management.

How does the Schroders Sustainable Quotient framework work?

The Sustainable Quotient (SQ) framework is at the heart of our investment process. Every company that makes it onto our investible universe must have been through this assessment and undergone the scrutiny of our investment committee.

I want to share two recent case studies to shed light on how this works in practice.

Firstly, Recruit Holdings, that we've held since 2017. See below for more details. Recruit is a Japanese industrial, technically, but its largest assets are the job recruitment sites Glassdoor and Indeed. Now, Recruit is not normally considered to be an ESG leader, but when we did our SQ analysis, we found that the company stood out in a number of areas, both on its relationship with its key stakeholders and also 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. We were also really impressed by their entrepreneurial culture.

In contrast, a name that we recently looked at and rejected for our investible universe is the US technology analytics firm Gartner. It's quite an interesting comparison because many of the key stakeholders are similar to Recruit, its customers and its employees, for example. And similarly it's a very good fundamental business, but when we went through the SQ, we were largely disappointed by the company's performance. They just didn't stand out to us in any one area, and we got the impression that they were doing the bare minimum in some places.


Recruit Holdings case study: Changing a recruitment firm for the better

We have invested in Recruit for several years and we own almost 1% of the company. The company’s mission is to prioritise social value by making the labour market more efficient and encouraging diversity.

In 2019, we provided feedback on how the business was governed and on executive pay. In 2020, Recruit appointed its first woman to the board.

In March 2021, we encouraged Recruit to set net zero targets and in May 2021 it announced company-wide emissions reduction targets for the first time, including plans to achieve net zero by 2030.

Our subsequent conversations with the company have focused on implementation, including best practice for carbon offsets. The company also announced targets for gender parity at all levels of the organisation by 2030.

Recruit plans to achieve this by accelerating the development of younger women and expects to hire more foreign women to grow its pool of female talent.

Diversity goals are now enshrined in the pay structure for senior executives. We’ll continue to monitor Recruit’s progress, but see this as immensely encouraging.

The company has recently announced the nomination of another female independent director to the board from 2022, which will bring female representation to a credible 30%.

 

For illustrative purposes only and not a recommendation to buy/sell. 

Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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