Garnet Roach talks to Maria Egan of Reynders McVeigh Capital Management about what it looks for in an investment, what would be on its ESG wish list and the companies that are getting things right
Maria Egan is vice president and director of shareholder engagement at Reynders McVeigh Capital Management in Boston, an investment house with $3.27 bn in assets under management as of December 31, 2020. In total, Reynders McVeigh advises directly on assets of approximately $6.84 bn with a strong focus on ESG and sustainable investing – something Egan says has been part of the firm’s philosophy since it was founded in 2005.
Here she talks ESG standardization, using investor coalitions to amplify the Reynders McVeigh voice and how a ‘contrarian approach’ means companies don’t necessarily have to be at the top of the ESG ratings list to get a look in.
Can you sum up your investment style for us? Our core investment discipline seeks to provide capital preservation and appreciation through full market cycles. We look for sustainable growth opportunities domestically and abroad by analyzing prospective investments over a timeframe of three to five years. We believe in the power of compounding returns that are driven by fundamentally sound investments and forward-thinking management.
Reynders McVeigh states that ‘ESG integration is the foundation of our contrarian approach’. What does that mean in terms of your investment strategy? When we think about ESG integration, and how we apply that to our research and investment process, we do think we’re quite contrarian. We think of ESG as a dataset and a starting point: it’s not a complete way of investing. So we don’t just take ESG scores or data and say, This company scores highly, so we’ll add it to our portfolio. This one scores poorly, so we will never invest in it.
You have to go beyond that and understand all the stakeholders involved. We want to really understand everyone a company is interacting with and how it is treating all those different stakeholders. And then how that translates into the firm’s financial health and how we think it will do over time. It’s not just about maximizing profit – and that’s essentially what ESG is getting to the heart of.
Which ESG ratings agencies do you use and how is that data used? We aren’t beholden to any one agency. We use OwlShares, which aggregates more than 400 different sources of financial and ESG data.
We do look at ESG ratings but these are not the be-all and end-all. We also have an internal algorithm we apply to all the different datasets. Right now, we have adequate data flow on about 20,000 companies, coming from 400 different data sources. That number is staggering. On top of that we add our above-and-beyond research looking at how a company interacts with the geographies and communities in which it operates – including within its supply chain.
We need to see some type of standardization in ESG data. If you’d asked me about this five years ago, I would have said the growing number of ESG shops was a good thing, because it meant there was attention being paid to the issue. But it’s become expensive and time-consuming for companies to try to figure out which one to go with.
SASB seems to be the one that is kind of going to be 'the winner’ but then there are also others in different niche areas and industries. So there’s still work to be done as far as what investors are demanding, and then what companies are willing to do.
How can companies bring themselves to the attention of Reynders McVeigh? There are a few things we look for. We’ll obviously look for leaders: if a company is a first mover and saying, We recognize that this is important, we’ll start reporting on this, that will always catch our attention.
But we will also give as much attention to the most-improved companies, firms that are willing to say, We recognize that maybe we haven’t been doing this the best way or that our environmental or social footprint hasn’t been terrific – but we want to improve. That’s another area of interest for us, as long as it’s authentic.
Of course, that has to be coupled with potential financial growth. We’re not just going to invest in all water companies, or all renewable energy companies, because they’re the best environmental companies. The financial growth stories have to be there as well.
No company is perfect, and there are always going to be things we like about it and things we think it could improve on, so a willingness to hear that from investors is also important. There are some companies we’ve engaged with for years now, where there’s been very marginal improvement – or even no improvement at all. Those are not companies we’re actively buying.
There are other companies we’re actively engaging with that always take our feedback on board. They might say, We can’t give you 100 percent of your ask, but we can give you 5 percent of your ask. They know this is on our agenda and it’s a priority, so maybe over the next five or 10 or however many years, they will keep making incremental progress. What advice do you have for companies conscious that they’re not rated highly on ESG issues? That investors will be patient with the transition process.
Maybe there is that fear that if you’re going to rank poorly against your peers, you think it’s better just to avoid certain issues, but if we see that you’re improving at a faster rate than another company, your financials look better, and we think you have other competitive advantages, that’s more attractive to us than just the best-in-class approach.
I think that is what differentiates us. We’re not just trying to create an ESG product because it’s popular right now: we’ve been in this space since our firm was incepted, more than 16 years ago. We want ESG efforts to be authentic and we recognize that it is something that really has to be integrated at every level of a company. It can’t just be IR or the research team or marketing saying, Here’s our fancy report.
From the CEO and executive suite down, there has to be the message that ESG is a priority for the company and something that is integrated into the business model – and that has to be apparent to all stakeholders.
With such a strong focus on ESG, can you talk me through your process of engagement when a company falls below your expectations? We always try to start informally before submitting a shareholder proposal because we want to hear companies out first. That will generally start with IR and we’ll set out what we see and what we think and ask for their response.
If we feel we’re getting a blanket response with nothing behind it, that’s when we look to build a network and collaborate with socially responsible peers and other ESG investment firms.
We’ll also often bring in experts, whether that’s a research company or a nonprofit. We’ve done this around lobbying engagement and also paid family leave engagement, for example. We’re not experts in what companies should offer as paid family leave, or how companies should be transparently reporting their lobbying, but we know it’s important and we know there are nonprofits out there spending all day on just those social issues.
We’ve built this little collaboration of investors, nonprofits and different stakeholders that essentially allows us to leverage our voice. We’re a $3.27 bn investment shop but, by collaborating with others, we become a $20 bn investment consortium.
But the proposal – if we decide that is the right avenue – is really the end-spot. We’re seeing tremendous increase in support [for ESG proposals], and this is an effective way to create change. Even where we’re not seeing majority vote outcomes, we’re starting to see a lot more in the 20 percent to 40 percent range. That doesn’t mean a firm has to act, but it does get its attention.
What would be on your wish list in terms of company disclosure or engagement? At the moment, we’d like more diversity reporting. We’ve been asking for that for years, even before everything came to a head last year with the Black Lives Matter movement. I think we’ve reached a good place with reporting on gender diversity – not that gender diversity has reached a good point, just that we have the reporting on it – but we’d like better reporting around other areas of diversity.
The other thing is more generally to have more transparent and standardized reporting. But that goes two ways: we need to figure out what the right structure is – we’ve spent a lot of time giving feedback and input to groups like SASB – and then we need to get companies to adopt it.
What are your largest and smallest shareholdings? Looking at what’s in our mutual fund, our largest holding is Tesla due to recent market appreciation, and the smallest is [3D printing firm] ExOne. This differs from our separately managed accounts for clients.
Finally, can you tell me about some companies you think are doing good things around ESG and what your engagement is like with them? Two companies that have just been great to work with – and that have shown leadership and improvement over time – are Novartis in Europe and Starbucks in the US.
Novartis has a living wage campaign. Every year, it looks at all its employees around the globe and does an analysis of the geographic area they live in and asks, Are you making a living wage? Not a minimum wage: a living wage. And if not, it will adjust up.
We have had a lot of dialogue and engagement with Novartis, not around improving it – we think the process is great – but to try to figure out how not only other pharmaceutical and healthcare companies can learn from that model, but also how pretty much all companies can learn from it.
It’s not something Novartis markets that widely and we think it's something it should talk about more, just to let folks know what the company’s doing. Income inequality in the US has reached a very wide gap and we see this as one way that companies could start to help tackle that problem a bit.
Starbucks has also been a pleasure to work with. We have submitted shareholder proposals and we’ve pretty much had a constant dialogue with it for years now. It’s always honest, transparent and receptive.
We did a lot of work with it around a paid family leave policy. We realized maybe six years ago that Starbucks’ paid family leave policy didn’t extend to part-time baristas who were working 30 hours a week or more. It was for employees working 40+ hours a week only. It also didn’t extend to adoptive or LGBTQ+ parents.
Starbucks is a coffee shop company that has to hire a lot of part-time workers, so that’s an area with a pretty high turnover, which means more training costs that add to expenses. So we went to the company and said, If you can extend this policy, you’ll probably end up reducing your costs, which will end up increasing your profitability over time. And Starbucks met us and said You’re right, let’s do it. That was a huge win for us.
Also, Starbucks’ environmental footprint is not terrific. It has a lot of single-use plastic, single-use paper, so we have started talking to it about how it could improve that. Again, it was very receptive to dialogue, but that was one where it said, We can’t just turn the switch overnight, because packaging is an issue that impacts so many different areas of the business.
What it did say was that over a certain number of years, it is going to look to reduce single-use plastics. It started by saying that straws would be the first thing to go – and now you can’t get a straw at Starbucks anymore.
We think about the whole chain of our investments and it’s funny because we also invest in BillerudKorsnäs, a paper company that is essentially looking to eradicate plastic, so there’s overlap in some of our investments. That company is working on a paper bottle that can withstand carbonation and different shampoos and other products that would otherwise degrade a paper bottle.
We flagged that to Starbucks and said, Let’s figure out who can make a paper bottle or a better paper cup for your coffee. And then let’s also make sure the coffee companies are going to want to adopt it.
What’s great about this is that Starbucks sets the standard of a better vessel for getting people their hot coffee, and that standard will flow down through all other big coffee chains and into small coffee shops, too. That’s something that can end up having the biggest impact in the long run.
