A New Fashion Trend: ESG?

ClearBridge analysts met with Burberry in February 2018. The company designs, manufactures and sells luxury apparel and leather goods online and in its retail stores. It is No. 3—after LVMH and Kering—and has historically had more of an apparel focus with its heritage product being the Burberry trench coat. Burberry is a growth company that ClearBridge analysts classify as a structural story in that they see future returns moving meaningfully higher. In the luxury space, we focus on several relevant ESG issues. Environmental impact has been a big area of focus for luxury with better sourcing and supply chain sustainability. Within social employee issues, supplier quality and adherence to internal standards along with verification targets are a focus. Within governance, Burberry focuses more specifically on management compensation and its alignment with shareholders, boards of directors—both composition and independence—gender diversity and capital allocation.

Burberry ranks high for its ESG efforts. The company has had a dedicated corporate responsibility team since 2004. In June 2017, the company restructured its teams to be more intgerated and impact-minded. The program was developed with the help of employees at all levels including senior leadership with final sign-off by the CEO. All goals, with the exception of community goals, are owned throughout the organization. Burberry is focusing on environmental issues and how that change impacts the corporation. In addition, it is making the social side an equal component of its sustainability agenda.

Burberry has two main manufacturing centers and chose to focus its social work around improving local communities, including access to jobs and career training for the luxury industry. In Yorkshire, where social mobility is low, Burberry has established teaching, career training and mentoring programs using external partners such as Teach First and Teach for All. In Italy, another manufacturing hub for Burberry, the company launched an in-school mentoring program focusing on areas with high school drop-out rates. Burberry also established a partnership with OxFam, an organization that is at the forefront of migration issues from Asia and North Africa.

When we first evaluated Burberry, it was way ahead of its peers. However, we identified three shortfalls that prevented us from rating the company higher: No initiatives to boost employee satisfaction and compensation, no effort to rein in management compensation and a lack of alignment of compensation with shareholder interests. The company’s internal reviews cited shortcomings in its retail operations. Employee morale was low with a lot of turnover. Separately, the introduction of a chief creative director role led to a demoralized workforce. Communication from senior management through all levels of the retail organization was inadequate. The company recognizes it hasn’t invested enough in training or determined whether they’re recruiting the right people to manage their stores. Given that Burberry had a new chief creative director and their best way to engage the consumer was through their own channel, they understood this issue was important and made solving it a priority.

ClearBridge held a management meeting with their CFO in their offices in New York in January 2018. The company had recently hired a new CEO and was undergoing a number of changes including hiring a new creative director in addition to establishing new ESG goals. ClearBridge spent the majority of the meeting reviewing the CEO’s new objectives and strategies as well as discussing their new ESG goals. However, ClearBridge felt it was worth spending dedicated time solely on understanding their new ESG objectives and how these new goals differed from the previously established objectives. As a result, ClearBridge analysts requested a follow-up at the end of the meeting, which they were delighted to set up. ClearBridge held a separate call in early February with Charlotte Cowley, Burberry’s head of investor relations, and Pam Batty, head of ESG. The ultimate goal for this engagement was to better understand Burberry’s new ESG objectives and, to gain clarity on areas where they had concerns. ClearBridge analysts aimed to bring their concerns to Burberry’s attention and find out whether the company shared their concerns— and to understand the steps needed to resolve them.

ClearBridge came away very satisfied from this engagement with the view that the company was well aware of the issues around employee morale, training and management communications. Burberry has put new training programs in place, invested in the management of teams, improved communications from the CEO and is conducting global employee surveys and being transparent about the results. ClearBridge will discuss these initiatives with Burberry in their next meeting to gain a better understanding of how the company is progressing.

Burberry’s retail performance has been mediocre relative to its peer set and engaged employees at the retail level will be vital to delivering stronger sales and profitability from its new chief creative director. Elevating the brand experience is vital. Its focus on social change and how it resonates across the organization will, ClearBridge believes, attract a more passionate, socially conscious employee. In turn, ClearBridge believes that Burberry’s message will resonate better with the young consumers of today. Ultimately, it won’t be one item that raises its ESG profile but many small changes. Those changes must begin at the employee level and ClearBridge sees these changes as catalysts for delivering better earnings and profitability to an already great brand and company.

ClearBridge’s ratings system for ESG ranges from A to AAA, from beginning to best in class. Upon ClearBridge’s initial review of the company, sector analysts felt the company was strong on ESG issues but weren’t clear whether it deserved a AAA rating, ClearBridge’s initial rating was AA. ClearBridge was inclined to upgrade post the call this year, but given the many changes at Burberry, analysts decided to monitor these changes and consider whether to upgrade Burberry at their next engagement.