A New Fashion Trend: ESG?
- February 10, 2020
This is a case study on how investment managers are engaging public companies and embedding environmental, social and governance factors into fundamental analysis and security selection.
At Oppenheimer Asset Management, we believe ESG investment strategies allow investors to incorporate socially conscious principles into their portfolios without sacrificing investment performance. A growing number of investors are expressing interest in strategies that incorporate environmental, social and governance factors into their investment processes.
The increased demand for these investments is changing the way public companies run their businesses. To demonstrate how ESG managers are influencing company management teams to improve in these areas, we put together a series of case studies that give real-world examples of ESG in action.
Our latest case study focuses on ClearBridge’s interactions with luxury retailer Burberry. The company was an early adopter of ESG best practices, having had an ESG program in place since 2004.Today, Burberry is focused on minimizing the environmental impact of its operations, aligning management compensation with shareholder interests and diversifying its boardroom by adding more women.
Specifically, Burberry is making strides toward its goal to become carbon neutral by 2022, promoting career training in local communities and streamlining its communication from senior management to its retail stores. The following Q&A highlights Burberry’s management of critical ESG initiatives on the heels of ClearBridge’s recent meetings with senior management.
Q&A
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.
Disclosures
To formally recognize Environmental, Social and Governance (ESG) factors in its investment process, ClearBridge Investments has an internal ESG ratings process across its equity research platform. ESG ratings are proprietary scores intended to signal to investment teams how well a company has executed its ESG practices. ClearBridge analysts have long integrated ESG factors into their processes for generating investment recommendations. To learn more, read ESG Ratings: Integrating Fundamental Analysis with Environmental, Social and Governance Considerations.
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