Elephant's Memory in Action: Stewart Investors’ Sustainability Philosophy

The Edinburgh-founded firm is one of only eight asset managers to receive a ‘Leader’ Morningstar ESG Commitment Level. Why?

Kate Lin 12 October, 2023 | 9:25
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A growing group of asset managers are considering corporate culture while evaluating a company’s sustainability efforts and even the true worth of a business. One such example is Stewart Investors. Founded in Edinburgh, the firm is cognizant of the substantial impact a company’s culture has on sustainability outcomes, which ultimately translate into operational profits and equity gains.

Just as an elephant never forgets, Stewart Investors, symbolized by a hybrid African and Asian elephant, places significant importance on the track record of people within companies as part of their sustainability process.

“We like to meet the leaders of companies, like to look at the history and the track records of companies. We go back many years to understand the leaders of companies. We look at how they respond in times of crises, or if something goes wrong, because that tells us a lot about the quality of the management of the business,” says Pablo Berrutti, the firm’s senior investment specialist.

How to Tell a Company’s Quality

Stewart Investors is one of only eight asset managers out of 108 global firms evaluated to receive the highest ranking of Leader destination of Morningstar ESG Commitment Level. Morningstar’s analysts think the team at Stewart Investors has strong sustainability credentials and puts ESG at its core. The Leader designation also reflects how the firm boasts one of the industry's strongest sustainability philosophies.

At the core of Stewart Investors’ sustainability philosophy lies the concept of quality. The firm’s belief is that the success of driving sustainable outcomes hinges on the quality of management. Therefore, the Stewart Investors' team dedicates a significant amount of time to thoroughly studying company leaders and corporate culture. This includes assessing how resilient a business is during challenging times. Specifically, there are three key elements that paint the picture of a company’s ‘quality’:

- Management

- Franchise

- Financials

What It Takes to Have a Glimpse into a Company’s Next Decade

To start, management is the steer of a company, the style and culture of which, to a great extent, defines the mission and vision, the workplace and business culture, and the direction a company is headed.

Berrutti says: “One aspect of the way that we engage with companies, which allows us to have those conversations in a constructive way, is that we look to try and build relationships that are enduring, and we look to be a long-term investor. We want to be investing in companies for a decade or more.”

The characteristics the Stewart Investors' team is looking for in a company are a culture of doing the right thing and a culture of focusing on customers, making sure the products and services are of high quality.

A proxy he uses is to invest in a company with leaders who plan things with a generational lens, as he believes leaders who truly account for sustainability issues would typically think for their business, community, and stakeholders decades ahead, Berrutti says. “They are not just looking to maximize their own salaries for the time they work there, but rather to hand over the business to the next generation in a better shape than when they found it and lead to long-term success. Sometimes, that means making decisions that involve sacrificing the short-term so that you can get a better long-term outcome.”

There are many more angles to it, including the way company management makes themselves accountable for the resiliency of local communities and the soundness of the environment they operate in.

“At the end of the day, we can't solve biodiversity loss and we can't solve climate change without our investees. Only the companies themselves can change the way that they operate. This goes back to stewardship and having the right type of leadership.”

“They're the types of leaders who understand that these issues are a long-term threat to their business. If they don't do the right things to try and make those issues better, then they’re not going to be able to maintain their legacy.”

Longevity Concerns Need Longer-Term Vision

An example of a business that could tackle real issues about business resiliency and longevity is Nestle.

Berrutti says: “As much as 27% of Nestle’s revenue comes from coffee while 80% of the coffee in the world is farmed by smallholder farmers. It's in Nestle's interests to work with smallholder farmers to make them more sustainable. And, coffee is susceptible to a changing climate.”

When Berrutti is engaging with Nestle, the company leadership understands that this is a clear business issue. “They have some excellent programs in place and have worked with hundreds of thousands of smallholder farmers to try and help improve their resilience in the future.”

Berrutti calls working with Nestle a constructive and practical engagement example. “Leaders who are willing to think over the long term are the ingredients to successful engagement,” he adds.

Two More Quality Criteria

Alongside the management quality, Berrutti says the consideration also lies in franchise and financials.

“The second part of the quality consideration is franchise. We’re looking at aspects like other products and services necessary for a sustainable economy.”

For example, the firm tends not to invest in luxury brands and has a stronger preference for necessary products like consumer goods, healthcare, and industrial products. “We prefer companies that are helping us to become cleaner, healthier, and more productive,” he adds.

Examples of consumer goods companies are Japanese disposable hygiene products maker Unicharm and India’s cooking and hair oil producer Marico. Both names are in the top 10 holdings in Stewart Investors Global Emerging Markets Sustainability Strategies as of June 2023.

In the firms’ investing philosophy, the product of risk, to the downside, is absolute capital loss, not relative losses versus benchmark.

“To us, resilient financials are incredibly important, not just for preventing losses in a downturn, but how do you come out of a crisis stronger when the economy returns to growth,” Berrutti explains. “We like to see companies with strong balance sheets, those that pay their fair share of tax, with simple and straightforward financial statements and business models.”

While an unfavorable economic and business environment is an inevitable factor in most cases, a company with higher financial resiliency would typically be one that is able to keep its employees rather than resorting to sacking people, invest in research and development, and have enough dry powder to acquire other companies, riding through a cycle.

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About Author

Kate Lin

Kate Lin  is an Editor for Morningstar Asia, and is based in Hong Kong

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