Case study by Boston Trust and Investment Management Company
An investment manager’s process to monitor companies once in client portfolios is equally as important as the initial buy decision. Companies bring to market new products and services, operational and management practices change over time and new information (particularly ESG data) can become available – all of which can alter the ESG profile of a company.
Our ESG review discipline includes three types of systematic review (product, controversy and sectoral), along with ad hoc reviews triggered by emerging events.
All companies are reviewed quarterly for product and service changes and monthly for controversies using tools from third-party research providers.
Biennially, we also strive to review holdings by GICS sector, comparing all companies in client portfolios to sector leaders from outside the portfolio to provide a more comprehensive understanding of the spectrum of performance on key ESG issues.
Breaking news can prompt an immediate review. While the news could relate to ESG opportunities, they tend to relate to potential ESG risks.
Hundreds of companies have been reviewed through this process. In 2007, we analysed Nestlé and determined that the ESG risks were too great to invest. Numerous operational, environmental and social challenges were identified, ranging from the sustainability of groundwater withdrawals around Nestlé bottling facilities; the recyclability of its packaging and container recovery; a spotty record on product nutrition, safety and quality; and its much-criticised infant formula marketing practices in developing countries. Among the most troubling were concerns relating to international labour practices and alleged involvement in perpetuating what the ILO defines as “the worst forms of” child labour through purchases of cocoa beans.
Over the course of the following two years we monitored Nestlé, gaining a deeper understanding of the company’s practices and its progress in addressing the issues we had identified of concern. We examined company publications, analyses conducted by independent research organisations, and information from traditional resources and gleaned from internet and media searches. To assess the company’s responsiveness to stakeholders, we interviewed investor groups and NGOs engaged with Nestlé, as well as its outspoken critics in the US and Europe.
While still facing challenges, based on this research, we determined that Nestlé was taking important steps to address and eliminate child labour in its supply chain, and had much improved its marketing practices of infant formula. We observed gradual improvement in the nutritional quality of some of its products, such as reducing sodium, fat and sugar. The company had also introduced measures to reduce the environmental impact of its packaging and had engaged positively on related public policy. Additionally, we observed a significant improvement in the company’s ESG disclosure. Guided by a new CEO and in response to stakeholder pressure, Nestlé in 2008 published its first sustainability report, Creating Shared Value.
After this comprehensive review we determined Nestlé to be an acceptable investment based on tangible progress in major ESG areas and plans to engage with the company.
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A practical guide to ESG integration for equity investing