Capital Flows and Socially Responsible Investing in Sustainable Brands
Content
Capital Flow & Sustainable Brands:
How Investors are Driving New Opportunity
Maria Kamin
Product Manager, Research
Responsible Investment
"We are proud to endorse the Principles, which recognize that social and environmental issues can be material to the financial outlook of a company and therefore to the value of our shares in that company,”
- Denise Nappier, Treasurer of the State of Connecticut
The U.S. SRI Market
Socially Responsible Investing (SRI) is an investment
process that considers social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis.”
Origins lie in 18th century Quaker investors Today’s investors include:
Source: Social Investment Forum 2007 Report on Socially Responsible Investing Trends in the United States – March 2008
The U.S. SRI Market
Today, $2.71 trillion market in the US (March 2008) Total SRI assets represent ~ 1 in 9 dollars under professional management in the U.S. Growth rate of SRI asset flows has exceeded non-SRI growth rates. From 1995-2007, total SRI assets rose 324% while total assets under professional management increased 260%.
Source: Social Investment Forum 2007 Report on Socially Responsible Investing Trends in the United States – March 2008
SRI Practice: Screening
Screening is… …avoiding companies with poor ESG track records, …positively filtering a portfolio for companies that have stronger CSR policies and practices, or …otherwise incorporating ESG, CSR, and sometimes ethical factors into the process of investment analysis, decision-making and management
Examples of Screening: •ESG Issues: Discrimination, Employee & Product Safety •Divestment: Sudan, Iran •Best-in-class: Industry leaders •Industry Restrictions: Healthcare •Harmful Products: Tobacco •Convention Compliance: Global Compact, ILO •Religious Concerns: Christian, Jewish, Islamic •Controversial Business Practice: Retail marketing of alcohol •Other special concerns: Animal Welfare
Source: Social Investment Forum 2007 Report on Socially Responsible Investing Trends in the United States – March 2008
SRI Research
• •
KLD covers 4,000+ global firms Environmental, Social & Governance (ESG) coverage includes:
– – – – – – – Climate change Alternative energy Human rights Supply chain Workforce diversity Political accountability Transparency
• •
280+ datapoints collected per company 70 scored indicators
Brand as a Factor
• Importance of brand is reflected in several areas of KLD’s CSR coverage:
– – – – – Employees: Customers: Communities: Investors: Goodwill: Retention & hiring risks Sales & competitive risks Implementation risk Valuation risk Acquisition valuation risk ST/ LT ST/ LT ST/ LT ST/ LT LT
• Example: Nike
Valuing Brand with CSR
• Using KLD research, CoreBrand has done analysis to better understand how CSR issues impact the brand • CSR is one of the positive drivers of Brand Power • Of the factors CoreBrand studied CSR was the only favorability measure to grow in importance over time from 2003 - 2006 • Percentage of the variance in Brand Power can be attributed to KLD’s CSR data • Can estimate the value of CSR issues to an individual company through their brand equity model • Failure to deliver on important CSR messages will result in a diminished investment potential
CSR & Brand: Best Practice
• Transparency & Disclosure
– Learn what’s in order at your house
• Past, present and goals • Positives & negatives
– Avoid green washing
•
Engage Your Stakeholders
– Stakeholders: Shareholders, Communities, Employees, Customers, etc. – Look for internal CSR champions – Incorporate CSR into the corporate culture
“We’ve been amazed by the volume of positive, thoughtful comments from Xerox people worldwide after we released our first comprehensive global citizenships report last year… We’ve learned that not being shy about telling our CSR stories resonates incredible well with employees.” -Hector Motroni, Chief Ethics Officer, Xerox
Source: The CRO Magazine, www.thecro.com
•
Metrics
– – – – – Clarify & reuse your baseline Meet minimum standards (GRI) Focus on Key Issues for your industry Measure impact Improve performance over time
Ben Allen
Director of Research
Firm Overview
• Research-centric boutique
• Bottom-up research
Fixed-Income Fund Parnassus Fund
Mid-Cap Fund Small-Cap Fund
Workplace Fund
• Fundamental analysis
• Value-based investment approach • Attention to risk in portfolio construction • Corporate social responsibility
• Established 1984 and privately owned
• Boutique culture – In-depth, in-person fundamental research – Dedicated & responsive client service • 26 employees – 8 investment professionals – 18 support personnel
Fund Equity Income Fund Parnassus Fund Fixed-Income Fund Small-Cap Fund Mid-Cap Fund Workplace Fund Total net assets: As of 3/31/08
Equity Income Fund
Assets in $MM % of Total 926.8 256.3 87.0 7.1 5.6 4.2 1,287.0 72.0% 19.9% 6.8% 0.5% 0.4% 0.3%
Environmental, Social & Governance Assessment: The 3 P’s
1. Product / Service 2. Production / Operations 3. Planning
Where do we look for ESG information?
Sources
Verification
• CSR/Sustainability Reports • SEC filings • Corporate website • Management interviews • Sell-side ESG research • Government data • Social networks
• KLD Research • David Gardiner & Assoc. • More Management Interviews • Third-party audits • NGO & SRI collaboration • Sector surveys
• Industrial property developer and owner • Strong connection between business goals and CSR goals • Branding through case studies, Sustainability Report, websites • Third party recognition for efforts
Country’s largest waste services company Public trust, sustainable services are crucial for business Branding through TV advertising, Sustainability Report, websites Uses specific numbers to drive home sustainability commitment
www.thinkgreen.com www.wmgreensquad.com
Lloyd Kurtz
Senior Portfolio Manager
A Case Study in Reputational Risk
At the Center…
Stakeholder theory can be viewed as a constellation of ‘Hirschman relationships’ between a Control Group and a variety of groups...
CONTROL GROUP (MGMT)
Commercial Relationships
"There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else." - Sam Walton
CONTROL GROUP (MGMT)
CUSTOMERS
Commercial Relationships
In the 80s and early 90s it was popular to say that if you took care of these groups, you didn’t need to worry about much else.
SUPPLIERS
CUSTOMERS
CONTROL GROUP (MGMT)
EMPLOYEES
SHAREHOLDERS
Social/Environmental Relationships
SUPPLIERS ENVIRONMENT EMPLOYEES
LOCAL COMMUNITY
CONTROL GROUP (MGMT) SHAREHOLDERS
GOVERNMENT
CUSTOMERS
Thomas and Friends
Percy the Small Engine Thomas the Tank Engine
Henry the Green Engine
Toby the Tram Engine James the Red Engine
Wooden Railway
Good gross margins
Set above lists for $44.99 Manufactured inexpensively abroad
Bright colors, detailing faithful to books and tv show Bundled with trading cards Sometimes included as a ‘bonus’ with DVD purchase
The Company
Learning Curve was founded in Chicago in 1993 Key Product Lines
The First Years Lamaze Playtown Thomas & Friends
In 2003, Learning Curve was acquired by RC2 Corp (ticker: RCRC)
Firm Strategy
“RC2 builds consumer loyalty by fulfilling the passions of targeted consumers with branded toys, collectibles, hobby or infant products that encourage repeat purchases and are fun to own and use. “Our goal is to achieve leadership in targeted markets worldwide by acting on significant consumer trends, continuously applying innovation and developing consumerpreferred brands and products distributed through multiple channels.”
- RC2 Website, accessed 8/1/2007
Four Focus Areas
“Building our own brands”
First Years, Lamaze, Learning Curve, and Johnny Lightning
“Differentiation”
“…more segmentation, more niche marketing…”
“Distribution…”
Including international expansion, Internet distribution, inventory planning and management.
“Consumer communication”
“…the shopper is in more control than ever over where, when, what, and how the products are being purchased.”
Excerpted and adapted from Streetevents transcript of Feb. 13, 2007 earnings conference call.
An Analysts’ View of RC2
“Management’s consistent track record of solid execution (securing new licenses and developing new products) along with past acquisitions, gives us confidence that core revenues and EPS growth is sustainable in the 5%-10% and mid-teens, respectively, over the next several years…”
- Timothy Conder, A.G. Edwards, January 12, 2007
Bad News, 6/13/2007
“The U.S. Consumer Product Safety Commission, in cooperation with [R2C], today announced the recall of the following consumer product. Consumers should stop using recalled products immediately unless otherwise instructed…” “Name of Products: Various Thomas and Friends™ Wooden Railway Toys” [1.5 mm units] “Hazard: Surface paints on the recalled products contain lead. Lead is toxic if ingested by young children and can cause adverse health effects.”
An Incident in China
“A manager at the RC2 factory detained a New York Times reporter for more than nine hours after he had been admitted to the premises by security guards to ask questions about the operation…”
“RC2’s Train Wreck”, The New York Times, 6/19
Analyst Comment
“These recalls happen fairly often. It’s when the recall becomes botched and children are hurt when it takes on a life of its own… [This recall] should not have any long-term damage.”
“RC2’s Train Wreck”, The New York Times, 6/19
25
30
35
40
45
50
12/29/2006 1/5/2007 1/12/2007 1/19/2007 1/26/2007 2/2/2007 2/9/2007 2/16/2007 2/23/2007 3/2/2007 3/9/2007 3/16/2007 3/23/2007 3/30/2007 4/6/2007 4/13/2007 4/20/2007 4/27/2007 5/4/2007 5/11/2007 5/18/2007 5/25/2007 6/1/2007 6/8/2007 6/15/2007 6/22/2007 6/29/2007 7/6/2007 7/13/2007 7/20/2007 7/27/2007 8/3/2007
6/13 – Joint press release w/ Consumer Product Safety Commission.
7/4 – Lawsuit alleges lead paint problems with metal train toys. 8/1 - Disappointing revenues and earnings.
RCRC: Spot the Reputational Effects
6/19 – New York Times story: reporter detained at China factory
Subsequent Performance
Indexed Price
25-May-2007 to 28-May-2008 (Daily) 25-May-2007=100; Local RC2 Corp. (RCRC) 43.2 S&P 500 (SP50) 91.3 100 90 80 70 60 50 40 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
Data Source: Prices / Exshare
©FactSet Research Systems 2008
How Investors are Driving New Opportunity
Maria Kamin
Product Manager, Research
Responsible Investment
"We are proud to endorse the Principles, which recognize that social and environmental issues can be material to the financial outlook of a company and therefore to the value of our shares in that company,”
- Denise Nappier, Treasurer of the State of Connecticut
The U.S. SRI Market
Socially Responsible Investing (SRI) is an investment
process that considers social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis.”
Origins lie in 18th century Quaker investors Today’s investors include:
Source: Social Investment Forum 2007 Report on Socially Responsible Investing Trends in the United States – March 2008
The U.S. SRI Market
Today, $2.71 trillion market in the US (March 2008) Total SRI assets represent ~ 1 in 9 dollars under professional management in the U.S. Growth rate of SRI asset flows has exceeded non-SRI growth rates. From 1995-2007, total SRI assets rose 324% while total assets under professional management increased 260%.
Source: Social Investment Forum 2007 Report on Socially Responsible Investing Trends in the United States – March 2008
SRI Practice: Screening
Screening is… …avoiding companies with poor ESG track records, …positively filtering a portfolio for companies that have stronger CSR policies and practices, or …otherwise incorporating ESG, CSR, and sometimes ethical factors into the process of investment analysis, decision-making and management
Examples of Screening: •ESG Issues: Discrimination, Employee & Product Safety •Divestment: Sudan, Iran •Best-in-class: Industry leaders •Industry Restrictions: Healthcare •Harmful Products: Tobacco •Convention Compliance: Global Compact, ILO •Religious Concerns: Christian, Jewish, Islamic •Controversial Business Practice: Retail marketing of alcohol •Other special concerns: Animal Welfare
Source: Social Investment Forum 2007 Report on Socially Responsible Investing Trends in the United States – March 2008
SRI Research
• •
KLD covers 4,000+ global firms Environmental, Social & Governance (ESG) coverage includes:
– – – – – – – Climate change Alternative energy Human rights Supply chain Workforce diversity Political accountability Transparency
• •
280+ datapoints collected per company 70 scored indicators
Brand as a Factor
• Importance of brand is reflected in several areas of KLD’s CSR coverage:
– – – – – Employees: Customers: Communities: Investors: Goodwill: Retention & hiring risks Sales & competitive risks Implementation risk Valuation risk Acquisition valuation risk ST/ LT ST/ LT ST/ LT ST/ LT LT
• Example: Nike
Valuing Brand with CSR
• Using KLD research, CoreBrand has done analysis to better understand how CSR issues impact the brand • CSR is one of the positive drivers of Brand Power • Of the factors CoreBrand studied CSR was the only favorability measure to grow in importance over time from 2003 - 2006 • Percentage of the variance in Brand Power can be attributed to KLD’s CSR data • Can estimate the value of CSR issues to an individual company through their brand equity model • Failure to deliver on important CSR messages will result in a diminished investment potential
CSR & Brand: Best Practice
• Transparency & Disclosure
– Learn what’s in order at your house
• Past, present and goals • Positives & negatives
– Avoid green washing
•
Engage Your Stakeholders
– Stakeholders: Shareholders, Communities, Employees, Customers, etc. – Look for internal CSR champions – Incorporate CSR into the corporate culture
“We’ve been amazed by the volume of positive, thoughtful comments from Xerox people worldwide after we released our first comprehensive global citizenships report last year… We’ve learned that not being shy about telling our CSR stories resonates incredible well with employees.” -Hector Motroni, Chief Ethics Officer, Xerox
Source: The CRO Magazine, www.thecro.com
•
Metrics
– – – – – Clarify & reuse your baseline Meet minimum standards (GRI) Focus on Key Issues for your industry Measure impact Improve performance over time
Ben Allen
Director of Research
Firm Overview
• Research-centric boutique
• Bottom-up research
Fixed-Income Fund Parnassus Fund
Mid-Cap Fund Small-Cap Fund
Workplace Fund
• Fundamental analysis
• Value-based investment approach • Attention to risk in portfolio construction • Corporate social responsibility
• Established 1984 and privately owned
• Boutique culture – In-depth, in-person fundamental research – Dedicated & responsive client service • 26 employees – 8 investment professionals – 18 support personnel
Fund Equity Income Fund Parnassus Fund Fixed-Income Fund Small-Cap Fund Mid-Cap Fund Workplace Fund Total net assets: As of 3/31/08
Equity Income Fund
Assets in $MM % of Total 926.8 256.3 87.0 7.1 5.6 4.2 1,287.0 72.0% 19.9% 6.8% 0.5% 0.4% 0.3%
Environmental, Social & Governance Assessment: The 3 P’s
1. Product / Service 2. Production / Operations 3. Planning
Where do we look for ESG information?
Sources
Verification
• CSR/Sustainability Reports • SEC filings • Corporate website • Management interviews • Sell-side ESG research • Government data • Social networks
• KLD Research • David Gardiner & Assoc. • More Management Interviews • Third-party audits • NGO & SRI collaboration • Sector surveys
• Industrial property developer and owner • Strong connection between business goals and CSR goals • Branding through case studies, Sustainability Report, websites • Third party recognition for efforts
Country’s largest waste services company Public trust, sustainable services are crucial for business Branding through TV advertising, Sustainability Report, websites Uses specific numbers to drive home sustainability commitment
www.thinkgreen.com www.wmgreensquad.com
Lloyd Kurtz
Senior Portfolio Manager
A Case Study in Reputational Risk
At the Center…
Stakeholder theory can be viewed as a constellation of ‘Hirschman relationships’ between a Control Group and a variety of groups...
CONTROL GROUP (MGMT)
Commercial Relationships
"There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else." - Sam Walton
CONTROL GROUP (MGMT)
CUSTOMERS
Commercial Relationships
In the 80s and early 90s it was popular to say that if you took care of these groups, you didn’t need to worry about much else.
SUPPLIERS
CUSTOMERS
CONTROL GROUP (MGMT)
EMPLOYEES
SHAREHOLDERS
Social/Environmental Relationships
SUPPLIERS ENVIRONMENT EMPLOYEES
LOCAL COMMUNITY
CONTROL GROUP (MGMT) SHAREHOLDERS
GOVERNMENT
CUSTOMERS
Thomas and Friends
Percy the Small Engine Thomas the Tank Engine
Henry the Green Engine
Toby the Tram Engine James the Red Engine
Wooden Railway
Good gross margins
Set above lists for $44.99 Manufactured inexpensively abroad
Bright colors, detailing faithful to books and tv show Bundled with trading cards Sometimes included as a ‘bonus’ with DVD purchase
The Company
Learning Curve was founded in Chicago in 1993 Key Product Lines
The First Years Lamaze Playtown Thomas & Friends
In 2003, Learning Curve was acquired by RC2 Corp (ticker: RCRC)
Firm Strategy
“RC2 builds consumer loyalty by fulfilling the passions of targeted consumers with branded toys, collectibles, hobby or infant products that encourage repeat purchases and are fun to own and use. “Our goal is to achieve leadership in targeted markets worldwide by acting on significant consumer trends, continuously applying innovation and developing consumerpreferred brands and products distributed through multiple channels.”
- RC2 Website, accessed 8/1/2007
Four Focus Areas
“Building our own brands”
First Years, Lamaze, Learning Curve, and Johnny Lightning
“Differentiation”
“…more segmentation, more niche marketing…”
“Distribution…”
Including international expansion, Internet distribution, inventory planning and management.
“Consumer communication”
“…the shopper is in more control than ever over where, when, what, and how the products are being purchased.”
Excerpted and adapted from Streetevents transcript of Feb. 13, 2007 earnings conference call.
An Analysts’ View of RC2
“Management’s consistent track record of solid execution (securing new licenses and developing new products) along with past acquisitions, gives us confidence that core revenues and EPS growth is sustainable in the 5%-10% and mid-teens, respectively, over the next several years…”
- Timothy Conder, A.G. Edwards, January 12, 2007
Bad News, 6/13/2007
“The U.S. Consumer Product Safety Commission, in cooperation with [R2C], today announced the recall of the following consumer product. Consumers should stop using recalled products immediately unless otherwise instructed…” “Name of Products: Various Thomas and Friends™ Wooden Railway Toys” [1.5 mm units] “Hazard: Surface paints on the recalled products contain lead. Lead is toxic if ingested by young children and can cause adverse health effects.”
An Incident in China
“A manager at the RC2 factory detained a New York Times reporter for more than nine hours after he had been admitted to the premises by security guards to ask questions about the operation…”
“RC2’s Train Wreck”, The New York Times, 6/19
Analyst Comment
“These recalls happen fairly often. It’s when the recall becomes botched and children are hurt when it takes on a life of its own… [This recall] should not have any long-term damage.”
“RC2’s Train Wreck”, The New York Times, 6/19
25
30
35
40
45
50
12/29/2006 1/5/2007 1/12/2007 1/19/2007 1/26/2007 2/2/2007 2/9/2007 2/16/2007 2/23/2007 3/2/2007 3/9/2007 3/16/2007 3/23/2007 3/30/2007 4/6/2007 4/13/2007 4/20/2007 4/27/2007 5/4/2007 5/11/2007 5/18/2007 5/25/2007 6/1/2007 6/8/2007 6/15/2007 6/22/2007 6/29/2007 7/6/2007 7/13/2007 7/20/2007 7/27/2007 8/3/2007
6/13 – Joint press release w/ Consumer Product Safety Commission.
7/4 – Lawsuit alleges lead paint problems with metal train toys. 8/1 - Disappointing revenues and earnings.
RCRC: Spot the Reputational Effects
6/19 – New York Times story: reporter detained at China factory
Subsequent Performance
Indexed Price
25-May-2007 to 28-May-2008 (Daily) 25-May-2007=100; Local RC2 Corp. (RCRC) 43.2 S&P 500 (SP50) 91.3 100 90 80 70 60 50 40 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
Data Source: Prices / Exshare
©FactSet Research Systems 2008
