Over the years, the financial community has developed a wide range of approaches to the integration of ESG factors into investment processes. Although some of these processes have become standard steps in the construction of investment portfolios, the final stock selection for an active manager still relies on an in-depth understanding of the dynamics of an investee company and the journey it is on.
The views expressed are those of the interviewee at the time of writing. Other teams may hold different views and make different investment decisions. The value of investments may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
According to Yolanda Courtines, co-Portfolio Manager of the Wellington Global Stewards Fund, Schneider Electric offers an interesting case study in how strategic vision can reverberate throughout an organisation to improve returns and reduce risks. Schneider is particularly interesting in that it operates in an industry naturally relevant for climate change mitigation, making sound stewardship and governance even more vital to investors and society.
The stewardship and governance approach
With almost three decades of experience in the financial industry, Courtines’s career has spanned roles across several large investment banks as well as the World Bank.
“Throughout my career, I have had a broad set of global experiences, focusing on emerging markets as well as European banks, both on the sell and on the buy side,” Courtines says.
“Of all the approaches to investing that I have witnessed, I concluded that focusing on long-term good governance, building sustainable franchises and strengthening risk controls are some of the best drivers of profits over time,” she explains.
When the time came to set up the Wellington Global Stewards Fund with her co-portfolio manager Mark Mandel, Courtines’s stewardship focus became a guiding principle. “We focus on investing in companies that marry a history of high returns and a commitment to stewardship. We own great business models with strong stewardship that in our view can perpetuate that return profile for future generations,” Courtines adds.
The Global Stewards Fund
The Wellington Global Stewards Fund has a low turnover, a very long-term investment horizon and takes a highly selective, best-in-class approach to ESG investing, aiming to hold no more than 50 different stocks in the portfolio. “Sustainable investing can be pursued in a wide range of different ways,” Courtines argues. “We think of the integration of ESG into the Global Stewards Fund as protecting and building value for the future. We look for practices that are sustainable for the business model and really take care of all stakeholders.”
The Global Stewards Fund takes a balanced approach to portfolio construction with exposures across the main sectors of the economy, she explains. “We wanted industrial exposure to companies that were not locked into traditional CO2-heavy approaches and were able to adapt to the energy transition. We apply scorecard criteria to stock selection and look for companies with a strong ESG profile focusing on the metrics that matter to us. We think our inclusive approach makes us very different from the average sustainable fund in the market that relies on exclusions and screens. We focus on companies that are already excelling, have a track record of being good stewards and, in our opinion, have the necessary edge to achieve sustained returns over the long term,” Courtines says.
ESG in Wellington’s investment scorecard
Wellington’s Global Stewards Team uses a proprietary scorecard for its investments which reviews both quantitative and qualitative aspects, including returns history and a range of governance, social and environmental factors. The stewardship part of the scorecard focuses on ESG factors distributed among three main categories: executive strength, board empowerment and stakeholder engagement and transparency.
Courtines highlights executive strength factors such as the tenure of the CEO, the employee turnover at all levels of the company and the degree of diversity at top executive levels as relevant to the Fund’s strategy. “We are looking for companies with the right incentives, where executives’ compensation, including that of the CEO, is aligned to appropriate outcomes over relevant time horizons,” she says. “Another important consideration is whether there is a purpose or strategic messaging that resonates and is repeated all the way through the company. The consistency and focus of this ‘tone from the top’ is also very important.”
At the board level, the focus is on empowerment, with competent, responsive and independent directors providing challenge in the boardroom and setting the long-term strategy for the company. “If executive strength and board empowerment are right, everything else falls into place,” says Courtines. “If a company’s messaging is from a marketing department that is ticking boxes on ESG criteria, it is not going to get the same performance as if that drive came from the board and the executives.”
Beyond these two governance factors, Wellington’s stewardship approach also tackles environmental and social challenges. “Stakeholder engagement considers how firms treat the environment, as well as how they lead on social and diversity factors, manage talent retention and partner with their supply chain and community and how we measure their culture,” Courtines says.
Stewardship on the ground
Operationalising these considerations requires data analysis and on-the-ground engagement. “For data to be informative, it’s necessary to know how to ask the right questions and do the due diligence. We will also consider the view of third-party ESG data providers, but we will not follow their opinion blindly. We consider bottom-up data and put it in the context of the company, thinking about materiality and internal and external validation of our opinions on each one of those topics,” the portfolio manager explains.
On-the-ground engagement is crucial to generating those insights, according to Courtines. “We would not be doing our job without diving deeply into the drivers behind the data points. We commit to one executive- and one board-level meeting annually for each of our holdings. In reality, we meet with companies five to seven times a year, for earnings sessions, board-level meetings, ESG meetings and supply chain meetings. It’s on those occasions that we can ask specific questions about the firm that inform our scorecard and investment decisions,” she adds.
ESG case study: Schneider Electric
“When setting up the Fund, we were looking for companies that help their industry move forward in innovative ways. The electrification sector and Schneider Electric — a forward-looking company which is thinking about the industry a decade ahead, instead of where it has been — are a very good fit with our approach,” Courtines explains.
Schneider Electric is a French energy solutions company operating in the low voltage space between electricity transmission and use. With a €87.7 billion market capitalisation, it is one of the leading industrial companies in Europe, on a par with Siemens and Legrand. Over the last five years, Schneider has expanded from being a provider of electric products to adding more digital solutions that help its customers reduce their carbon footprint and their energy bill. “In many ways, Schneider’s business is a natural choice for a sustainable investor,” Courtines argues.
According to her, Schneider’s story fits well into the Fund’s stewardship framework. “We’ve owned Schneider since the early days of the Fund’s life, investing in June 2019. It is a strong margin business generating returns on equity in the low teens. As there is room for it to grow in scale and add more value to the solutions they are already providing, we see strong potential for their earnings and returns to increase,” she explains.
“Schneider provides the products and services to support the last-mile delivery of electricity and the smart solutions for how it is consumed; it helps data centres run 24/7, supports smart buildings, and improves energy efficiency for industrial uses. Among other services, Schneider ensures the stability of power supply as the grid becomes more complex and uses more renewable energy from solar panels or wind turbines,” Courtines says.
“Schneider’s services help its customers reduce their carbon footprint and have a more positive impact on the planet. The company fulfils all the criteria that we look for when we do our screens for both returns and stewardship. It has been a top 10 contributor to the Fund and, given its present trajectory, we expect it to remain a positive contributor in the future,” she explains.
Courtines argues that Schneider is one of the most holistic fits with the Fund’s investment approach. “In addition to aligning with all our key scorecard metrics, the oversight, the strategic vision and the long-term culture are also handled extremely well at this company. There is no such thing as a perfect company and ESG is not a static concept. The bar is constantly moving, but we think that Schneider stands out as a good example of what we are looking for. We want companies to be transparent, science-focused in their targets and driven to continue to excel,” Courtines adds.
Strategic leadership at Schneider
Courtines underscores the value of resilience and adaptability. “Schneider Electric stands out among its peers because of its focus. After Jean-Pascal Tricoire took over as CEO of Schneider Electric in 2006, the company began a strategic shift to increase exposure to the themes of electrification and automation. That helped drive its approach to talent, to solutions for its customers as well as its investments over the long term.”
Referring to the importance of “tone from the top” in a company’s executive leadership, Courtines highlights the clarity of purpose provided by Schneider’s vision of electrifying for the future. “The driving force in this journey is the company’s clear focus on helping its clients electrify. To do this, Schneider seeks to be close to customers to help provide solutions to reduce their environmental footprint and ensure customer satisfaction,” she says.
The implications of Tricoire’s shift in strategic focus percolated throughout the company, according to Courtines. One of his main strategic focuses was local empowerment through a distributed management model, with talent and power spread locally across Schneider’s various regions of operation. “The regions are staffed to meet the end demand. Decision making is locally distributed and connected globally. The model is very powerful and allows the regions to communicate with each other while also engaging proactively with local customers and supply chains,” she explains. This helped reduce supply chain disruption post-COVID.
The value of good governance
“When it comes to people, Schneider’s clarity of purpose ensures it can manage and build a strong talent pool across regions. Despite its decentralised nature, Schneider’s focus on communications ensures open channels of exchange between teams to build value, understand local markets and have that depth of skill extend through to the supply chain to find solutions,” Courtines says.
Courtines notes that Schneider has also increased diversity at the executive and board levels. “We believe that diverse representation is additive to a company’s position of strength. When Tricoire joined, of the top 1,000 executives across Schneider, only 3% were women, a figure which has increased to 27%. The board also has a more diverse make-up, be it on gender or background as well as on the skill sets that they bring. The lead independent director is experienced and has the CEO’s confidence to set the board’s agenda. Although there is no separation of Chairman and CEO at present, the company discusses its openness to separate those functions in the next four years,” the portfolio manager explains.
The COVID-19 test
Schneider’s decentralised approach yielded results in the first half of 2021, when the global economy suffered significant logistical and supply chain disruptions and dislocation, according to Courtines. “This was one of the things that came through from the strength of that governance model. As with its other stakeholders, Schneider had leaned into its supply chain, partnering and developing close contacts and sharing a long-term vision, which allowed it to find proactive solutions that helped it defend its margins in the first half of 2021. Schneider looked much stronger than many of its peers on that front.”
Courtines believes that doing good paid off during the pandemic. “What COVID-19 taught us was that we were right to focus on companies that were treating their stakeholders well, and who had earned their trust before the COVID-19 period. As a result, companies like Schneider had less of a drawdown in revenues and managed their financial returns during that period better than their counterparts that did not have a similar strategic ESG focus,” she concludes.
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Further information on Wellington’s approach to sustainability is available at www.wellington.com/en/sustainable-investing/sustainable-finance-disclosure-regulation-sfdr or at www.wellingtonfunds.com/SFDR