Not sure one will call this a battle of the titans. When the 10th biggest shareholder of a global conglomerate has a go at its management, it was newsworthy. And the topic was the hottest in town: ESG.
There are lots of reports and comments in the media on Terry Smith’s recent lambast on Unilever management. Cynics of the founder of Fundsmith thought that Mr. Smith was trying to blame company management, rather than his poor stock picking skills, in holding onto a company that has been dragging his fund performance (see chart below). They also asked why the fund manager did not sell the stock if he so disliked Unilever’s management.
Returns calculated in GBP and rebased to 100 at June 2001
Supporters of Unilever’s management cited that the company is doing the right thing by putting ESG in the centre of its corporate strategy. Unilever management understood that a generation of consumers want products that do not harm the environment, do not underpay labour, do not abuse supply chains – all the ESG credentials that Terry Smith seemed to be unhappy about. Furthermore, management wants the company to have good ESG ratings with rating agencies. This will secure investment from institutional investors who are putting more focus on ESG scores in their investment decisions.
But let me offer two counterviews. First, what Terry Smith has done is recognised as fulfilling his stewardship duties on behalf of end investors. When a manager fails to get the attention of management through normal engagement, writing public letters and telling media on his view is known as “escalation” under stewardship. This approach is often taken by activist investors.
It is not clear whether Fundsmith is adopting an activist approach with Unilever, though an activist manager, Nelson Peltz’s Trian Partners, has built up a stake in Unilever as well. We also do not know whether Fundsmith has been engaging Unilever privately on this issue previously and for how long. Normally, activist managers usually hold onto the investment because they see value and growth in the company’s assets, are frustrated by the lack of action by the company and believe they can influence (or even force) management to change its approach. That may explain why Terry Smith has not sold his investment in Unilever yet.
Secondly, a frequently quoted phrase in Mr. Smith’s letter was that Unilever management is “obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business”. That is taken to be anti-ESG. But remember that the rationale for ESG investment is that these factors, in addition to other metrics and factors, drive the long-term sustainability of companies. A sustainable company is one that lasts, with management who thinks long term, creates jobs, benefits society at large as well as shareholders. Is running a sustainable business not about “fundamentals of the business”?
Companies that run on a purpose like being sustainable should naturally consider ESG in their strategies and in their day-to-day operations. But the converse may not be true, especially if management is just trying to get good ESG scores and ratings. This shows short-termism from management: where are the long-term strategies of the company when growth has - stagnated? No wonder why Mr. Smith complained again on Unilever’s failed attempt to buy GSK’s consumer unit.
There are often different views and philosophies in investment. For example, active vs passive management. These debates have been going on for years among practitioners and academics. While there are no clear, definitive conclusions to these debates, they help investors and advisers to think critically and make better informed decision. The debate on ESG has been more polarising than previous investment debates. There is also an inadvertent halo effect on those who says good things about ESG. Both limit quality but critical counterviews. So I welcome this type of debate in ESG. We need more Terry Smiths who are not afraid to say their views, even if it is unpopular (or may be wrong…).
James Chu CFA
Head of Investment Solutions