How does ESG and financial performance stack up?

How does ESG and financial performance stack up?

I wanted to start by highlighting a piece of research on the important topic of ESG in performance.

A recent Meta study from the New York Stern School of sustainable business looked at over 1000 individual papers published over the last five years. They found that over 60% of these papers report a positive relationship between ESG and financial performance. This is consistent with our concept of corporate karma and shows that investing in sustainability can deliver higher growth and returns through innovation, higher operational efficiency and better risk management.

The Schroders Sustainable Quotient framework in action

The SQ framework is at the heart of our investment process. Every company that makes it onto our investible universe must have been through this assessment and undergone the scrutiny of our investment committee.

I wanted to share two recent case studies to shed light on how this works in practise.

Firstly, Recruit, a Japanese company that was one of our best performers during Q3 2021, and that we've owned since 2017. Recruit is a Japanese industrial, technically, but its largest assets are the job recruitment sites Glassdoor and Indeed. Now, Recruit is not normally considered to be an ESG leader, but when we did our SQ analysis, we found that the company stood out in a number of areas, both on their relationship with their key stakeholders and also their wider commitment to CSR which is quite unusual in the Japanese market in particular. The company's mission is to prioritise social value by removing frictions in the labour market and encouraging diversity hiring. We were also really impressed by their entrepreneurial culture.

In contrast, a name that we recently looked at and rejected for our investible universe is the US technology analytics firm, Gartner. It's quite an interesting comparison because many of the key stakeholders are similar to Recruit, their customers and their employees, for example. And similarly it's a very good fundamental business, but when we went through the SQ, we were largely disappointed by the company's performance. It wasn't that there was anything particularly awful, they just didn't stand out to us in any one area, and we got the impression that they were doing the bare minimum in some places.

Active ownership case study

Lately, we've been engaging with AstraZeneca, a recent purchase. Throughout the SQ process, we were really impressed by the access we got to senior members of staff, and CSR specialists at the firm, and how seriously they clearly took our questions and concerns.

Through our engagement, we were able to get a much better understanding of their environmental and social programmes, and how seriously they take their corporate responsibilities. For example, they were one of the first firms to submit new net zero plans consistent with the science-based targets initiative. We continue to engage with the company going forwards on critical topics, such as access to medicine and drug pricing, especially when it comes to vaccines.