Moving forward on ESG

At FSSA, we are long-term, bottom-up investors with a focus on quality. This mind-set also applies to how we engage with companies on Environmental, Social and Governance (ESG) matters. We hold over 1,500 meetings a year with companies in Asia and global emerging markets (GEM), to better understand the companies we invest in and offer suggestions on ways to improve. Over time, we have built close relationships with management teams, enabling us to have frequent and frank conversations, to influence their decision-making.

Throughout our team’s 30-plus year history, we have integrated ESG analysis into our investment process, as we believe it is inseparable from the business goal of delivering sustainable earnings. We think it is critical that management teams spend time thinking about the externalities affecting their businesses, and we try to nudge them in the right direction when appropriate. To us, “ESG investing” is simply “investing.”

While ESG has become somewhat of a buzz word in the investment industry, we recognise that there is no perfect company, nor is there a one-size-fits-all approach. Rather than taking a box-ticking or negative screening approach, our philosophy is to partner with companies on a journey to gradually improve over time. A good example of this is Anta Sports, China’s leading sportswear company. Having followed Anta Sports since its initial public offering (IPO) in 2007, we have spent the past 15 years engaging in frequent dialogue with management.

Although companies in Asia and GEM are improving as a whole, individually they are in different stages of their evolution. This often requires patience on the part of investors, as some companies can seem reluctant in the early stages of embracing sustainability.

One example in our portfolio is Jardine Matheson (JM) together with its subsidiaries. We consider it one of Asia’s best examples of a family-owned company that is managed by professionals. However, it is only in the last three years after our continuous engagement that they have moved from reluctance to sustained effort towards ESG, with a high degree of openness.  

These efforts have been led by the group chairman, Ben Keswick. The turnabout started in early 2019 with his appointment to executive chairman and the subsequent announcement of a group-wide “momentum-shift” strategy. JM’s Sustainability Leadership Council was formed in July 2019 and now comprises all of the group CEOs. There are three key pillars: leading climate action, driving responsible consumption (recycling) and the promotion of social inclusion.

As long-term shareholders there have been two main areas of engagement for us in the past. The issues relate to Indonesia’s Astra, a subsidiary company, with the business involved in palm oil and coal mining. We can happily report positive actions from JM in both areas, although it’s an ongoing journey with every company.

We believe corporate culture is a key signifier of whether a company is likely to do the right thing in taking care of its people and surroundings. On the social front, we seek to understand a company’s treatment of its staff and customers; the health, safety and mental wellbeing of its workforce; and how diverse and representative the company is relative to its community and customer base.

Compared to the West, Asian cultures are often characterised by steeper hierarchies and larger power gaps. Therefore, we look for qualitative signs of inclusive and meritocratic decision-making. When things have gone wrong, we look at how management teams reacted and try to understand the reasons as well as lessons learned and/or changes made. Our level of tolerance varies depending on the severity of the issue and the context in which it occurred.

For example, we are investors in Nihon M&A Center, Japan’s largest M&A advisory services firm which focuses on serving small and medium-sized enterprises (SMEs). While its execution seemed outstanding, its highly motivated and sales-driven culture resulted in an unusual booking of sales at a subsidiary company in December 2021, which raised red flags about the sales and profit attribution over the quarter. Upon internal investigation the management discovered that several similar cases had occurred, involving more than 80 employees.¹ Brokers were being put under immense pressure by the top management to achieve sales targets, particularly around the 30th anniversary of the company’s founding in April 2021.

In June 2022 we met with the president at Nihon M&A’s office in Japan to discuss the issue. The president acknowledged the problems and was deeply apologetic. He committed to improving the situation and planned to implement preventative measures such as stricter sales recognition criteria and changes to the employee incentive program.

In our view, setting such high targets while ignoring the business environment could be a cultural issue and alleviating it may not come easily. On the other hand, the president has been clear that he does not condone these practices – we found his personal involvement in conducting face-to-face sessions with employees to address the issue to be a positive sign. We intend to monitor the president’s efforts to change the corporate culture.

We expand on these brief examples, along with many others, in our 2022 ESG report. ESG is highly complex and constantly evolving. Regulations have continued to accelerate with enhanced disclosure and reporting requirements against a regular cadence of greenwashing examples. Asset managers and companies alike have been back-pedalling from their commitments so as not to run afoul of the more stringent criteria. We see this as a positive which should ensure more thought and care.

We too are subject to these same regulatory developments and recognise we must continue to learn, evolve our work on ESG and improve our communications to stakeholders. Throughout, we remain focused on assessing company quality rather than marketing ourselves as a particular shade of green. 

¹ https://www.nihon-ma.co.jp/ir/pdf/220214_information1_en.pdf