Doing well while doing good: Where value and values can intersect

by Leola Ross, Ningning Wang, Russell Investments

Russell Investments has long held that it is possible to create investment value while incorporating values into the decision-making. In this blog post, we continue on that theme and highlight a small collection of securities that demonstrate doing well while doing good.

Doing well: A definition

We define doing well as strong excess over index and excess over sector returns for three years trailing December 2019.

Doing well, in a financial sense, is the fundamental mission of the investment management industry. It is not disputable that this is our mission. What has been, oddly, disputed is that doing well can be combined with, consistent with and even enhanced from doing good.¹

Doing good: A definition

We define doing good a bit more loosely in acknowledgement that there are many ways one can either measure or track goodness. In the sense of a corporation, goodness could be about exhibiting materially superior environmental, social and governance (ESG) practices as a firm (we have a measure for that!), emitting less carbon relative to peers and firm size (we have measures for that, too!) or exhibiting relatively low ESG-related risks (and, guess what? We even have a measure for that.).

By identifying some doing good metrics, we are able to evaluate some sector leaders that have been doing good and evaluating their ability to do well at the same time. From our perspective, it is definitely possible, but requires skill to get the balance right.

Because the fundamental mission of investment management is to promote doing well, identifying securities that should perform well in a forward-looking sense should be the highest priority for any security selection process. But identifying these securities is unlikely to be the sole task for any skilled investment manager. Indeed, risk management, liquidity provision, trading skill and many other functions are rolled up into portfolio construction.

Increasingly, both return identification and risk management are incorporating ESG as key considerations. Because of these considerations, that are part of a sound investment practice, it is increasingly the case that targeting ESG-related outcomes is a desirable goal alongside targeted performance outcomes. To illustrate the potential for this duality, we profile a few securities that did very well, over a three-years trailing history, while exhibiting some good characteristics, according to our measures, and were favored by our sub-advisors.

Please note: This is in no way a recommendation for these securities, nor for using these metrics to guarantee good corporate behavior. Instead, these companies are simply included as proof points and these metrics are a handy way of identifying some companies to feature.

Case 1: UK-based distiller, Diageo

Let’s start by acknowledging that our first featured security is in the alcohol business. As someone who was raised in a dry home, I had to swallow hard on this and dig a bit deeper. And with several of our funds overweighting this security over our three-years sample period, we can view it as a best-in-class sort of holding.

Returns

Diageo exhibited strong three-years returns of 4.63% over the MSCI All-Country World Index. Check. Russell Investments’ sub-advisors held this security at a material overweight (averaging from 0.18% to 0.43%) across four of our global equity funds during this time. With a market cap of $96 billion, such an overweight constitutes a material exposure.

Corporate social responsibility

Diageo has a lengthy corporate social responsibility webpage, where they also acknowledge that they are in the alcohol business, stating: “Some of our strongest advocacy work involves arguing for industry-wide standards to tackle alcohol misuse and promote responsible drinking.” In addition, they highlight community programs and environmental impact along with many other details.

Metrics

As of late 2019, Diageo demonstrated risk ratings and carbon footprints that were among the lowest in the consumer durables sector, and a material ESG score of 10, which is our highest score.

Votes and controversies

In reviewing our proxy voting record, we observed no contentious votes in 2019, no shareholder proposals and few controversies—only one that rises to the significant level. Given the global footprint of Diageo and a $96 billion market capitalization, we view this record positively.²

Case 2: U.S.-based medical devices producer, Mettler-Toledo

At this moment in history, we can certainly see the social value of a firm that produces medical devices.

Returns

Mettler-Toledo crushed the MSCI ACWI index with 10.70% excess return trailing three-years from December 2019. Three of Russell Investments’ global equity funds exhibited >0.31% overweight to Mettler-Toledo with a market cap of more than $17 billion.

Corporate social responsibility

Mettler-Toledo has a more modest discussion of sustainability on their webpage, where they highlight energy and resource efficiency, business practices and corporate values.

Metrics

As of late 2019, Mettler-Toledo demonstrated risk ratings and carbon footprints that were among the lowest in the healthcare sector, and a material ESG score of 10, which is our highest score.

Votes and controversies

In reviewing our proxy voting record, we observed no contentious votes in 2019, no shareholder proposals and only one very minor controversy in recent years.

Case 3: France-based materials, Air Liquide

No set of case studies on ESG would be complete without venturing into heavy industry. Air Liquide is a conglomerate including industrial oxygen, healthcare, electronics, engineering/construction and green energy.

Returns

Air Liquide outpaced the MSCI ACWI by 2.80% over the three-year period ending December 2019, and Russell Investments featured a 0.27% overweight in a bespoke global mandate. At more than $60 billion in market capitalization, this represents a material stake.

Corporate social responsibility

As a large conglomerate in more than 80 countries, Air Liquide has 67,000 employees and highlights some core principles on its webpage, including safety, ethics, climate and air quality.

Metrics

As of late 2019, Air Liquide demonstrated a risk rating that was among the lowest in the industrials sector, and even with a carbon footprint far exceeding our other case studies, it was low by industrials standards. The material ESG score was 9.

Votes and controversies

In reviewing our proxy voting record, we observed no contentious votes in 2019, no shareholder proposals and a small number of minor controversies on the record of this company employing 67,000 people worldwide.

Case 4: U.S.-based technology, Intel

We round out our list of well and good companies with a tech giant, Intel. I was surprised to see this one on the list as overweights to mega-caps are few in Russell Investments’ funds.

Returns

Intel exhibited doing very well, outperforming the MSCI ACWI by 8.19% over the three-year period ending December 2019, and Russell Investments had a 0.24% overweight in a tax-managed fund. Intel has a whopping $227 billion market cap. With that much heft in the global market, doing good can have quite a strong ripple effect.

Corporate social responsibility

In fact, Intel’s corporate social responsibility page says it will “do wonderful.” While I will leave wonderful to the eye of the beholder, I can verify that the page is apropos to its sector, with all the glamor, content and ease of use one would expect from a tech giant.

Metrics

As of late 2019, Intel demonstrated risk ratings and carbon footprints that were among the lowest in the tech sector, and a material ESG score of 10.

Votes and controversies

In reviewing our voting record with Intel, we observed three shareholder proposals, but nothing contentious in these proposals or any other votes in 2019.  In addition, we observed a small number of controversies, with only one rated significant. Such a record is quite impressive for a company of $227 billion in market capitalization and an extensive global reach.

These case studies are backward looking

Investment management is a forward-looking practice—this collection of case studies is backward-looking and, as was previously stated, does not constitute a recommendation. All we are demonstrating here is:

1. Stocks that do well may also have opportunities to do good
2. That good can be measured and observed
3. Stock selectors who are highly focused on beating benchmarks can find these stocks

As investment managers look for opportunities to add value in their portfolios, they must consider the impact of environmental, social and governance characteristics in the securities they select. Additionally, they must weigh the risks that poor environmental, social and governance practices will introduce. In seeking to balance these opportunities and these risks, we expect the skillful integration of ESG into their investment practices to be value-adding.

*****

¹ We acknowledge that ESG may, in some cases, dominate the investment thesis for an investment manager as either a thematic choice or because of a desire to do good.  When the choice to do good comes before doing well, investors should be highly cognizant of the potential for doing less well. The comments in this blog post do not relate to these special cases.

² All controversy information is reported to us by our ESG data provider, Sustainalytics.

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