Environmental, social and governance (ESG) promised a harmonious blend of profitability and responsibility and investors were drawn by the allure of aligning their portfolios with their values.
However we’re now witnessing a backlash, which has dulled some of ESG’s former shine. Investors are worried about greenwashing and there’s a lack of a universal framework for evaluating and disclosing ESG metrics.
Amid all of these problems one of the best ways to adhere to ESG principles is to look for companies going above and beyond peers to support positive change. Perhaps they don’t tick every box you can think of but we need less box ticking and more appreciation of the companies at the forefront of social and economic change.
We have our eye on what we believe are sometimes underappreciated companies that operate above the rest, following a clear sense of purpose and adhering to sustainable practices that foster long-term financial success. Three examples are retail giant Costco, logistics company JB Hunt, and pharmaceutical company Eli Lilly.
So, what do retail giant Costco and logistics company JB Hunt have in common? Both take exceptional care of their employees and turn this into a key competitive advantage. With close to $250bn in sales, Costco is the world’s third largest retailer after Amazon and Walmart. One of its four central tenets is to ‘take care of our employees’.
Costco pays its US employees $27 per hour, 60% more than the industry average. Alongside this, it offers great benefits such as health coverage and retirement plans, along with training and career progression opportunities.
As a result, employee turnover is at 10%, one of the lowest in the typically high turnover retail industry, where it is closer to 30%. This allows Costco to retain the best staff, which in turn, improves the quality of service for customers and facilitates future growth as existing employees experience and behaviours are key in the success of new store openings.
The current chief executive is the embodiment of this culture, having started in 1982 as a forklift driver in the warehouses with his predecessor being his foreman.
The good employment conditions and working practices are key elements of Costco’s unique subscription model and result in, what appears to be, an ever-improving member retention rate.
This is key as Costco makes most of its money from subscriptions, choosing to keep product variety limited and applying very little mark up to products to give the best deals to its members.
Meanwhile, JB Hunt is an American logistics company with the motto ‘Founded by a Driver, For Drivers’. The company’s founder Johnnie Bryan Hunt, who started the company with just five trucks in 1961, was a driver who had firsthand understanding of the job’s challenges and demands: long hours, stretches away from one’s family, and a tough work environment.
He thus set out to provide competitive compensation, driver-friendly policies, and a safety-first approach. This is key to recruiting in a high-vacancy industry. The US alone has a massive 80,000 truck drivers’ shortage which will double by 2030.
The company also generates close to 50% of its revenues with intermodal transportation, where containers are transferred from trucks to train. Initially devised to save costs for customers, as intermodal transportation is 30-40% cheaper than trucks intermodal also emits 60% less CO2 giving it very strong environmental benefits.
JB Hunt recently announced its intention to increase its Intermodal capacity 50% by 2027. We believe this move provides JB Hunt with high growth potential as intermodal transportation currently only moves 4% of long-haul loads.
Eli Lilly is a 150-year-old pharmaceutical company with a long history of driving positive change. One hundred years ago it started selling the first commercially available insulin in the US, enabling diabetic patients to survive what was at the time a fatal disease.
We are on the eve of a potentially similar change today in the fight against obesity. The company’s unique drug Zepbound is a GIP/GLP-1 enabling an average 23% weight loss for obese patients.
Obesity is a global pandemic affecting 800 million people globally. More than 40% of US adults are obese and this costs the US almost $150bn per year, a figure that is set to increase as obesity is related to 250 other health issues.
With Eli Lilly’s drug, this expense could be vastly reduced, freeing up funds for investment in combating other health issues. Eli Lilly and competitor Novo Nordisk stand to benefit with a market that could potentially generate more than 100 billion in revenues per annum and they are powerful drivers of positive change for society.
It is hard to know where to look to find ESG leaders given the controversy around greenwashing, ratings and so on. We definitely don’t pretend to have all of the answers but finding motivated, dedicated drivers of positive change is a good place to start.
Louis Citroen is portfolio manager of the Comgest Growth America fund. The views expressed above should not be taken as investment advice.