1980; Big hair, Rubik’s Cube, Pac-Man, The Empire Strikes Back J and ‘The lady’s not for turning’
And companies making stuff – actual things you could hold. Or rather tap, pump and burn according to the table below. The sort of things which required investment in physical, tangible assets (factories, machinery, inventory) and which in turn were the principal driver of company value.
Source – etfdb.com/history-of-the-s-and-p-500/
But fast forward quarter of a century and the value assigned to physical assets has declined significantly. To survive the knowledge, or information, revolution that has occurred, constant product and process innovation has been required, primarily enabled by investment in intangible assets such as R&D, patents, brands, information systems and people. Think intellectual (human) capital vs. bricks and mortar (physical); research and development vs. capital spending; services vs. manufacturing.
What’s the ESG link? Intangibles means different things in different sectors but customer relationships are common to all and the way that companies behave determines whether the value of this goodwill is sustained or damaged. Similarly, pick a company, any company and you will probably find some reference from either the CEO or chairman about ‘our people being our most important asset’. However, these (often boilerplate statements) are actually true! Especially for the capital light, ‘virtualised’ companies that we invest in where employees perform highly skilled tasks.
As investors, understanding how a company treats its employees is important. Treat people well and you improve retention rates. Even more powerful, sociological theories argue that satisfied employees identify with the firm and internalise its objectives, thus inducing effort. This last point might seem abstract but intuitively it strikes us that employee welfare is intrinsically linked with shareholder returns. Think short-term and from a purely accounting perspective and a lot of this fluffy stuff is an expense. Conversely, if it leads to better processes, quality, supplier relations and customer satisfaction, eventually it also moves the needle on revenues, market share and ultimately earnings – which are much less abstract concepts for investors.
About the author
Ryan Smith is Head of ESG Research. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 18 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University and is a CFA charterholder.
*As at 30 September 2018.