Brand management is a central topic in sustainability investing. As strong brands account for around one third of Robeco Global Consumer Trends Equities’ portfolio, it is crucial for the portfolio managers to assess the brand management of the companies in their portfolio. Engagement helps them to gain in-depth insight.
Brand management is material for many companies, as it interfaces with numerous aspects of a company’s operations. Good supply chain management, for example, is crucial to prevent widely reported incidents, such as accusations of child labor at suppliers. Such reports can seriously damage a company’s reputation and, consequently, its brand. Transparency is another key element that contributes to trust in a brand.
Brand management is especially relevant for consumer goods companies. A brand often is their most valuable intangible asset, which differentiates their products from those of competitors and encourages customer loyalty. Research by BrandFinance shows that strong brands are often correlated with strong sustainability.
Brand management takes up a prominent place in Robeco Global Consumer Trends Equities. Strong brands make up one of the three trends in the portfolio, alongside the advance of the digital consumer and the emerging consumer.
Portfolio managers Jack Neele and Richard Speetjens actively cooperate with Robeco’s engagement specialists, who engage with companies to improve their supply chain management and transparency. To show how this works, we will explain how Robeco has engaged with three stocks from the Global Consumer Trends portfolio and how this influences the conviction of the fund managers.
We have engaged with an apparel company on health and safety. In the clothing sector, buyers often source from numerous suppliers worldwide with limited visibility of companies beyond the first tier of their supply chain. However, if bad practices are exposed in those parts of the chain, the buyer’s brand will suffer regardless.
This company has a strategic plan for a stable and sustainable supply chain by 2018. To manage suppliers’ ESG risks, it has deliberately chosen to work with a large number of ‘proximity suppliers’ in the Mediterranean countries, rather than outsourcing all production to South Asia. It works with an IT-based system to monitor its suppliers, trains its suppliers extensively and performs regular audits on their compliance.
During our discussions, we gained sufficient confidence that the company is aware of its exposure to social risks and we closed our engagement with them in 2016.
Impact on the investment case for Global Consumer Trends
The success of this company’s main brand is founded on the concept of getting catwalk-inspired designs to the shops as soon as possible. To achieve this, an efficient and reliable supply chain is crucial. Managing risks in the supply chain is therefore not only a matter of reputation or cost risk management, but is also at the heart of the company’s corporate strategy, underpinning its growth and profitability. Disruptions in supply can have a significant financial impact. The engagement gives us more insight into the steps the company is taking to manage its supply chain.
The company also publishes the number of government requests. These requests require a fast decision on whether there is an imminent danger and if the company needs to cooperate. When agencies are just fishing for information, the company doesn’t want to give data away.
Impact on the investment case for Global Consumer Trends
The engagement helps us as portfolio managers in our risk analysis. Does the company see the risks we’re seeing and how do they tackle them? We acknowledge that customers are bound to give up some of their privacy to enjoy the benefits of free service. Still, it is important that the company is at least transparent to clients about what it does with their data. The engagement provides us with valuable information on how the company deals with this issue.
Thirdly, we engaged with a food and drink company. It runs risks if the raw materials for its products are not produced sustainably. There is a growing scarcity of available agricultural land and water for irrigation. This may lead to problems in supply reliability and to higher prices. This creates a direct operational risk for food producers, as they cannot pass on all price fluctuations to the consumer.
This company has developed a human rights impact assessment report, which we have asked them to share with other companies. It has also developed a robust child labor monitoring program for the cocoa supply chain. We will continue to monitor its progress. For new suppliers, the company has a stringent screening process. We have successfully closed our dialogue with them.
Impact on the investment case for Global Consumer Trends
Clients are increasingly aware of where products are coming from. This company has set responsible sourcing targets. Criticism in the past has made them realize that they need to take action to prevent risks and protect their brand. Their increased transparency and constructive cooperation with our engagement specialists gives us comfort that we can identify the risks, that they see them as well and that, most importantly, they address them.
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