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Procter & Gamble – virtue comes at a price

Procter & Gamble – virtue comes at a price
August 14, 2019
Procter & Gamble – virtue comes at a price

However, I accept that I’m certainly in the minority. My colleague Simon Thompson is willing to employ a combination of fundamental and technical analysis to make sense of the small-cap universe – and he hasn’t done too badly down through the years.

It may even be that this form of analysis has become an effective investment tool simply because if a technical position has enough adherents it becomes self-fulfilling.

It struck me recently that the same logic could be applied to environmental, social and governance (ESG) investing. Not that long ago, the very concept of ESG investing, a bastard offshoot of the stakeholder principle, was at the margins of managed money; now it’s part of the mainstream.

Analysis from Pictet Asset Management reveals that even if you disregard exclusionary screening, whereby funds eschew investments in certain industries, typically armaments and tobacco, then just under a third of global assets under management will be governed by ESG mandates by 2020.

And as you might imagine, the trend towards ethical investing is more pronounced in developed economies. The Global Sustainable Investment Alliance, a collaboration of sustainable investment organisations, estimates that total European assets committed to responsible investment strategies grew by 11 per cent from 2016 to 2018, reaching €12.3 trillion ($11.4 trillion), equivalent to 49 per cent of professionally managed assets.

So, like technical analysis, ESG is difficult to ignore from an investment perspective, particularly when you consider that it could be reflective of a demographic shift. The received wisdom is that anyone reaching young adulthood in the early 21st century is probably not only more environmentally aware than their forebears, but is also more inclined to factor ESG considerations in their daily lives. I don’t know if any empirical evidence supports this notion, but it’s undeniable that this demographic is attaining ever greater influence in decision making processes covering financial, political and regulatory affairs.

There’s ample evidence to suggest that ESG-related matters are already informing policy decisions. In 2015, France introduced legislation which compels institutional investors to declare how climate change considerations are incorporated into their investment policies. And financial corporations are increasingly adapting their policies voluntarily. The Task Force on Climate-related Financial Disclosures (TCFD), an initiative created to develop a set of recommendations for voluntary climate-related financial disclosures, recently revealed that 340 institutional investors with nearly $34 trillion in assets under management are asking companies to report under TCFD recommendations.

The trouble is that ESG considerations can extend beyond environmental policy to encompass social issues, such as a company’s work practices, its gender allocations or product safety – what's more, they're highly subjective. What happens, though, when a company alienates its customer base in pursuit of a seemingly noble cause? We had a possible example of this recently, when US personal products giant Procter & Gamble (NYSE: PG) was forced to book an $8bn write-down on the goodwill and intangibles of its Gillette shaving brand. Management said that the carrying values of Gillette products were hit by currency devaluations, but it also blamed the increased incidence of men sporting beards and intensifying competition.

However, the group’s full-year report contained no mention of a controversial advertising campaign for Gillette, an effective diatribe against 'toxic masculinity' which advanced some unflattering generalisations about the male of the species and his motivations. The campaign was relentlessly mocked on social media, while debate raged as to whether Procter & Gamble had overstepped the mark. Anyone old enough to remember the saga of Gerald Ratner will know that not all publicity is good publicity.

By its own admission, Procter & Gamble wants to “lead the charge in doing the right thing…to be a force for good”. That’s laudable in a sense, but firms need to be careful that they don’t engage in moral posturing, as opposed to the pursuit of good corporate governance. Most people resent being lectured by central government, so it’s unlikely that they’ll react well to corporations doing the same thing. Directors have a fiduciary duty to maximise shareholder returns, not to lead their company’s owners in the path of righteousness.