- Last week Hein Schumacher, chief executive of Unilever, said that corporate purpose was an “unwelcome distraction”.
- The share price of Unilever has plummeted 13.2% over the past six months.
- The link between ESG and profitability has not been theoretical for a long time: companies with better ESG ratings outperform their peers with lower ratings.
It has become headline-grabbing, almost fashionable for companies to step away from ESG and sustainability.
It started in the summer. Larry Fink’s comments at the Aspen Ideas Festival in Colorado at the end of June were a starting gun to throw sustainability under the bus. The chief executive of BlackRock’s ($10trn AUM) comments that he no longer intended to use the term because it had become “weaponised” and “misused by the far left and the far right” have been both, well, weaponised and misused.
It was jumped on by the oil and gas sector with some alacrity. Both Shell and BP have since scaled back their emission reduction targets and reduced their ambitions to cut fossil fuel production. And in the US there has been a rush of acquisitions.
In early October, Exxon Mobil paid $59.5bn to buy shale rival Pioneer Natural Resources in a deal that would dominate the largest oilfield in the US and add 700,000 barrels per day of new oil and gas within four years. And towards the end of the month, Chevron agreed to buy independent energy company Hess Corporation for $53bn, which will give it access to new oil fields in Guyana.
A distraction to strategy
Capital Monitor has written regularly about the oil and gas sector’s refusal to acknowledge sustainability, but last week such scepticism appeared to spill over to consumer corporates when Hein Schumacher, chief executive of Unilever, said that corporate purpose was an “unwelcome distraction”.
Despite the plaudits to the move – one British commentator for a right-wing British newspaper cheered that the company was rowing back “the social purpose flim-flam that has dominated its operations for the last 10 years” – it is hard not to think that Schumacher is using the move as a distraction to the company’s catastrophic management.
Schumacher’s comments were made at the release of the company’s third-quarter results.
These were not great. Turnover dropped 3.8% to €15.2bn ($16.1bn) in the third quarter of the year and sales volumes in Europe were down 10.7%.
The consumer group has made misstep after misstep in recent years, notably, its $68bn failed bid for GSK’s and Pfizer’s consumer health division in January last year.
More to the point, Unilever was put on the International Sponsor of War watchlist by the Ukrainian government – a list Kyiv keeps of those who refuse to cease doing business with Russia – after it emerged at the beginning of July that the London-listed company had not only refused to leave Russia, it had seen its profits in the country almost double to Rub9.2bn ($99m) in 2022 and had paid taxes of Rub3.8bn last year. It was something that Schumacher planned to address, but no movement has been seen so far.
The market remains unconvinced about the company’s prospects and the share price of Unilever has plummeted 13.2% over the past six months. Under these circumstances, the rejection of sustainability has less to do with a change of direction, and more to do with the flailing of a badly run company.
An ennui with ESG
But Schumacher’s comments do reflect an apparently growing ennui with ESG.
Morningstar’s global review of third-quarter fund flows released at the end of October backs this up. Blaming “sticky inflation, rising interest rates, and recession fears” that continued to weigh on investor sentiment, it showed that global sustainable funds attracted inflows of only $13.7bn in the third quarter of the year, half of the $23.6bn in the previous quarter.
Aside from the by-now familiar background noise of sniping in the US where sustainability has become almost entirely politicised, more fuel was thrown on the fire in the Financial Times last week. Aswath Damodaran, professor of finance at the Stern School of Business at New York University, did a hit job describing ESG as “born in sanctimony, nurtured with hypocrisy and sold with sophistry”.
His argument for its rejection is that of fiduciary duty. “Adding an ESG constraint to investing will lower expected returns, with the only question being how much, leaving fund managers who have fallen for its charms in a fiduciary bind,” he writes.
This bluster was almost immediately demolished by Ioannis Ioannou, associate professor of strategy and entrepreneurship at London Business School. “The argument bypasses the wealth of empirical evidence that showcases a positive correlation between robust ESG performance and enhanced financial results, lower cost of capital, and reduced stock price volatility,” he noted.
This is precisely the point. The link between ESG and profitability has not been theoretical for a long time and the weight of evidence that companies with better ESG ratings outperform their peers with lower ratings is overwhelming. There is a reason that the mean consensus of Unilever’s 19 analysts is “hold”. For an investor, it is hard to think of a larger red flag than a rejection of ESG.[Read more: Investors underplay cost of FMCG giants’ indirect emissions]