Welcome to Personally Invested. I’m Dave Richardson. This time I sit down with Jeremy Richardson. Now, Jeremy is not what you think: he’s not my brother, he’s not my cousin, he’s not my uncle: He’s actually a very successful Portfolio Manager with RBC Global Asset Management in London. He and a previous guest, Habib Subjally, and their entire team focus on global investing. But Jeremy has a unique perspective on ESG: environment, social and governance, as a screen for making investment decisions. In fact, Jeremy thinks that this is an undiscovered gem for investors in terms of analyzing companies beyond their financials, to identify companies that will perform better than others. Who knew that having a good track record on environment, treating your employees well, and having good governance in accounting practices would lead to better investment performance and in many ways a better world? Well, I think most of us know that, and Jeremy and his team are applying it to investing. I think you’ll enjoy the discussion.
Great to be here.
We are over in London, and it’s always great to get the opportunity to visit the team here with yourself and Habib, who we have had on the Podcast previously. And, I should note, for anyone listening: in the same link, under the same banner of “RBC Global Asset Management Investment Podcast,” you can find the podcast that Jeremy and Habib and their team do on a regular basis. For those of you who really like to get in-depth on different investment issues, it’s an outstanding podcast to listen to. They make…Is it funny?
Some of them—there are a few bits of humour in a few of the episodes.
Investment management funny.
Yeah, basically. It’s us trying to take the wind out of the deep sails of the talk.
And just something else to preface today’s discussion: We are not related.
At least, not that we are aware of.
That’s right. We have not done the DNA test, have we?
The smart wing of the family, we have got here today as a guest. So, Jeremy, I think you and I have known each other for a few years, but I don’t know that much about your background in terms of how you got into the investment industry. I guess you’ve always been in and around London, but how did you get to RBC Global Asset Management?
Well, I started off doing economics when I was at University, which I found absolutely fascinating because it was a subject that, for me, began to explain a little about how the world works, and some people define economics about the allocation of scarce resources and it showed that there is an interplay between certain things like inflation and unemployment and taxation. And, you know, there is all this interconnectedness, and it began to make me understand how the world, how the economy works. When I graduated, I was then faced with the choice about what I wanted to do with this sort of economics learning, and it was basically the choice between accountancy and law. And I realized pretty early on that I was actually hopeless at arguing somebody’s legal case that I didn’t necessarily believe in. So, despite being given some very early advice when I was at school—in fact, I remember the report the school teacher wrote saying, “I do not recommend that Jeremy goes into a numerate career”—I actually choose accountancy. I started it at Price Waterhouse, back in the day, doing audits. That was a wonderful education into the micro. Economics are like the macro sort of thing. Accountancy looks at the micro and actually how companies worked, the nuts and bolts of it: that is, inventory, stock, accounts payable, all that stuff, but also the internal relationships that are so important to making companies really successful. I felt very privileged—and now I don’t think it happens quite the same way these days—but I was introduced to lots of different industries. Now, I found, when I was an accountant, that I really enjoyed the first few days of every new assignment within companies because I was able to learn a huge amount, and I found the companies, the people, the industries, really, really interesting. But actually auditing the pension accruals in week 3 was a lot less so. So, for a period of time after I qualified, I hung around for a while. I then decided that there must be something I can do which would be able to combine both the macro with the micro that I would also find interesting. And that led me into the world of investment management, which I have been doing now for several years—I can’t figure out how many, how long—at a number of different firms, and I bumped into this team at the period of its inception, when it was a different firm. (We started back in 2006).
I should interject, this sounds like the old Monty Python skit where the accountant goes into the head-hunter and is looking for a new job because accountants are boring, and he wants to be a lion tamer. And he ultimately recommends that he go into banking, which is, you know, a nice step. So, I guess, going into investment management is that kind of a step. It’s not that much more exciting.
No. Well, I don’t know. I mean, to me it’s a wonderful job. I don’t think I would want to do anything else because no two days are the same. There is so much to learn—a huge amount. I have the enormous privilege of being able to meet with senior managements of companies, and senior management teams, and ask them naïvely stupid and basic questions, and they humour me with their response, which is, I think, a huge privilege. And I learn such a lot from that, but also I learn the markets themselves, which are so intellectually stimulating that it’s a wonderful combination of that element of competition, because you are always trying to do a good job for your investors, a good job for your clients, and, at the same time, you, frankly, are trying to beat your competitors as well. But also, you are filling up that fount of knowledge. You are learning, and you are improving, and you are getting better. And, I think, that is a really a wonderful pursuit. I would not want to do anything else.
Yes, and, to be fair, I think it’s incredibly exciting as well, and to anyone listening to this particular podcast will be—it is almost lion taming, being in the world of numbers, investment management and giving investment advice to clients and investors.
There’s a mental image.
So, if someone is listening, they agree with you that it is an exciting world. But so, we taped a podcast with Habib, who you work with on your investment team, and he talked a lot about the process that that you follow in detail, in general. But you, in particular, are quite passionate about ESG (or environment social, governance) as an important part of your investment process and the success and sustainable results that you and the team have generated as investors over the years. And what I was hoping we could do just in the next few minutes, primarily for Canadian investors, is define what that is and to also take away some of the misconceptions in terms of: “Well, if I look at these factors when I’m investing, I might be giving up something in terms of potential return, so that there is some kind of a trade-off there.” So when I say “ESG,” what does ESG mean to you as an investment manager?
I think the first thing to say, though, is that ESG as a moniker, as a collection of letters, is perhaps poorly defined. It has come to take on a general sense of meaning, but often we would say that, in terms of environmental social governance, the one that isn’t in there actually is stewardship. And, actually, if you are thinking like a long-term investor, stewardships is something you should really be concerned with. So, we should think of ESG not so much in terms of what the discrete letters stand for—environment, social, governance—but in terms, actually, of a tool: as a framework for reaching more complete and holistic decisions. And what I mean by that is: it’s a way in which a long-term investor can help discover, for themselves, risks and opportunities that they may want to think about when making an investment. Now, the reason why I say “long-term investor” is because many of these risks and opportunities can play out over time. So, if you think that investing is all about renting a share certificate for a short period of time—maybe you are a high frequency trader—then these types of issues are unlikely to interest and appeal to you because you are really not going to be on the shareholder register when these things actually convert from being just sort of ideas and to actually impacting financial statements and the share prices of companies. So, you need to have the right approach to wealth creation, the right approach to investing, for you to care. But if you do have that long-term time horizon, if you do think in terms of investment being a marathon and not a sprint, it’s about consistent wealth creation through a disciplined approach, then ESG is really something you should be thinking about because it’s a huge opportunity in two ways. Firstly, if you have a more complete assessment of the company because you are also considering some of these non-traditional sources of risk and opportunity, then it can help steer you away from a lot of bad stuff. Perhaps the issue of bad governance, for example, governance and stewardship. Both are really, really important and it’s a little like driving, in some ways, because we all want to get to where we want to get to safely and on time. And in some ways, stewardship is how you are driving. It’s about getting there safely and all their expectations. And governance is what is there, hopefully, to save you when things go wrong. It’s like putting on the seatbelt. Now, if you don’t have good governance and something bad happens, and you might be a wonderful steward, it might not be anything to do with your fault. It might be somebody else’s on the road. There might be a weather event, whatever it is, and the car gets into a spin—it’s often too late to reach behind you and put on a seatbelt. So, making sure you have the right governance in place is actually probably in your interest if you think like a long-term investor. Sure, things might be good today, but if the right structures are in place, then if anything untoward is to happen that I can’t necessarily predict… But if the right governance is in place, then I know I have got a more resilient investment because I’ve got a more resilient company. Similarly, in terms of the opportunities—going back to when I was an accountant—when I used to go out and do auditing, “ticking and bashing” as we used to call it. Looking at the companies’ balance sheets, fixed assets, currency assets, liabilities—all the things that we know and love, dear to my heart. I never ever, ever had to audit human capital, culture, innovation, organizational health, none of this. And yet we know—and I know you know, in particular, because we both work in people businesses—it is the people that make the company. Right?
And there is a uniqueness, there is something really very special about our organization because of the people who work there. If we were to remove all of them from RBC and replace them with those of one of our local competitors, it would change the organization. So, there is something unique about that human capital. And if you are a long-term investor, you should probably care about that. And, actually, you should look beyond the financial statements, beyond what the balance sheet is telling you to these extra-financial assets and liabilities—we call them contingent assets within the team—but for us, we think these are underappreciated by traditional financial analysis. But if you are investing in a company which has got these extra financial assets, these hidden attributes, then using this ESG framework you are better off: you are able to ask different types of questions and get behind the numbers, which are, at the end of the day, are just a kind of output to understand the key inputs that go into it.
But as a sceptic—and this is asking from an accounting perspective—how, if you are not there working and living in that company for an extended period of time, can you actually go in and measure the people, the way those people are treated, the culture, and that it’s a net positive to the potential success of the business over the long haul versus having no value at all?
Yeah, so, you mentioned measure, and that is, frankly, very, very hard to do. As you often say, “not everything that counts can be counted.” And when it comes to these types of almost intangible aspects of a company’s health, it’s often hard to associate a particular number with it. But you can get a sense of whether something is in good health or in poor health. But you have to… you need a couple of things. First of all, you need the right motivation, you need to think like a long-term owner of a business. If you don’t have that, you won’t be interested and you will get distracted from your purpose.
And that is a fundamental part of your investment process?
You really view yourself as owners over a long period of time?
Absolutely. It’s foundational. It’s elemental to how we approach the thing. I mean, within the global equities team, we often refer to our purpose, which is to make a positive difference. We can make a positive difference, we think, for our investors in terms of the nature of the returns we offer them and generate on their behalf. But also, the companies that we are invested in. We want to engage with those companies and, hopefully, help to make them better because we believe it’s in our investors’ interest. But also, by doing that, we can also extend that benefit into society as a whole. Now, if you are a short-term investor, none of that is going to matter to you. And you are going to wander around with your head down toward the ground trying to see if you can find a dollar that somebody has had fallen out of their pocket. That is going to be how you are going to approach trying to add value. But we think that is not the way. We would much rather go around planting acorns and growing slowly, surely and steadily, and one day actually getting to the sky. So, you need that perspective. So, the second thing you need, though, to try and get, to measure these alternatives aspects, these intangible aspects of companies, is you need to ask different types of questions. You need to try to explore these things in a more imaginative way. So, there aren’t numbers in the accounts that will tell you about the health of corporate culture, but there are other ways you can get a sense of that. First of all, you can go and talk to the company itself. You can talk to management teams. And when we meet with management teams on our investors’ behalf, we are often having conversations with them about things like staff turnover, employee net promoter scores. Things like how is it to recruit people and how well are you succeeding in retaining the key talent that you would like to hang on to? You can go and talk to the people who used to work for the company for perhaps a more of an unvarnished assessment of what the company is really like. You can talk to people who do business with the company: suppliers and customers. There are other tools. So, if anybody that is listening has got a spare 10 minutes, it might be worth checking out a website called glassdoor.com. It’s a little bit like TripAdvisor for companies because on that website, individuals can rate companies on a series of different criteria. And it’s not a financial tool as such, but it’s a really helpful tool for us to be able to, as the name suggests, to look inside a company and get a sense of the health of its corporate culture. But when you are trying to do the same things when it relates to environmental, say things like water use, things like carbon emissions, things like recycling and control over waste… We have spoken a little about governance, but on governance we have, what we would like to see is management teams who think like owners, who are there for the long term, who care about the long-term success of the company. And, you know, I have spoken before about my family’s farm, not my farm but my uncle’s farm up in Cheshire, and if you own a property…
My uncle has a farm in Cheshire too.
Is that right?
Maybe we are making the link now.
Goodness me. I think you’d look good in gumboots. But if you think like an owner, what was that word? So, was it Johnny Depp who said the fastest car in the world is a hired car? I own a car, and I’ll tell you, I don’t drive it as if it’s the fastest car in the world because I own it. If you own a real business, you think about it differently. You care about how it gets passed on, and you make long-term decisions for the health of that company, health of that business. And we think that is in our investors’ interests as well because, at the end of the day, who would not want to be invested in a business that is getting better all the time?
And the farm analogy is what your uncle would do in preparing for the long haul.
Exactly, so when I was a youngster, we used to get in the back of the car and get driven up to Cheshire, which is sort of northish of England and on that side of the family, I come from a long line of second sons, and the second son never, ever inherits the farm, so that side of the family had all the land and they were the farmers. So, we go up and visit. And I remember when I was a youngster sitting with my siblings in my uncle’s kitchen. And my uncle, we were having tea at the time, my uncle comes in, and he is wearing green overalls, and he sits down in the chair, and he has taken off his boots because every time he comes in the house he has to take off his boots right off, as those are the rules at my aunt’s house. And farmers, particularly my uncle, are never particularly happy people because there is always something that is not quite right, and he has been out in the field with a backhoe digger clearing out the ditches. And he spent all day clearing out ditches, and he comes in, and he says, “It’s not as though the cows know I have done it. It’s not as though the cows know I have done it.” It always stuck with me because he went out and did it anyway, not because the cows knew whether he did it or not but because it was the right thing to do. Because if he did not clear out the ditches on a regular basis, the fields would get water logged, the grass would not grow as quickly, the cows would not get the nutrition they wanted, and the value of the farm would diminish over time because the milk yield would fall and when he would come to pass it along to my cousin Andrew, it would be in less good condition than he got it from his father. So, my uncle Ray sadly passed away last winter. We buried him in the churchyard just down the road and so now, it’s my cousin who is managing the farm, and he is digging ditches so that when he comes to pass it on to his kids, it’s going to be in just as good condition. It’s a different way of thinking of long-term stewardship.
Okay, let’s just finish up with the payoff, again for Canadian investors who might say, “I understand that I should think about the long haul, that this is going to add value, and I want to own the company and participate in that sustained growth, but I still feel like there is a trade-off. If a company is not 100% focused on generating profits, then I’m giving up something potentially in returns, and I know both of us would say that is just the wrong way to think about it.
But I think it’s a very pertinent argument, and it’s something that we encounter a lot even today. This is the sort of fiduciary interest argument, and I think it goes back to a piece written in the early ’70s by Milton Friedman, I think in the New York Times—saying that the social purpose of every company is to maximize profits because then you end up with an efficient allocation of resources and that creates, that grows the pie and so everybody’s slice gets a little bit bigger and that’s a good thing. I guess that is sort of like what I was learning about at university when I was doing economics. Today, that has kind of been challenged, I think, because people are not looking at it in terms of that value creation, so short-term profit maximization may not create long-term value maximization, and it’s a little bit like the unsustainability if my uncle had not cleaned out the ditches because if had not done that, then he would have been able to do something else with his time: he would not have used the diesel, his tractor, and equipment would not have to be maintained so much. There would have been a savings that he would have pocketed that would have maximized profit, but it would have diminished long-term value. And when we think about ESG, actually what we are really focusing on, I think, is on that long-term value maximization, and it’s not the case that you have to necessarily give up short-term profits either. I mean, it may cost you a little bit more to do the things that you should be doing, but it might not and often we find in talking to companies that, so we are sitting in a studio here, and I can’t see what the light fittings are in detail, but if you were to replace the light fittings in here with say modern LED lights away from phosphorescent light bulbs, actually you would make an immediate savings, and it would have a good environmental impact. So it’s not necessarily the case that this stuff is actually going to cost you more. You could actually do the right thing and save money. Good corporate culture should not really cost you anything else. It does not cost you anything to be nice, does it, really? I mean, it shouldn’t do. You are a good case in point.
Thanks for that
So, if it does not cost you to be nice, just be nice because it’s actually in your long-term interests and it adds value.
And, in today’s day and age, why it makes so much sense is, you know, with media, and social media, and a company that is doing something environmentally damaging, it gets out in the press and people don’t want to buy that product anymore.
That is a really, really good point because there is a sense, I think, as well, that societal expectations are shifting and anybody who has got a smartphone in their pocket now is a reporter and, actually, in terms of thinking about if you are a company where every employee is an ambassador and making sure that that corporate culture is the right corporate culture, that you are respecting your coworkers, your suppliers, your customers and society you are operating within. In many ways, that’s your first line of defence.
And so, in today’s world,--and we could argue that in yesterday’s world as well, but certainly in today’s world—these are factors you just have to consider to deliver sustainable results from an investment perspective, and obviously the team has done an exceptional job with that.
And so, we would say, in terms of “thinking about ESG,:”it is just good business.”
Exactly, exactly. Well, Jeremy I have really enjoyed the chat today. Thank you, thank you for joining us on Personally Invested
You are welcome. I enjoyed it too.