Since the establishment of Mobius Capital Partners, integrating ESG+Culture factors into our research and engagement has been a core component of our investment process. Given our focus on a single strategy, combined with running a highly concentrated portfolio, our ability to conduct thorough research an engagement with all portfolio companies differentiates us from our peers. Accordingly, our ESG+C™ reporting aims to provide transparency on a range of factors, using a framework which is systematic and consistent. 

What do we mean by ESG+Culture and why is it important? 

Whilst a focus on Environmental, Social and Governance (ESG) factors has become common over the years, we believe a crucial and missing component within this is Corporate Culture. Whilst some may categorise this factor within governance or even social, we believe culture warrants a distinct and separate categorisation. This is particularly true for emerging market investors, who interact and engage with an incredibly diverse range of corporate cultures throughout the world. There is strong evidence showing that ESG leaders outperform their peers. We believe that by integrating corporate culture into our research process, the outperformance should be greater.

Chart 4, Source: UNPRI Report: ESG and Alpha in China/MSCI, all risk and return figures are annualised (USD) 

From 1980 onwards, the concept of corporate culture started gaining attention from academics as well as managers (1). According to the Harvard Business Review, there is evidence that a strong corporate culture benefits a company’s performance. Harvard academic James L. Heskett states that corporate culture “can account for 20–30% of the differential in corporate performance”(2). 

Furthermore, Andrew Chamberlain, chief economist at Glassdoor, investigated the relationship of a company’s share price development after the companies’ inclusion in the ‘100 best firms to work for’ ranking (3). Chamberlain constructed a portfolio of 36 publicly traded companies of the 2009 Glassdoor “Best Places to Work” ranking. 

The portfolio consisting of companies such as Netflix (4.4 Glassdoor score) and Procter & Gamble (3.9 Glassdoor score) performed 236% over a five-year period. This equals an outperformance of 115.6% versus the S&P 500 (4). By weighting the companies within the portfolio according to their Glassdoor score, the performance could be improved by 6.7% over a five-year period.

Chart 5, Does Company Culture Pay Off? -Andrew Chamberlain, Ph.D. Chief Economist, Glassdoor

Within emerging markets, we are yet to find a consistent ranking of ‘best firms to work for’ and accordingly it is difficult to replicate the Glassdoor study. LinkedIn for example published a list of top companies in China to work for using data from 40 million users. Top companies included Chinese companies (Alibaba) as well as U.S. companies operating in China (Tesla). However, we believe more consistent rankings will be published over the next decade. What is clear is that assessing corporate culture provides us with a differentiated lens and allows us to select outstanding companies to hold for the long-term. 

The ESG+Culture Factsheet:

Within the process of creating the ESG+C™ factsheet, we faced two major challenges:

Our Framework:

By adding culture to the assessment of ESG factors, we decided to create a proprietary framework which allows us to assess corporate culture. Our culture framework consists of five focus areas: “Equality”, “Freedom”, “Recruitment”, “Innovation” and “Remuneration”. The five focus areas within culture are subdivided into different factors influencing the focus area. Many of these factors cannot be quantified themselves. However, proxies can be used to ensure the inclusion of different factors on a quantitative basis.

Data Sources and Limitations:

Information from companies is only considered if it is publicly available and traceable to the source. Accordingly, we avoided private questionnaires or surveys as such a process is difficult to replicate on a quarterly basis. Based on this principle, annual reports are one of the central data sources. Unfortunately, not every company is reporting in English in emerging markets. 

Furthermore, the reliability of existing data sources is sometimes questionable. Many companies have recognised the importance of ESG and therefore include it into their reporting. Still, there exists a great inconsistency among the various ESG reports. Data is always subject to adjustments due to regulatory requirements from national stock exchanges. 

Quantifying qualitative data:

ESG reporting from many of our competitors running emerging market portfolios typically utilises case studies of single portfolio companies. These individual assessments do not show a holistic picture nor do they show the development of the overall portfolio. Culture is often assessed by conducting surveys, a complex and resource intensive approach. Both are lacking transparency and are not objective.

Quantifying qualitative data helps to evaluate the overall portfolio and provides comparable data. In general, three different groups of proxies can be identified. First, proxies based on a binary evaluation verifying the existence or implementation of standards or services. Secondly, the weighted average of factors such as the proportion of women in leadership positions. Thirdly, by using external scores such as ratings from the Carbon Disclosure Project.

Portfolio findings:

Whilst this is by no means an empirical exercise, we have several observations from the data within our portfolio. Within the environmental category, whilst 50% of the portfolio publishes an environmental report, only 13% of portfolio companies’ (13%) formulated concrete environmental targets. Among the social factors, more than 40% of the portfolio companies report on their contribution to the UN Sustainable Development Goals (SDG). Most of these portfolio companies contributed to the 8th goal (decent work and economic growth), the 3rd goal (good health and well-being), and the 4th goal (quality education).

Reporting according to the standards of the “Global Reporting Initiative (GRI)” has been identified as one of the governance metrics. Across the portfolio, 42% of companies report in line with GRI reporting standards. This is closely correlated to companies which report on the UN SDG goals. While it is common in Latin America to report in line with the GRI standards (100%), Asian companies within the portfolio tend not to utilise the GRI framework (21%). This is not surprising as Brazil became one of the first GRI hubs already in 2007. GRI hubs in Asia were launched later und usually cover multiple countries, increasing the complexity of integrating the GRI standards into different regulatory systems. Reporting in accordance with the GRI standards enables companies to disclose their environmental, social and governance activities. The GRI standards include, for example, reporting on the contribution to the UN Sustainable Development Goals.

As previously described, remuneration is one of the five areas of the culture framework. From our decades of experience of investing in emerging markets, share option schemes can provide employees the opportunity to take real ownership within a business. Furthermore, share option schemes create a long-term incentive to act in the interests of a company.

72% of portfolio companies offer share option schemes to their employees. The assessment of share option schemes revealed regional differences. Companies within the portfolio incorporated in Europe, Middle East, or Africa (EMEA) tend not to (33%) offer share option schemes to employees. In contrast, Asian (68%) and especially Latin American (100%) companies offer share option schemes to a large extent. Employee satisfaction and engagement is an important dimension to assess culture. Typically, internal surveys are used to measure these factors. As these surveys often lack transparency and their reliability needs to be questioned, we decided to only use publicly available data. 

Therefore, job and recruiting websites such as Glassdoor appeared to be a suitable data source. Using Glassdoor data is supported by an approach published in the MIT Sloan Management Review. The main reasons for utilising this approach is the reduction of polarization through a series of policies designed to promote honest and representative reviews by Glassdoor. Additionally, unlike other platforms, Glassdoor reviews gravitate towards the centre of the distribution, with fewer extremely positive or negative ratings, drawing a more realistic and less extreme picture. Whilst not all companies in the portfolio have a Glassdoor score, 71% do. Across the portfolio, the average Glassdoor score has an average of 3.63 on a five-point scale.

What are the implications of the ESG+C findings for our engagement:

Based on the reporting, we were able to derive implications for future engagement. 

Across the portfolio, 18% percent of board members and 17% of management teams are female. As a result of this observation, we will continue to engage on improving gender diversity at the board level as well as across the C-suite. 

Only 16% of portfolio companies set quantitative environmental targets. We will continue to engage on this area to significantly increase the percentage of portfolio companies with concrete environmental targets. Quantitative environmental targets include the reduction of waste production, reduction of water consumption and CO2 emissions. These quantitative targets can be directly linked to the executive compensation and therefore play a central role in improving the sustainability profile of portfolio companies.

Whilst ESG reporting has become more common for portfolios investing in developed markets, the data challenges within our investment universe have made this task difficult for our portfolio. Nonetheless, we anticipate more companies across the market cap spectrum in emerging and frontier markets will improve their reporting over the next decade. At Mobius Capital Partners, we will continue to act as long-term stewards of your capital by engaging with all portfolio companies and will continue to enhance our ESG+C reporting.

Footnotes:
The Handbook of Organizational Culture and Climate,Sonja A. Sackman – Neal M. Ashkanasy et al.
Does Company Culture Pay Off? – Andrew Chamberlain – Glassdoor
What Great Companies Know About Culture – John Coleman, Harvard Business Review
https://www.glassdoor.com/Award/Best-Places-to-Work-2009-LST_KQ0,24.htm

Further Reading:

‘We cannot “see” corporate culture but it has a clear impact on returns’ ESG Clarity speaks to MCP’s Usman Ali about our ESG+Culture approach

Target top employers to beat the stock market, study finds, The Daily Telegraph on culture driving outperformance

The ESG+Culture Factsheet

Photo by Jonathan Chng on Unsplash