This company is in a "multi-year re-rating cycle" and top of the pops for social license

Tue 04 Jul 23, 10:40am (AEST)

Key Points

  • MarketMeter's latest institutional investor research is out.
  • The top 10 ASX companies with strong social licenses have been revealed.

When you think about the value of a company, chances are you think about its earnings profile, the customers it has, and its product lines. But there is another part of a company's total valuation that is less thought of. Goodwill can add millions (even billions) to a company's intrinsic value and is often determined by the stakeholders that mean the most to its future. 

You can think of goodwill in lots of ways but fund managers often think of it through a growing social license. 

  • Is a company being viewed favourably by the public? 

  • Is its employee base diverse and happy? 

  • Has the organisation been making concerted efforts to do their part for the planet and its future inhabitants?

All the answers to these questions form part of an individual business' social licence. And it's this social licence that fund managers have been evaluating in the latest edition of MarketMeter's institutional investor research. Nearly 140 buy and sell-side institutions were invited to participate and the results are in. 

In this wire, I'll share the top 10 companies which fund managers deemed to have the strongest social license in the market. Then, we'll get the views of IML's Timothy Wood.

In addition, Livewire and MarketMeter reached out to companies in the top 10 for their views on the importance of social licence. We were fortunate to connect with Lachlan Feggans, senior director for ESG and Sustainability at Brambles. Brambles topped the list. 

What is MarketMeter?

MarketMeter is an interactive market insights platform that measures and benchmarks institutional investor perceptions of Australian listed companies, who find it is a reliable risk management tool to understand their performance in the eyes of institutional investors.

Using a combination of quantitative and qualitative research (in other words, both numbers-based and non-numerical) insights, MarketMeter helps gauge the sentiment of these professional investors.

“That sentiment will ultimately affect a company’s share price, depending on what area of the company we’re talking about,” says Nicholas Coles, managing director and co-founder at MarketMeter.

Top 10 Companies for Social License

The list appears in order based on the results of the most recent MarketMeter research.

  1. Brambles Limited (ASX: BXB)

  2. Xero Limited (ASX: XRO)

  3. REA Group (ASX: REA)

  4. Macquarie Group (ASX: MQG)

  5. Ramsay Health Care (ASX: RHC)

  6. QBE Insurance (ASX: QBE)

  7. Fisher & Paykel Healthcare (ASX: FPH)

  8. IGO Limited (ASX: IGO)

  9. The Lottery Corporation (ASX: TLC)

  10. Coles Group (ASX: COL)

Fundie's Take

Tim Wood manages the IML Sustainable Future Fund alongside Daniel Moore and is a co-portfolio manager for the Investors Mutual All Industrials Share Fund. Wood has worked in equity research since 2008 and in financial services since 2002. He joined Investors Mutual from JP Morgan Asset Management. He also has a long history with Brambles as an investor."They've been a really well run business, particularly over the last two or three years. I think social licence is a really important aspect to consider when looking to invest in any company. For us, Brambles really stands out from a governance perspective. The board at the moment are exceptional. We've got a lot of time for Chairman, John Mullen's history as both an executive and chairman across multiple companies. He's also the chairman of Telstra (ASX: TLS) at the moment and is about to join the board of Treasury Wine Estates (ASX: TWE)," Wood said.

LW: Are you surprised by any of the names on the list?

Wood: The one that probably surprises us is The Lottery Corporation. We think Lottery Corp's a really good business, with monopoly licences in most states in Australia. But I think because they're involved in gambling, I wouldn't have expected to see them on a list of top 10 in the social space.

Again, it's a really well-run business. We do own it in a lot of our portfolios. But from a social licence point of view, I would've thought that there would've been some other companies that would've been in the top 10 rather than a gambling company.

LW: Do you agree with the rankings of Brambles and Xero in the top two positions

Wood: I am not surprised to see them [Brambles] right at the top of the list. They would definitely have been in most people's top five. It's a high-quality company. They do publish extensively on their ESG outcomes. I think a lot of people from a social point of view, put a lot of weight on diversity at a board level. For us, while we think the board's really important from that governance perspective, our focus from a diversity perspective is really around the senior management teams.

We think it's that senior management team, diversity of backgrounds, diversity of gender, diversity of just way that they think about the world is really, really important and Brambles certainly ticks that box.

We know that the CFO, Nessa O’Sullivan, is due to leave at some stage, so it'll be interesting to see what the new CFO is like. If you think about their business model though, it's really around helping their customers to improve their waste and environmental footprints. We think from a social point of view, that's a really good business model to set up to help other customers meet their own ESG goals.We’re not surprised to see Xero on the list and great to see a tech company with diverse management, including a high proportion of female leaders, having such success. Xero’s business model is about making life easier for small and medium-sized businesses and so with its high NPS scores it’s easy to see how it ranks well from a social perspective.

LW: Who would you have expected to be on the list?

Wood: CSL Limited (ASX: CSL) for us have a really strong social licence. Their whole business model is around creating new medicines and therapies for what are mostly rare, hard-to-cure diseases.

We think about the DNA of the company - what is the company trying to do? What's driving the business? In a company like CSL, it's really around providing new therapies for people to live better lives. A lot of the things that they're trying to tackle, the patients would be completely unable to contribute to society if it was not for these lifesaving therapies.Think about getting a paper cut in your office. If you've got haemophilia, you're going to bleed uncontrollably. You would be rushed to hospital for undertaking what should be a simple task that people do every day.CSL have got a really strong research and development background in bringing new therapies that can make life better for millions of people.

It’s easy for people to say drug companies charge too much for their drugs. While we can all have sympathy for that , if you are one of the patients that's receiving these lifesaving treatments, it's only possible because of the billions of research and development dollars that companies put into their research.

We think that the product suite and management team, are very, very strong. We've only seen three changes in the CEO in 32 years, and they've all come from internal candidates where they've built people up to take bigger roles and more responsibility. We think that the company’s social mission, to create lifesaving therapies is a really attractive one. So CSL is one that we would've expected to see, not just on the list but towards the top of the list.LW: How important is social license to your overall investment process?

Wood: For us at IML, we put a lot of focus on the governance side and genuinely, we don't think you get good E or S outcomes if you don't have strong governance. So that's why we focus so much on the governance side of things but social is really important.

If you think about maintaining a good social licence to operate - companies can make more money, for example you have less staff turnover, because you keep your team motivated through good social practices. You are also more likely to have a more durable business model. And what I mean by that is, if I've got a really bad relationship with my customers, my other stakeholders, the government or my customers, it's really easy for someone to come in and attack my business model.

Maintaining that social licence to operate includes having good relationships with your customers and we measure that through things like net promoter scores (“NPS”). Companies with strong NPS have really demonstrated that benefit in the last couple of reporting seasons and in our experience have been better able to pass on price increases, and those companies have been able to maintain margins and grow market share. So that's really important to us.

And to think about a classic example of a mining or oil and gas company, if you don't maintain your social licence to operate, by keeping people safe on site and maintaining’ strong relationships with First Nations people, your site is much more likely to be shut down or have industrial action or other negative consequences that can shorten the duration of the business.Poor social license can affect cashflow, profitability, and importantly, the price that investors are willing to pay for a company if they don't maintain a good social licence to operate.

LW: Aside from social license, what else is attractive about Brambles?

Wood: We think Brambles is really in the middle of a multi-year rerating cycle. So if you think about the last few years, particularly through the pandemic, there's been a considerable shortage in pallets and lots of their customers like Proctor and Gamble (NYSE: PG), Nestle (SWX: NESN) and Pepsi (NYSE: PEP), manufacturers that are providing goods to the retailers.If you are not making things easy and efficient for those customers to supply Walmart (NYSE: WMT) and Coles (ASX: COL) and Woolworths (ASX: WOW), then you're really at a disadvantage.

And really there's no other way to efficiently move around goods these days than pallets. Due to the lack of pallet availability the last few years, you can imagine a lot of whitewood or single-use pallets have found their way into the system. These sorts of low-quality pallets are increasingly being ruled out in a lot of the big automation systems that we're seeing from the big retailers globally.

So if you are Coles or Woolworths or Walmart or Costco (NASDAQ: COST), the last thing you want to do is put goods on a pallet, stacked 20 meters high in your automated warehouse and have the pallet break. It really upsets the system.So, we're seeing a lot of those end users of the pallet force suppliers, Brambles' customers, to use higher quality pallets. And obviously Brambles' reusable pallets are designed to be more durable than your typical single-use pellets. In the US, around 50% of the market is using single-use whitewood, low-quality pallets.

We see an opportunity as lumber prices come down, as transport systems and working capital start to ease up, for Brambles’ pallets to be redistributed to not only their existing customers, but new customers that haven't been able to access those high-quality pallets in the past.

So Brambles is a multi-year re-rating story from us - we see higher margins and importantly, greatly improved cashflow than they've seen the last couple of years. Pallet poolers have had to pay a lot to buy replacement pallets through the pandemic and so we see a really strong free cash flow growth story and we're only paying about 18 times PE for Brambles. They operate in a duopoly market in nearly every country that they are in and we think they will benefit from several more years of strong, rational market behaviour that should see them continue do well.

Brambles' View

Lachlan Feggans is the Director for Sustainability, Corporate and Asia Pacific at Brambles. Feggans holds a Bachelor's degree in natural resource management from Macquarie University and a Masters of Sustainability at the University of Sydney. 

LW: Why do you think you have been ranked so highly by investors when it comes to social licence? I think one of Brambles’ greatest strengths and natural advantages is that we have an inherently circular business model, which means we are producing tangible environmental benefits just by going about our normal course of business.

So our growth aims to create more circular supply chains, moving away from wasteful linear systems, which is a fundamentally sustainable business model. The global footprint of our business also means we’re able to scale those benefits across supply chains around the world.

Equally as important has been our continual pursuit of transparency in disclosure and reporting, which is underpinned by materiality, all of which are highly valued and have helped Brambles establish strong credibility. Materiality and ‘Double Materiality’ in particular will become more critical with the new ISSB standards as investors and regulators want to know how the business impacts both the financially material sustainability issues and broader social and environmental issues for a specific company.

LW: As part of the “Communities Positive” programme, Brambles has set a 2025 target whereby it “commits to adopting or developing natural and social capital accounting approaches to transparently measure and validate performance...” 

You have stated that there has been some progress with regards to natural capital accounting, but how are you progressing on the social capital accounting approach?

The Communities Positive programme in Brambles’ 2025 targets was built around the Natural and Social Capital concept to recognise and account for ‘economic externalities’ - those impacts that have a cost on society and the environment but are not valued or accounted for in conventional business balance sheets. 

For example, creating pollution - be it carbon emissions or un-recyclable plastic waste - or gender inequity and ethical sourcing, are respectively examples of environmental externalities and social externalities that commonly apply to businesses.

Frameworks to account for natural capital have been in development for some time but have only recently now taken shape through the TNFD. Social capital frameworks are further behind, but the success of the TCFD has been a benchmark for the nature/biodiversity framework, the TNFD standard and will also inform the social impact accounting systems.

Given that Brambles’ value creation model is directly dependent on natural resources, it makes sense that this is where the greater focus has been. For instance, we are currently testing a draft Greenhouse Gas Protocol (GHG) standard for Land Sector Removals (LSR) to understand how we can account for stocks and flows of biogenic carbon regarding the use of timber pallets in our circular business model. Throughout FY24, Brambles will be exploring in greater detail what the TNFD framework means for our business.

LW: Another 2025 target is to collaborate with food banks to serve rescued food to 10 million people. However it appears you have already surpassed this target with over 16m meals served in FY22 alone. 

You have indicated that this target is under review. Are you in a position to update us on progress of the review?

We are so proud to have reached this target ahead of schedule. I think much of its success can be credited to the fact it was a goal we could share across our stakeholder base. We’ve been able to involve our customers – from growers and producers to packaged food manufacturers - who donate their goods on our platforms, while also encouraging our employees to donate their time, by accessing the corporate volunteering days they’re entitled to each year.

The role food banks play will only grow in importance as we move into a period of greater food insecurity and poverty, so it’s incumbent upon organisations like ours to maintain our support. 

That’s why we have recently recommitted to a partnership with The Global Foodbanking Network, which will see us continuing to provide in-kind donations and financial support for a further three years. Brambles will be reviewing all targets in our program in FY24 to prepare for 2025 and beyond.

LW: What will Brambles be doing over the next 12-24 months to maintain its position as a leader in this area?

We’re now just past the halfway mark to our 2025 sustainability targets, so it’s mission-critical that we put our efforts into meeting those commitments, not just because we as employees or management are scored against it but because doing what we say we will do is how we maintain the trust and confidence of our investors, customers and partners.

While we are in a strong position and are receiving positive feedback from investors on our ESG program, we are already preparing for the recently released ISSB standards. This means revising and aligning our materiality, improving our data collection and reporting systems, and building the sustainability expertise we will require to stay ahead of expectations. 

For Brambles, like most organisations, this means deeper integration of sustainability into the four core pillars that underpin the TCFD framework: governance, finance, strategy, metrics and targets.

Beyond meeting our own targets, our focus over the upcoming period is to step up the momentum we’ve built in pursuing regenerative supply chains. It’s a vision that our customers and partners have shown great support for and want to align more closely with as they review their own sustainability targets and goals. 

Written By

Hans Lee

Senior Editor

Hans is one of the Senior Editors at Livewire Markets and Market Index. He created Signal or Noise and leads the team's coverage of the global economy and fixed income markets.

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