Engaged with Nestlé on its aggressive approach to reducing its carbon footprint and how it was impacting the financials of the business.
Discussed the Chinese government’s “common prosperity” initiative with Richemont’s Chief Financial Officer and how it may impact the business.
Investigated and discussed potential concerns related to Schindler’s board and audit committee.
Environmental
Nestlé, the multinational food and drink processing conglomerate, has been a core holding within the European portfolio for over two decades and is a leader in ESG. As part of our engagement process, we have spoken to the company many times on ESG issues.
One area we have conducted considerable research on is Nestlé’s approach to reducing its carbon footprint. We discussed the company’s efforts recently during a one-on-one meeting with the CEO. Nestle’s management team is taking an aggressive approach to reducing carbon emissions through explicit and measurable targets, including a 20% reduction in Scope 3 greenhouse gas emissions by 2025, a 50% reduction in that metric by 2030, and net-zero Scope 3 emissions by 2050.
We think this approach is commensurate with the expectations of Nestlé’s customers and necessary to preserve the company’s wholesome brand image. Unfortunately, the cost of meeting management’s carbon footprint goals will be meaningful. This negatively impacted our assessment of Nestlé’s intrinsic value, which contributed, in part, to our recent decision to trim our position in the company.
NESTLÉ IS TAKING AN AGGRESSIVE APPROACH TO REDUCING SCOPE 3 GREENHOUSE GAS EMISSIONS:
20% reduction by 2025
50% reduction by 2030
net-0 emissions by 2050
The above notwithstanding, when it comes to the Burgundy European strategy, we do not think that climate change poses a substantial risk to the competitive advantages or reputations of most of the companies in the portfolio or to our investment theses on them. As a result of our quality/value-based investment philosophy, we tend to avoid companies where climate-related risks are the most present, including capital-intensive manufacturing and commodity industries.
Social
We became shareholders in the luxury goods producer Compagnie Financière Richemont (commonly referred to as Richemont) in 2018 and since that time, we have been very pleased with the performance of the company as well as the stewardship of its controlling shareholder.
Richemont derives a significant portion of its earnings from China (we estimate approximately 40%-50%), and we think this poses social risks for the company and the intrinsic value of its shares."
However, Richemont derives a significant portion of its earnings from China (we estimate approximately 40%-50%), and we think this poses social risks for the company and the intrinsic value of its shares.
There is, in our view, some risk that the Chinese government could seek to significantly reduce the size of the luxury market in China over concerns that it has negative cultural externalities. The government’s recent “common prosperity” initiative has heightened this risk. We are also concerned that Richemont might be forced to acquiesce to the Chinese government on political issues in a manner that offends Western values in general, and our values in particular. We recently discussed these issues with the Chief Financial Officer (CFO) of the company and conducted considerable research into the implications of the common prosperity initiative. We ultimately concluded that these risks are manageable within the context of our investment thesis on Richemont; however, we continue to monitor the situation closely for evidence that the risks are greater than we perceive them to be.
Richemont derives a significant portion of its earnings from China (we estimate approximately 40%-50%), and we think this poses social risks for the company and the intrinsic value of its shares."
Governance
Elevator and escalator manufacturer Schindler has been a Burgundy holding for over 15 years. While reviewing Schindler’s proxy circular ahead of casting our votes at the annual general meeting, we found two issues we felt garnered further attention.
The first had to do with consulting payments to two board members, which we felt lacked sufficient disclosure. The second was that the chair of the Schindler’s audit committee was also the company’s former CFO. We addressed both of these issues during a meeting with Schindler’s current CFO.
On the consulting payments, the CFO pointed out that the amounts were low and for legitimate expenses that the board members incurred on behalf of their work for the company. On the audit committee issue, he conceded that it is not ideal from an optics perspective, but that the board and controlling family trust the former CFO implicitly and believe he is well qualified for the role. While the families that control Schindler do not always follow conventional governance practices, their prudent long-term stewardship of the company and alignment with us are critical components of our investment thesis on Schindler. As a result, we are inclined to acquiesce to their judgment on these issues.
Sources: Company filings, Burgundy research
About the Author
Kenneth Broekaert, CFA
senior Vice President,
Portfolio Manager
Ken’s passion for investing grew out of his interest in business. His generalist interests led him to The Boston Consulting Group at the start of his career. A fascination he developed during that period was the study of how businesses can enhance or lose their competitive advantages. Then he discovered the writings of Warren Buffett and Benjamin Graham. One of his favourite Buffett concepts is to challenge yourself to make only 20 investment decisions in your life, which requires good judgment about the durability of the competitive advantages of businesses. Ken continuously challenges himself to own a concentrated portfolio of companies that Burgundy could own “forever” that earn stronger long-term returns for clients.
