What Drives Change and Financial Success? Culture and Strategy

Sustainable finance continues to move towards the mainstream, and this is fantastic to see. That said, as any connoisseur can attest, the best work in most disciplines is most often under acknowledged or even ‘limited-run’. This same has emerged with ESG strategies. The consistently strong performance of ‘deep-green fundamentals’ active managers of the likes of Generation and Stewart Investors merits renewed focus.

What is a ‘deep green fundamentals approach?’

Deep green fundamentals adds firm culture, strategy, and purpose to deep fundamentals research. This applies not only to public companies, put privately run organizations as well.

On strategy, Generation first assesses large global challenges. Climate change, access to clean water, healthcare, etc; they bring in a panel of experts to update their priorities seasonally then look for big picture solutions that meet those challenges. The big picture leads to a short list of global companies for further attention, when corporate strategies align. For example: Low-carbon urbanization? Look for sustainable construction materials companies.

After finding focal points, they focus deeply on culture. Interviews with company management, employees, and customers. Reviews from suppliers. Compensation incentives. Governance structures. Companies are people, and the best companies are where people put forth their best work. This requires adept management, collegial trust, and a purposeful vision that inspires. Each company receives a score, which is considered side by side with traditional financial fundamentals.

Why does this work so well?

The basic premise that good companies do well may seem obvious, but the execution from a fund manager perspective isn’t straightforward. Assessing corporate culture is, ultimately, difficult. Many macro and micro perspectives can be equally important, and maintaining buy/sell discipline act on such research is key. All of this deep research takes a lot of person-hours for each prospective investment. But as a reward for hard work, managers can uncover market inefficiencies, as Generation and Stewart have rewarded their investors.

This ‘deep-green fundamentals’ approach can positively impact the world. When enough investors assess strategy and culture directly, companies improve, as does financial performance.

Indirectly assessing companies through metrics triggers Goodhart’s law: “when a measure becomes a target, it ceases to become a good measure.”

So, we’d like to help. If we can help facilitate a better understanding of the connections between strategy, culture and financial performance, we’re getting somewhere useful.

For practitioners, this could mean a gap analysis for your fund or institution, internal education workshops and even applied research. This approach is equally relevant to corporates seeking to improve as to investors seeking to identify the most impactful companies. We’re particularly interested in non-western markets, such as China, where this approach works well, perhaps especially given a lack of reliable ESG data, but we really believe strategy and culture are universal.

In fact, we’ve created a “Real Insights” report assessing the strategy and culture of a prominent Chinese company attempting to assist the low carbon transition through the manufacturing of electric vehicles, Great Wall Auto.

This does not emphasize obscure metrics or a bunch of rehashed news items as you might find from other sources. Rather, the focus is on company management, company culture, and whether their strategy is positioned for success in light of major global sustainability trends alongside their financial bearing, critical for success after all is whether a company can achieve its desired impact which requires that the company not fail financially.

This Real Insights sample as above offers immediate benefits over more traditional ESG profiles. Some ESG data providers are believed to score listed companies such as Great Wall Motors as either terrible or average until proven otherwise, exacerbating the ESG data scatterplots du jour. A recent BNP Paribas report highlights that only 843 of the 3500+ companies listed on the Shenzhen Stock Exchange have published a sustainability report and recent efforts from the HKSE to mandate ESG reporting have been pushed back upon. China is leading in many areas, though, from EVs to solar and innovation is now coming from everywhere, more so than most understand.

At the end of the day, we all really want to know on a forward looking basis who has 1) the right business strategy, 2) the best culture (including governance and stakeholder interaction) and 3) a business case with room to grow.

Both companies and investors can achieve to these three factors, creating the sort of positive dynamic that can tip financial markets in general in a better direction.

As our Real Impact Tracker Certified Community knows, when enough investors influence corporate strategy directly, companies improve, as does financial performance.

Let’s not leave ‘the good sustainable stuff’ to just a few connoisseurs.

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