ESG Integration in Action: Palm Oil

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  • 04 mins 39 secs
Using the palm oil industry for illustration, MFS research analyst, Pooja Daftary explains how our ESG (Environmental, Social and Governance) integration helps us understand the sustainability of a supply chain in order to develop our investment view.


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- Can you talk a little bit about how your work integrates with the fundamental analyst, and maybe some specific example?

- So, I feel like as an ESG Analyst, our role is really multi-faceted and extends across the investment platform. So part of the integration process is really helping analysts think really deep about certain ESG issues. ESG is one piece of a puzzle that an analyst needs to put together to come up with his or her investment view. So, recently a project that I worked on with an analyst in Asia was around a company that did palm oil plantations in Indonesia, and there's been a lot of concern around the sustainability of the palm oil plantations, especially when it comes to displacing animals, the slash and burn that takes place in the forest, the pollution that that generates, the indigenous populations that are displaced as a result of those activities. Increasingly, consumers have been responding to food brands that use palm oil in their products and saying that, well if your chain of supply is not sustainable, we don't want to buy your products. That becomes a risk then for the palm oil manufacturers and plantation owners, as they have to start cleaning up their supply chain. I took a look at the company's palm oil generation practices, right up the value chain to the farmers from where the farmers caught their palm oil from. Did they do slash and burn? How was the quality checked? How was that palm oil then integrated into the factories at the manufacturer level? What was interesting is that companies are becoming increasingly savvy these days in putting together very glossy sustainability reports. The way we can add value is to be really critical in evaluating whether a particular company is really walking the talk. That happens through the engagement activities that we're able to undertake, either informal, where we get to interview and sit down with the management team, the CEOs, CFOs, or a sustainability officer, and we get to ask them questions about how they really integrate the supply chain, and how they ensure that the practices are sustainable. Is there continuity in that practice over time? Are there the right checks and balances, or are they just doing it so that they can sell their products to these food and beverage companies globally, and at some point they're just gonna stop doing it.

- How do you take an issue like that and actually work with the analysts to have an impact on their work in the valuation, either current valuation or future valuation of that company.

- There are a number of ways in which the work that I would have done on palm oil plantations would affect multiple different entities within MFS. The first would be the analyst that's actually covering the palm oil stock. So he or she would assess what the regulation looks like for palm oil in Indonesia and for palm oil globally, to see that if this particular company is not compliant with that regulation, what happens to their capacity? Does it get shut down? If capacity gets shut down, what sort of price dislocations does it cause in the market? Now that pricing information is then really useful if we were to extrapolate it into a global context and say, well what's gonna happen to palm oil pricing for consumer goods companies for which palm oil is a very important input? The other way to think about that same question, is that if palm oil sustainability cannot be achieved in the right way, and consumers of food and beverage companies continue to stop using those products, what happens to the value of the brand or the franchise of that consumer company that we have invested in? All those variables then feed into evaluation output of both a palm oil manufacturer, which would be part of the capital goods sector; but then also a consumer brands company that's part of the consumer staple sector. And then we may also want to consider in addition to that, the impact on the bonds of that particular company, so it touches so many different parts of our investment process and that's where ESG integration really becomes powerful.

Please keep in mind that a sustainable investing approach does not guarantee positive results.
The views expressed are those of the speakers and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.