How We View ESG

What is ESG? SRI?

I think some historian once described capitalism as a ragbag of disparate concepts masquerading as a practical theory. Actually, it is also like the Abrahamic religion, which only exists as a family of competing ideas, sometimes at peace, periodically at war. So, too, is ESG. Acronyms are for the gnomic obscurantists: straight talkers call it cant. I prefer learning by example, so I will give you a few examples to show you what I have learned.

I have worked on governance and alternative categories of analysis since I started in fund management. My first meaningful project at Lloyd George Management in 2005 was a review of Chinese corporate governance history; this was closely followed by work to assess the viability of a “green” fund. Although ESG was around before this time, this was probably just before the acronym became really fashionable, around the time of the financial crisis. Ironically, I would suggest it became fashionable precisely because “green” was too specific a term, whereas ESG could be used as a catchall, even though its use is normally both quite limited and indeterminate. Around this time, I became very interested in alternative or unconventional techniques of analysis and accounting, of which environmental and social impact are just some of a dozen (for example, there are two distinct but logically sound methods of three-dimensional financial accounting).

Implementing a Standardized System of Environmental Accounting

At the time, with or without reference to a copy of Integrated Environmental and Economic Accounting (2003), it was obvious that the only way to really deal with the environmental costs (or any “externality” for that matter) from a normative point of view would be to try to formally, systematically internalise it through accounting.

The extent to which ESG investing is to the advantage or appetite of investors makes sense in the way it is currently lobbied for. However, the extent to which ESG lobbyists would like a normative standard, the current framework will do very little to achieve their long-term aims. A few years ago I tried to explain this to an ESG officer at a large pension fund using the example of the U.K. tax on plastic carrier bags in 2015 (just before the tax was implemented in England). My point was that overarching government intervention would be the best way to change incentives for habits of normative behaviour. Arguing with each individual bag carrier (or even each individual listed retailer) to comply or explain in order to seriously regulate usage is the quixotic masquerading as burlesque.

I was told that my example was “trivial”, and I was asked why I “couldn’t use a serious ESG example” (a classic example of someone thinking something is right just because they are anxious to talk about it). Meanwhile, since the £0.05 charge per bag was levied in England, the country now uses 6 billion plastic bags fewer – 85% less per year than previously[1] – a change that would have been impossible without systematic intervention.

If a standardized system of environmental accounting were mandated by exchanges, this could have an effect that UN-PRI or ESG indexing will never achieve. If private investors already have a system of estimating environmental costs (which I spent only a little time looking into in 2006), they will have a significant technical advantage. In any case, this would take the issue away from ESG, since we’d have financialised the non-financial. The ESG indexing industry, which is a great self-promoting mechanism, would be largely redundant.

How to Add Value: Remain Independent

Not to be confused with ESG, or some forms of SRI, I am also proud of the advances in stewardship we have made for the Emerging Markets Dividend Growth strategy at Somerset. When I first started at Lloyd George Management, we had a policy to abstain from proxy voting (typical of fund managers in general in those days).

Things have changed a lot since then. These days, I don’t really count “engagements” as asking rubber plantation companies about their sustainable forestry policies, or talking about the level of unionization of factories with Taiwanese hardware manufacturers. There are many other research providers that do a much better job collecting this sort of run-of-the-mill engagement; often, it is the ESG index providers themselves.

I am interested in meaningful value-added engagement at the cutting edge. We have been involved with a number of these now, ranging from the minor (getting companies to change annual general meeting agenda items or dividend policies) to the major (significantly altering corporate action terms in favour of minority investors). I partially documented one in 2012[2], which actually turned out successfully.

Our crucial value-add is remaining independent. A recent example of this was voting against the election of Jay-Yong Lee to become an executive director of Samsung Electronics at an extraordinary general meeting in October 2016. We did this despite Institutional Shareholder Services (ISS), a leading global corporate governance research provider, recommending that we vote in favour of his election. Whilst I did not anticipate what was about to happen, Jay-Yong Lee was arrested on February 17, 2017 in relation to charges or bribing the South Korean president. Naturally, I feel this also helps to demonstrate the continued relevance of our research framework to large capitalization investing (which is not as well covered as most people assume) and to the South Korean market, whether it is as classified emerging or developed.

Our most significant engagement to date, though, remains our encounter with the proposed affiliate transaction between Shoprite (a South African supermarket retailer held in the fund) and Steinhoff (a South African and global furniture manufacturer and retailer) announced in December 2016. Roughly, the transaction proposed was for Shoprite to buy the African retail assets of Steinhoff in exchange for Shoprite shares. The problem with the transaction was that:

  1. It was proposed by Cristo Weise, a Chairman and major shareholder of both Shoprite and Steinhoff, but with the greater holdings in Steinhoff
  2. The amount of shares Shoprite would likely have to issue to buy Steinhoff’s assets could trigger a change of control or takeover of Shoprite by Steinhoff. Under South African exchange regulations, Cristo Weise and related entities might not be classified as a related party to the actual transaction, and thus might be permitted to vote their Shoprite shares on the transaction, despite benefiting via their holdings in Steinhoff.

Because of the concatenate nature of the transaction and the asymmetric nature of the vote, the deal was highly unlikely to end up being favourable to minority investors in Shoprite. Worse, when we reached out to peers and friends in South Africa with the purpose of finding allies to oppose the deal, we were warned by several sources to forget about it. If Cristo Wiese, the Afrikaans equivalent of Warren Buffett, was involved it was a forgone conclusion: “Minority interests are incidental.  Large [South African] institutional interest will either already be co-opted or too passive to raise any challenge[3].

When we also reached out to large foreign institutional shareholders, we could not get through and instead had to watch as they began to liquidate their positions (note that these are, of course, managers who have formal ESG programs and are signatories to UNI-PRI).

Despite this, my previous experience of action within South Africa and emerging markets convinced me we had a defensible case and not to waste this by selling out. Our Emerging Markets Dividend Growth team therefore began the process of scrutinising the legal and regulatory documents for trip clauses and wire traps. We then reaching out to the relevant companies, institutions and people: Shoprite, Steinhoff, JSE (Johannesburg Stock Exchange), the exchange regulator, and the head of the Takeover regulation panel.

Amongst other objections, our principle angles on the case were:

  1. The moral suasion argument that the deal would be bad for the South African market, which Cristo Wiese has himself staked his reputation to support in a recent tour.
  2. Whilst there might not be a formal issue of a related-party transaction, there remains a clear “conflict of interest” in the transaction that should make it formally questionable to the takeover panel.

In the end, the deal was called off in February and Shoprite shares jumped 8% on the day (by US$600 million in value). It will never be known exactly what impact we had on the result, but the facts are that:

  • Cristo Wiese and all other board members with similar conflicts of interest were prevented from voting on whether to recommend the transaction to shareholders;
  • We were the only significant party we were aware of using “conflict of interest” grounds to oppose the deal; and
  • We were the only significant party we were aware of that believed that the deal could even be opposed.

Given the overwhelming consensus, I believe we had a pivotal, deal-busting impact. In the meantime, I also observe that some of the large foreign shareholders that had been sellers during this transaction period are now accumulating the shares again; after all, Shoprite is a great company.


There is much more I could add on the subject of sustainable or universal investing that I have worked on and am working on. The final thing to reiterate, though, is that ESG, SRI, UN-PRI, CSR, etc. – but particularly ESG – remain limited, non-fundamental and inconsistent frameworks, and lousy acronyms with indeterminate meaning (I have documented this more formally elsewhere). The approach I have developed over time, whilst by no means fully explored, is both theoretically comprehensive and actually fundamental. Namely, it is the use of Unconventional Categories of Analysis, Research and Engagement. I think it is also a more amusing acronym.

Turning away from those UCARE for the moment, it is pleasing to note that the portfolio has done its job of holding when markets have been volatile, resulting not just in a bit of a catch up with the market year to date, but also the portfolio being placed close to new highs. We continue to be optimistic about markets, but are comfortable being the Armadillo-Ayotochli to the tortoise and the hare.




Redwood Emerging Markets Dividend Fund performance

  3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr Since Inception*
Series A 11.95 9.55 19.07 4.73 6.58 6.68 4.52
Series F 12.27 10.20 20.49 5.78 7.67 7.78 5.58

*Inception of Redwood Emerging Markets Dividend Fund: November 5, 2010. Source: Morningstar Direct, as at April 30, 2017.


This commentary was provided by the portfolio manager responsible for the management of the Redwood Emerging Markets Dividend Fund. Any securities mentioned may or may not be held by the Fund. In addition the Fund may sell these securities at any time or purchase securities that have previously been sold. Nothing in any commentary should be considered a recommendation to buy or sell a particular security.

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[2] C.f. My monthly factsheet November/December 2012

[3] Anonymous source, local investor with 25 years’ experience investing in South Africa. My emphasis

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