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ESG case study
Hermes Global Equities
CVS v Walmart: Retail therapy Louise Dudley Portfolio Manager, Hermes Global Equities
In 2012, we perceived Walmart as a company with attractive investment characteristics. But our proprietary ESG Dashboard, which analyses the environmental, social and governance (ESG) risk exposures of each company in our universe, flagged significant social and governance concerns regarding the US retailer. At the time, ongoing labour rights disputes that resulted in high-profile lawsuits, and allegations of bribery and corruption in its Mexican, Brazilian, Indian and Chinese operations, were significant ESG risks that also fuelled negative press coverage. This led Hermes EOS, our stewardship team, to engage the company and compelled us to seek more information about these incidents and consider alternative investments.
Action We identified another US retailer as a suitable alternative investment: CVS, an integrated pharmacy business that had comparable financial credentials but superior ESG performance to Walmart. CVS had previously endured tough times itself: poor performance following its acquisition of Caremark Rx in 2009, investigations over accounting adjustments and concerns about its corporate governance. But the company took decisive action, undergoing a significant restructure to place more appropriately skilled people on its board, and appointing a new CEO whose duties are separate from those of the independent chair. A dividend increase of 38% in 2013 further improved the investment case.
Results The company has shown its commitment to retaining the integrity of its board. The involvement of activist shareholder Relational Investors LLC – seen as influential in the company meeting many of its strategic objectives – has helped to improve corporate strategy and execution. The execution of strategic decisions is now a core focus, and key performance indicators and more demanding targets have been introduced.
Since we initiated our position in July 2012, CVS has gained 113.6%, compared to the -4.56% return from Walmart (see chart). This is not solely due to better governance: since 2012, CVS has become a more attractive stock than Walmart in many dimensions. As of July 2015, it has demonstrated a stronger ability to grow, exhibited more shareholderfriendly corporate behaviour and benefited from positive market sentiment. However, we continue to monitor both companies and their peers to determine which has the best combination of fundamental characteristics – in which ESG risk exposure is an important consideration. CVS v Walmart: stock prices and ESG ratings 250 225 200 175
QESG Scores July 2013
CVS 80 Walmart 51
QESG Scores June 2015
QESG Scores April 2016
CVS 81 Walmart 40
CVS 86 Walmart 70
Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16
Meantime, Hermes EOS actively engaged with Walmart and is encouraged by its increasing transparency with shareholders and the public. In the last two years, the company has worked to reduce risk in its Bangladesh factories, strengthened its anti-bribery programme and overseen substantial reforms of its US labour practices. However, our ESG Dashboard shows that its business ethics, treatment of employees and management of suppliers are still risks. This is reflected in our QESG Score for Walmart, which shows the retailer’s overall ESG rating. Despite an improvement in Walmart’s score, which increased from 40 out of 100 in 2015 to 70 out of 100 in 2016, CVS rates much higher at 86 out of 100. Such data is important in our investment decisions – so are the unique qualitative insights we gain through EOS’ research and engagements. This makes us