As anyone who works in sustainable investing will tell you, it’s an awful feeling when you scroll through the morning news and find a negative ESG headline about a stock held in one of your firm’s funds.
It’s even worse when that company is Unilever – a titan in responsible business and widely held in sustainable portfolios – and the controversy is the Russian invasion of Ukraine and the ongoing conflict there. Unilever has been in the spotlight in recent months for its continued presence in Russia, even though many, many other Western brands have now exited.
So how does the investment manager respond when controversy arises at a company held in a sustainable portfolio? Unilever and its operations in Russia, the aggressor in the war in Ukraine, provides a live example of how we address such controversies.
The motivation for writing about this is to highlight the careful judgment calls we make in these circumstances but also to point out that no company is perfect. Sustainable fund managers can be guilty of portraying companies as either “good” (we will invest) or “bad” (we won’t). Of course, there are egregious industries that many sustainable funds avoid, ourselves included. Nevertheless, we need to move beyond a simplistic framing of the corporate sector and be more open about the fact that bad things can and do happen at good companies. It’s how the company responds that counts.
Like most sustainable fund managers, there’s a process that kicks in when any of our holdings get in the press for the wrong reasons. First, we seek to establish the facts. We’ll then conduct an informed engagement with the company, before we finally form our view on the issue.
And so to Unilever
Let’s start by acknowledging the contribution that Unilever has made over the past two decades to corporate responsibility. An early adopter of sustainability reporting and ambitious goal-setting, it has continued to build a strong track record ever since. Although not without marketing mis-steps and isolated incidents of poor practice, Unilever’s consistent commitment to responsible sourcing, human rights and reducing its environmental impacts have set the standard for the consumer goods sector for years. It’s worth recognising too the readiness of the investor relations team to talk openly and thoughtfully about the situation in Russia.
The company employs 3,000 people in the country and prior to the invasion, it accounted for around 2% of Unilever’s global revenue. From the outset, Unilever denounced Russian aggression in Ukraine. It continued to operate there, and to produce a broad range of products, but took steps to isolate the subsidiary by stopping imports to and exports from Russia, as well as stemming all capital flows. Importantly, Unilever is operating under UK sanctions law and therefore has no contact with its Russian business.
Unilever’s view is that continuing operations within strict parameters is the “least worst” option, and preferable to closing the business and risking state appropriation. It has also been unsuccessful in finding a buyer that would both safeguard staff and “avoid the Russian state potentially gaining further benefit.” In effect, it is stuck with the status quo. Crucially for us, all profits generated within Russia are ring-fenced, so thoughtful and principled UK investors can take comfort that they are not benefitting from the arrangement. That said, the subsidiary will be paying tax to the Russian state.
As part of our engagement, we requested an update on Russia in the Q3 results call scheduled for October. We made our position on the matter clear: Unilever’s Russian operations are adding very little to the investment case from a financial or reputational perspective; in fact the opposite is true. We would like to see Unilever exit the market, notwithstanding the difficulties in finding a suitable buyer and its reluctance to sever ties with local employees. It’s easy to be cynical about statements around employee wellbeing, but, as the company itself notes, Unilever colleagues in other volatile locations will be watching on with interest. Plus, as an employee-owned business ourselves, we want other firms to value each and every employee.
However, the risk of a forced exit is growing; Danone and Carlsberg have had operations appropriated by the Russian state in the past few months. Unilever is increasingly an outlier, at a time when many other Western brands have now left Russia. There are no signs of any major consumer boycotts at the moment, but that could change with an effective NGO campaign.
Can Unilever still be considered a sustainable leader and a titan in responsible business? The company’s hard-earned reputation for sustainability has been damaged, but remains propped up, for now at least, by the comprehensiveness of its sustainability programme to date.
We remain invested, taking reassurance that Russian profits are ringfenced away from the rest of the business. We’ll continue to engage on this topic and to push for further updates from management, particularly as the new CEO has now settled in. This is a classic example of a “bad” thing happening at an otherwise largely “good” company, highlighting both the complexities of multinational firms and the judgment calls that we make as sustainable investors.