It seems that nearly every KiwiSaver provider is now promoting themselves as a "fully integrated ESG manager" or "the most ethical". Frankly, we don't believe most of them.
There is a simple test to determine whether your manager really believes in Environmental, Social and Governance (ESG) analysis or is just applying it as a nice layer of marketing spin on top of their business as usual approach. That simple test is called the Johnson & Johnson (J&J) test and it's a test that almost all the New Zealand ESG KiwiSaver schemes fail.
We all know J&J – it is one of the largest consumer brand companies in the world with a long and storied history. Founded in New Jersey in 1886, it now sells pharmaceuticals, medical devices and consumer products in over 175 countries in the world. It is one of the most recognisable brands in the world and has some iconic products – Johnsons Baby Powder, Cotton Buds, Neutrogena skin and beauty products, Band-Aids, Tylenol etc. It also sells products embroiled in massive legal controversies. It has been found guilty of selling cancer-causing and asbestos-tainted talcum powder and concealing the side effects of anti-dementia drugs. (Last week the company lost a US$8 billion ($12.5b) judgment - which will likely be reduced on appeal - for an antipsychotic drug that has the unfortunate side effect of causing men to grow breasts .) It is also being sued for recklessly marketing opioids, and selling surgical mesh implants without full disclosure of the risks. When we look at J&J from an ESG perspective we see very serious shortcomings in their governance standards. Governance isn't just about what the board does, it's also about the culture of how a company develops, sell and manage products. For health-related products, the hurdle must be high – we rely on healthcare manufacturers to ensure these products are safe and effective. In our view, J&J has failed on the governance task because the evidence presented in these lawsuits show it has over a long period of time knowingly sold products about which it had significant internal concerns. A great illustration of this is evidence emerging over the sale of the company's iconic baby powder.
In December 2018, J&J was forced to release internal documents showing that as long ago as 1971 the company was aware of asbestos contamination in its baby powder product and spent the decades since finding ways to conceal this unfortunate fact from the public. Last Friday Friday J&J announced a recall of asbestos tainted talcum powder – the shares fell over 6 per cent on the news. Markets are hard to predict but I am comfortable betting this won't be the last piece of bad product governance news we hear from J&J. The other major controversy J&J is dealing with, is its alleged role in enabling opioid addiction in the USA. In 2017, more than 47,000 Americans died from opioid overdoses. Many states and counties in the US are suing J&J for the way the company promoted these drugs. In August, J&J was ordered to pay the State of Oklahoma US$572 million in the first of these many cases. This latest evidence has simply confirmed our long-held view. In early 2017 we recognised the level of controversy around this company's product governance was just too high. When a company keeps on repeating the same controversial practices, this is a clear sign that the culture and management practices of that company are wrong. Others have not taken such a critical approach. The vast majority of KiwiSaver schemes that invest in US stocks own J&J and this includes the 9 KiwiSaver managers listed on www.mindfulmoney.co.nz that claim to embrace responsible ethical or ESG based investment practices.
Meanwhile, we have been rewarded for our caution. This chart shows J&J price performance over the last few years and the impact of some of these product governance issues. Over the last two years J&J has returned -2.6 per cent per annum compared to the S&P500 which has returned +10.1 per cent per annum. In our view J&J is running risks well above what should be normal for a well governed company. ESG measurements are an efficient way to quantify these risks, a tool we use rigorously. Right now, J&J looks more like a litigation management company than a responsible consumer goods company. This is an easy company for us to avoid in our ethical portfolios. Given it also test cosmetics on animals J&J remains a big pass for us.
- Paul Brownsey is the Chief Investment Officer for the ethical KiwiSaver fund CareSaver and Pathfinder Asset Management, a specialist responsible investment fund manager.