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ESG Focus: The Little Big Things – 03-08-2023 – Endeavour, Coles, Woolworths, Metcash and AI

ESG Focus | Aug 03 2023

This story features ENDEAVOUR GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: EDV

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ESG Focus: The Little Big Things – Endeavour, Coles, Woolworths, Metcash and AI

FNArena zooms in on the social theme, examining developments affecting food and liquor retailers and wholesalers and miners while checking out big capital’s attitude to social metrics, and the roles AI might play in helping companies manage social issues.

-UBS tunes its ESG Radar to Australian Food & Liquor
-Big capital favouring companies with strong social metrics
-AI could help companies with the S, says UBS
-WA Aboriginal heritage laws begin – miners on notice

Compiled by Sarah Mills

Food and Liquor In An ESG World

UBS has tuned its ESG Radar to Australian Food & Liquor Retail & Wholesale markets in an effort to determine which companies are most exposed to the Social imprimatur.

The analyst observes three main categories of exposure (both risks and opportunities) that may not yet be price in:

Product risk: gaming and alcohol, tobacco, food waste and plastic

Operational risk: safety and emissions reduction (the latter being an E imprimatur), and

Supply chain risk: access to product and transparency

The analyst advises that the greatest risk lies in Product, and considers Endeavour to be the most exposed due to its gambling exposure.

Supply chain risk, through food waste, plastic use and product access are considered to be the next major challenges.

UBS says Endeavour’s ((EDV)) exposure to TGA (tobacco, gaming, alcohol) products as at FY22 was the greatest, comprising 98% of revenue and 70% of earnings (EBIT). 

This compares with Coles ((COL)), where TGA product exposure was 17% of earnings and 14% of EBIT; Woolworths ((WOW)) at 11% of revenue and 11% of EBIT via its 14.8% holding in Endeavour; and Metcash ((MTS)) at 38% of revenue and 24% of EBIT.

The broker observes that gaming represents 70% of Endeavour’s Hotels EBIT but believes the company’s underperformance in locations with high gaming net profit is related to the company’s training on problem gambling and money laundering.

All up, including E imprimaturs, the broker observes Woolworths and Coles are better placed the Endeavour and Metcash going forward.

Social Skills In The Spotlight

Big Capital acknowledges that the transition will cause considerable disruption so is favouring companies that, along with strong green credentials, demonstrate strong social metrics, says Morgan Stanley.

The broker also highlights a considerable investment opportunity related to the growing global middle class.

Morgan Stanley adopts a 4Cs for a social framework (Culture, Cultivate, Conduct and Collaborate), suggesting these metrics will inform major investors’ decisions going forward: 

Culture: which includes key KPIs such as Purpose, labour productivity, employee turnover, employee engagement, DE&I (diversity, equity & inclusion), shareholder voting, supply chain policy, UNGC (United Nations global impact) breaches;

Cultivate: Identifying companies that foster sustainable growth “with considered investment in social opportunities. Key investment priorities include Additionality, Intentionality and Materiality.

Conduct: This is governance oriented and relates to appropriate and responsible social conduct as measured by: Clearly defined board responsibilities and committees; DE&I across the business; board independence and composition; CEO tenure and experience; audit processes and internal controls; health and safety incidences; reporting transparency; corporate social responsibility initiative; whistleblower protection; and regulatory and legal compliance.

Collaborate: This revolves around engagement and social stewardship and the broker says big capital will be asking companies questions such as: How do you allocate capital towards social considerations, be it through product, R&D, innovation or M&A; and similar probes on the company’s corporate culture and engagement with local communities.

Morgan Stanley says the five core themes in social investing include:

-Access to Healthcare (pharmaceuticals, orthopaedics, medical devices, elderly care, sanitation and hygiene, women’s health and sexual health; 

Nutrition and Fitness (infant nutrition, healthy/healthier food and beverage, alternative proteins, food safety and food packaging.

-Social Infrastructure (mobility, digital and communication systems, healthcare and education facilities, community and affordable housing and access to clean energy.

Inclusive Finance (microfinance, financial infrastructure, mobile/digital banking, fintech solutions and provision of financial services to SMEs.

The broker’s top-ranked companies on performance-linked social metrics with Morgan Stanley’s EMEA coverage as at July 2023 did not included any ASX-listed stocks, although its top two global picks included Caixa Bank SA and SAP SE. 

UBS Checks Out AI And Social Improvement

A UBS Private Companies Showcase have heard from AI operators, who outlined their key challenges and obstacles.

These included the quality of underlying data as algorithms become more standardised (recalling the male bias of existing algorithms over females among other things) and one solution was to use proprietary data.

The analysts believes this could help with several ESG concerns such as copyright breaches, accidental sharing of IP or trade secrets, the further embedding of bias, and inaccurate information.

One analyst suggested moving away entirely from web scraping, which offers less control over inputs and outputs.

One drawback of proprietary data sets was that it was energy intense.

Transparency and fact checking was another major challenge that was likely to be crucial to regulatory and industry approval of generative models, says UBS. 

This would involve replace the “human” part of existing language models built on reinforcement learning with human feedback. 

UBS expects this would help address content moderation type requirements, which are notoriously exceptionally challenging. 

But who ultimately controls the fact-checking algorithm?

Auditing AI in highly regulated markets such as finance was another issue, and similarly the question arises, who is auditing the AI auditor?

Social Equity Improvements

UBS addresses the potential for generative AI to improve social equity, if designed intentionally to do so.

Healthcare was regarded by several panellists as a likely application, citing evidence showing generative AI outperformed humans on the empathy front. Having spent some time in emergency recently, it doesn’t surprise me.

Its use in educational platforms was also aired, particularly for developing countries.

UBS says panellists were generally convinced that AI benefits would yield strong productivity improvements with minimal job losses.

The analyst agrees productivity gains could yield benefits such as a four day working weeks, it remains concerned about the capacity for AI to generate structural job losses. 

Western Australian Aboriginal Heritage Laws

WA’s new heritage laws were announced on July 1 and represents a major shift in heritage regulation after Rio Tinto’s ((RIO)) highly publicised destruction of the Juukan Gorge in 2020.

The legislation has the potential to seriously impact Australia’s major miners, although one assumes most of the majors are on top of this by now.

The Association of Corporate Counsel Australia observes companies now have a compliance pathway but describes this as complex and expects the legislation will introduce delays and cost risk for projects.

Lexology observes the legislation:

-expands the scope of protected Aboriginal heritage;

-places knowledge holders at the centre of decision making and consultation for activities on their land;

-raises penalties for offences and includes timeframes for commencing prosecutions.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

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