Total time: 12:43

00:00

Sara Rodriguez: Hi, everyone, and thanks for tuning in to another episode of The Hitchhiker's Guide to ESG. My name is Sara Rodriguez, and I'm here today with my colleague Andy Poreda. We’re going to be diving into the topic of brand value, which is part of a company's intangible assets. Intangible assets are things like patents and trademarks, and over the past 40 years, they've grown to make up a significant part of company's valuations. When it comes to sustainable investing, ESG risk can affect a company's brand value, so it's a financially material factor for investors to consider. But it hasn't always been that way. Andy, can you tell us a bit about how the way we calculate a company's value has changed over time?

00:42

Andy Poreda: Yeah, absolutely Sara. So, when we’re looking at companies, we go back in history and look at 1970s companies, many back then were manufacturing based. They may have held a lot of cash, and a lot of their assets were tied up into things like factories that you could easily touch your hand on and showcase what they were. But now, as Americans have shifted to a service-based economy, intangible assets have really grown significantly. These are things like the value of your workers and their human capital they possess, their degrees, their experience, those are really critical when you're talking about a service-based company. Then you think about the relationships that companies have with clients and their customers, that has some value to it. As we start getting into this tech boom, think of all the technology that we've created in America, and that intellectual property and patents and things like that. So, these types of intangible assets have really grown in value. As of 2018, if we look at the S&P 500, intangible assets make up $21 trillion out of the $25 trillion of the market weights of these companies, and that's 84% of the overall value of these S&P 500 companies. So, that's a huge amount of money, and I think that highlights this idea of we need to look at intangible assets from a company perspective.

02:07

Sara Rodriguez: So, it's clear that intangible assets are of increasing financial value, even if they're less clear on a balance sheet. That leads us to the intangible asset we'll be discussing today, which is brand value. Andy, how would you define brand value?

02:23

Andy Poreda: Well Sara, it's a great question. There are some nuances to how to calculate it and define it, but in a simple way, I'd look at it as how much extra is someone is going to pay for two particularly similar base goods. It could be the example of my choice of what I value between the difference between Coke and Pepsi, or a paper towel brand, between Bounty paper towels, and Brawny paper towels. People have their reasons that they will pay more for certain goods. There are things that I look at as to why I purchased one product over another, certain things like I think it's better quality, I think it may be safer. If it's a something like a car that I'm purchasing, it may also be, does that company and how it operates, do their values align with mine? We are seeing that as also an increasingly important topic, that people want to have companies whose values match theirs.

03:16

Sara Rodriguez: Absolutely, companies work really hard to create that brand value over time, but it can be diminished very quickly due to some sort of controversy event or business action that may have a negative outcome. So, let's talk about how brand value is linked to some of the ESG factors we look at. The first one we'll talk about is the Deepwater Horizon oil spill that occurred in the Gulf of Mexico in 2010. Andy, could you tell us about that event and how it affected the company's brand value?

03:45

Andy Poreda: Absolutely. It’s a story that many of us remember, about 10 years ago, when this happened it was a very big event in the in the eyes of the media and consumers worldwide were watching this event and looking at the negative damage that this Deepwater spill was doing to the environment. People were angry, and they really saw this as a negligent action by the company. And as a result, stock prices fell 51% in a 40-day period, a huge decline in the stock price. Why that was happening is we were seeing people outright saying they were going to boycott BP and their products. In United States, approximately 11,000 gas stations that are locally owned that were buying BP gas had a decrease of revenue of 20% in that time period, just based on those boycotts alone. General Sentiment, which is a company that measures brand value, over the time period that General Sentiment was looking at brand value, they basically totaled that the loss was $1 billion in brand value loss from this event, which was proximately $32 million a day. So, what that meant was BP really had work to do to get back that positive brand in the eyes of the public. So, they spent approximately 70 billion on the cleanup efforts, and in a two year period spent about $500 billion in marketing to explain that they had put the safeguards in place to make their company safer over time. That was sort of their mea culpa, that they were trying to revamp themselves as a leader in the space for safety to prevent this from happening ever again. That was a huge marketing push—approximately three times more than they spent on marketing on an annual basis. If we look back, this is why ESG analysis is so important. If we had looked at some of BP’s issues and how they addressed critical risk management—which is trying to prevent something catastrophic from happening, just like if you were an airline, trying to prevent an airplane crash from happening—and BP had put efforts on a lot of their smaller individual worker safety issues, but they weren't looking for this big catastrophic event from happening.

06:00

Sara Rodriguez: Right. So, if we had had ESG analysts looking into BP, we may have been able to flag this as a potential risk that the company faced. Now let's move into an example of a social event that can affect brand value. Tell us about Nike and Colin Kaepernick,

06:17

Andy Poreda: Basically, what happened in 2016, Colin Kaepernick came under fire by the NFL, as well as many in the media and then the general public when he decided to take a stand on social justice issues and would take a knee during the national anthem. It became a very controversial topic and a very divisive topic, but what happened is, we saw that Nike decided and actually saw this as an opportunity and created ads and marketing materials to support his decision. And so, at the time, it was a risky move, because they were basically bringing this issue to the forefront and a lot of investors were really concerned by it. We were seeing stock prices rapidly fall, and it was looking like this was going to be a really bad decision to derail Nike. In the end, it really was telling because they were basically getting free advertising from this event because it was such an issue. Nike was becoming part of the forefront of the talk of political pundits in the media, and basically getting their name out there. So, what ultimately happened is very interesting because they saw about a 31% boost in sales really driven by the Gen Zers and younger consumers that saw this as aligning with their values, and Nike ultimately saw their brand value increase by about $6 billion. Right now, it's one of the most valuable apparel brands in the world. So, it's really interesting, because I don't know if at the time people would have expected that, but that calculated decision to address a social issue from the ESG perspective paid off for them in the long run.

07:59

Sara Rodriguez: Wow. So, in some cases, controversy can have a positive effect on brand value. For the last example, let's talk about a governance event. And really any of these events could be attributed to governance because they have to do with how a company is run. Do these companies have the foresight to see these ESG risks as being potential controversies or events that could threaten their reputation? Do they see that these things could impact the livelihood of their stakeholders? Let's talk about an example that clearly stems from poor governance, and that is the Wells Fargo fraud scandal that was uncovered in 2016.

08:38

Andy Poreda: Sure, Wells Fargo is one of the largest banks in the United States, and had been for centuries, almost 160 years, a beloved American bank and household brand name that was synonymous with a with a quality institution. In 2013, things really started getting interesting when it was seen that Wells Fargo was trying to have their employees make these unrealistic quotas and basically, employees would sign up these customers for accounts and credit cards that they didn't want, or didn't need, or maybe even know about. So that was a big, interesting issue. It unfolded over the years, and we didn't get full wrath of this controversy until about 2016, when it really started to unravel. What that meant for Wells Fargo is, the trust that they had had spent years to build up was eroded over this time period, and it materialized in the fact that they had to pay about 1.5 billion in legal fees. You can look at their shareholder returns over the last few years, and they have really lagged behind their competitors in what's been mostly a bull market. We look at it now in 2020, and in their fiscal year, their fourth quarter 2020 profits plummeted 53% to $2.7 billion from what was $6 billion a year ago. So, it's not like they're getting over it, this is a continued controversy that Wells Fargo has not properly addressed from a governance perspective, it is ongoing. A company like BP, we could look at and say that they actually had put the safeguards in place to be a better company and they learned from it, which is great. Wells Fargo, the jury is still out there. From an ESG analysis, to us, it looks like they're basically trying to just move on from this and not actually learn from their mistakes. Again, with this, just like BP, I think for Wells Fargo the tea leaves were probably out there that they may have had some issues, the problem is that no one was looking for it. In 2004, we saw that there was an internal investigation that Wells Fargo auditors showed that there was a potential for employees to cheat to meet sales goals. But ultimately, it didn't get released to the general public, and I think one of the big things with ESG investing that's really important now is the fact of transparency. So, just like if we were looking at vaccine results from a company that was doing a COVID vaccine trial, we'd want to see all the results right? When companies are transparent, ultimately, it helps us lead to better outcomes because we can actually see what these companies are doing. That’s a big benefit of ESG investing is this push for transparency, but Wells Fargo has not been as transparent and because of that it takes us time to really realize how big of an issue this is, and also that they have not taken the proper steps to address it.

11:20

Sara Rodriguez: Wow, as intangible assets continue to make up a larger part of a company's valuation, brand value will be financially material for investors when it comes to sustainable investing. ESG risk can affect company's brand value and can affect company performance and the bottom line. Strong sustainability management may help identify these risks as we saw with BP and with Wells Fargo and prevent controversies that can contribute to brand value loss. Thank you, Andy, for talking with us today, and thank you everyone for listening. For more information, you can find us at sageadvisory.com, or on our Sage Advisory Instagram and LinkedIn pages. See you next time.

12:01

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