By Benedict Buckley, CFA, Dimitry Dayen CFA, & Mary Jane McQuillen
Sowing Seeds for Success in a Growing Field
Market Overview
Despite inklings of a market broadening in the fourth quarter following the U.S. election and a further interest rate cut, equity returns remained momentum-led with relatively narrow leadership. Gains outside of mega cap growth stocks were more modest for the quarter, with the all cap Russell 3000 Index benchmark advancing 2.63% — its growth subset rose 6.83%. The small cap Russell 2000 Index returned only 0.33%. The Magnificent Seven stocks accounted for 29% of the Russell 3000 to finish the quarter, compared to 27% on September 30. A rate cut came amid strong economic data that began to support the case for a slower easing cycle from the Federal Reserve than had been expected. This, along with potentially reflationary policy from the Trump administration, such as tariffs, as well as slight upticks in inflation data, put some upward pressure on longer-term interest rates, causing some weakness in economically sensitive and rate-sensitive value sectors. The Russell 3000 Value Index returned -1.94%.
The narrow market continued to prove challenging for our diversified portfolio of sustainability leaders, which trailed the Russell 3000 Index, while sentiment for some sustainability-related stocks like renewables soured following the Republican victory in November. Our diversification helped in mitigating this risk, we believe, as our exposure to pure play renewables has been minimal and we have sought balanced exposures across industries, styles and market capitalizations. That said, we have been observing a potential market trough for opportunities.
Main detractors for the quarter were concentrated in the health care sector, where our overweight was also a headwind, as potential regulatory pressures on pharmacy benefit managers and negative overall sentiment toward the sector weighed on holdings CVS Health (CVS) and UnitedHealth Group (UNH). Diabetes and obesity drug maker Novo Nordisk (NVO) declined following a disappointing clinical trial relative to company-set expectations for a next- generation weight loss drug. We believe investors overreacted to the slight miss of its efficacy targets and believe a close evaluation of the data shows the drug is likely to be at least as effective as or superior to its leading competitor.
Benchmark performance was led by the consumer discretionary sector, where travel and consumer stocks such as holdings Booking (BKNG) and Amazon.com (AMZN) fared well with investors optimistic that robust consumer spending would continue beyond the holiday shopping season. The other main contributor in the sector was Tesla (TSLA), which rose 52% as investors chased the open-ended optionality of Tesla’s autonomous driving leadership and robotics strategy; not owning this was a relative drag on portfolio performance.
We found better overall participation in the communication services sector, driven by strong showings from Alphabet (GOOG,GOOGL) , which rebounded nicely after showcasing several new AI product innovations and a research breakthrough in quantum computing, and new position Reddit (RDDT), a global online platform of communities where members engage in authentic conversations, explore passions, research new hobbies, exchange goods and services and create new experiences. Reddit is a unique destination for community and conversation on the internet. As the platform has grown, management has significantly increased initiatives around content safety, relevance and moderation, making Reddit a safe space for communities to engage and where users can monitor for inappropriate content as well. Given the adverse social aspects of many social media businesses, Reddit’s transparency and content safety stand out from the group, which should continue to help drive engagement and users.
In addition to Reddit, we were active in adding five new holdings in the quarter. Extending our additions to software in 2024, as we have found the sector’s role in the next phase of AI adoption overlooked, we bought end-to-end software-as-a-service (SaaS) platform ServiceNow (NOW). The company’s platform is becoming increasingly mission critical to its enterprise clients (98% customer retention) and is displacing legacy solutions and manual processes given its strong value proposition and a broader trend toward software vendor consolidation. ServiceNow also has one of the most credible and monetizable generative AI use cases in its AI agents.
In health care we exited medical technology company Hologic (HOLX), whose long-term growth has been trending down, and added pharmaceuticals distributor McKesson (MCK), the latter having the largest specialty drug and oncology business in the U.S., which is the fastest-growing, highest-margin segment of drug distribution.
In financials we trimmed strong 2024 performers Hartford Financial and JPMorgan Chase (JPM) and diversified our financials exposure with the additions of life and group insurance company MetLife (MET) and Bank of America (BAC). Rising interest rates make MetLife’s retirement products both more attractive and more profitable, and the company has structurally improved its return on equity and derisked its business relative to the past. Bank of America is similarly a derisking story: most broadly it has meaningfully derisked its balance sheet following the Global Financial Crisis; it has also significantly improved its loss ratio relative to peers. We view the bank as well-positioned to deliver above-peer earnings growth as it is underearning meaningfully on spread income after prematurely extending the duration of assets early in the tightening cycle. Coupled with stabilizing/improving trends on the funding side, this should result in a long runway for gradual net interest margin expansion.
Finally, we added Chewy (CHWY), a pure play e-commerce company focusing on pet products whose growth is being driven by this underpenetrated e-commerce category and pet ownership normalizing from the post-COVID and inflation-driven slowdown.
Outlook
Despite a challenging year for diversified portfolios in an extremely concentrated market, the Strategy was able to deliver strong absolute returns for the year via diverse exposure to sustainable companies across all sectors. We believe this approach should be able to generate superior returns over long time horizons by capitalizing on opportunities to address global challenges and by avoiding risks associated with irresponsible business practices. Although the market could remain highly concentrated in the quarters to come, concentration has reached historically extreme levels. Broader earnings growth after multiple years of superior mega cap earnings growth should lead to wider equity market participation in 2025 with the laggards of this cycle (small cap, mid cap, value) catching up on a relative basis, to the benefit of our all cap portfolio.
A market concentration mean reversion could begin to play out in 2025 due to fundamental drivers like relative earnings growth. We have been actively sowing the seeds for success in such a market throughout 2024, adding 15 new names across seven sectors, where our disciplined fundamental research process has enabled us to identify attractive investment candidates with leading environmental, social and governance profiles. We have likewise maintained a strict sell discipline, exiting 10 holdings as we actively recycled capital from strong performers as well as cases where our thesis has not played out. Sustainability themes captured by the U.N. Sustainable Development Goals such as mitigating and adapting to climate change, health and well being and sustainable food systems remain key investment opportunities for the portfolio as we look through potential near-term policy noise to the large market opportunities for addressing these pressing challenges.
Portfolio Highlights
The ClearBridge Sustainability Leaders Strategy underperformed its Russell 3000 Index benchmark in the fourth quarter. On an absolute basis, the Strategy had gains in four of 10 sectors in which it was invested (out of 11 sectors total). The main contributors were the financials and IT sectors, while the health care and materials sectors were the main detractors.
On a relative basis, overall stock selection and sector allocation detracted. In particular, stock selection in health care, IT and consumer discretionary, overweights to health care and materials and a communication services underweight detracted from relative results, while stock selection in communication services and financials proved beneficial.
On an individual stock basis, Broadcom (AVGO), JPMorgan Chase, Amazon.com, Morgan Stanley (MS) and Alphabet were the largest contributors to absolute performance. The main detractors from absolute returns were positions in Novo Nordisk, CVS Health, Danaher (DHR), BALL and Enphase Energy (ENPH).
ESG Highlights: Public Equities Amplifying Positive Impact
Large companies with complex global operations may sometimes present challenges for sustainability-minded investors. In some cases, because a larger company’s business is more complex than smaller, pure play companies focused on one particular sustainability need (addressing unmet medical needs or enabling renewable energy, for example), its sustainability contributions might be misunderstood or overlooked. Yet some well-known companies can have lesser known sustainability strengths, and these may be all the more impactful due to their large scale. The importance of scale represents a key tenet of ClearBridge’s approach to ESG integration, as companies can make a positive impact simply because of their global reach, their deep supply chains and the depth of their involvement in the communities in which they operate.
A mega cap company like Amazon is a complex and very large company that may seem difficult to own in sustainable portfolios, as investors might be concerned about its overall carbon footprint and environmental impact, as well as working conditions, given the size and speed of the workforce. Amazon has drastically improved its capital allocation and profitability since 2022 under new CEO Andy Jassy; much of this has been driven by ongoing efforts at margin improvement through retail regionalization, scaling its advertising business and improving costs. Complementing these fundamental and governance improvements is Amazon’s growth as company for which sustainable improvements strengthen the business case, with potential for positive change that benefits multiple stakeholders (employees, customers and shareholders).
Since 2019, ClearBridge’s sector analysts have been engaging Amazon on the most material and relevant activities that could pose risk to the company in terms of operations and societal impact. These areas include climate change and climate targets; labor topics such as worker health and safety and unionization; packaging and materials; responsible AI; and disclosure. During our multiyear engagements, Amazon has agreed to disclose more data around each of these issues. In addition, Amazon reaches out to us throughout the year (and vice versa) to consult us on its sustainability progress and goals. Our most recent engagement, in September 2024, was on climate strategy and covered science-based targets, last-miles-driven, renewables and EV investments and AI power needs.
Sustainability disclosures are significant for shareholders as they help benefit the bottom line over the long term, and Amazon’s progress on several sustainability initiatives, such as reducing and innovating on packaging materials and increasing their circularity, are meaningful considering the scale of its operations. Amazon is the second-largest private employer in the U.S., with over 1.5 million employees: increasing wages, providing immediate family benefits and free tuition, and focusing on worker safety at these volumes positively impacts their many employees. The company delivers over 600 million packages per year with less materials and filling. It uses machine learning algorithms to determine the most efficient packaging for each order and so it can minimize empty space in boxes and optimize shipments to require less space in vehicles, reducing the number of vehicles on the road (Exhibit 1). AWS, meanwhile, is the largest cloud provider in the world, and is designing the latest protocols on addressing responsible AI. We believe progress made on these sustainability topics will have a material positive impact.
Exhibit 1: Amazon Reductions in Single-Use Plastic and Packaging Weight
Source: “How Amazon is improving packaging and boosting sustainability,” Oct. 2024, Amazon.
More Than a New Coat of Paint
As the world’s largest paint and coating company, Sherwin-Williams (SHW) may suffer from negative sustainability perceptions due to their paint products being derivatives of petrochemicals like propylene. The industry has, however, been increasingly replacing hydrocarbon-based solvents with water-based ones, which have no harmful volatile organic compounds (VOCs) — in particular architectural paints, which are two-thirds of Sherwin-Williams’s business. Some waterborne solvent products made by Sherwin-Williams and others include air-purifying and sanitizing paints that reduce VOC levels from sources such as carpeting, cabinetry and fabrics in addition to fighting bacteria.
Sherwin-Williams further distinguishes itself with a sustainability-forward salesforce that helps its customers become more efficient. It stands out as an engaged supplier to its customers, providing education and recommendations on best practices using its products that can help its customers overcome labor shortages with paints that require fewer passes, for example, and use less material. In a recent engagement with the company, we also learned how it supports new accounts (small business owners) with consulting resources such as the digital infrastructure, invoices and accounting basics needed for new contracting businesses to succeed long term.
In terms of how to recycle or properly dispose of excess paint, Sherwin Williams volunteers many of its stores across the U.S. as drop-off locations for unwanted or leftover paint through its partnership with PaintCare, a nonprofit organization.
While the company’s execution on its stated sustainability goals such as carbon emission reductions has been slower than might be hoped, we recognize such large goals take time. Upgrading LED lighting kits for all paint store color displays, investing in renewable energy to power its facilities and growing its paint recycling program are positive signposts for Sherwin-Williams, as its recently appointed CEO — a woman (only 6% of CEOs at the companies in the S&P 500 are women),1 — continues to foster a winning culture of product innovation and service excellence with positive environmental and social impacts.
Change Should Start with Industry Leaders
Modern clothing manufacturing and retail is often considered riddled with environmental and social problems such as resources use, waste, pollution, overwhelmed landfills, child labor and unfair labor practices. However, a clothing manufacturer leader like Inditex is actually an agent of change and improvement in a problematic industry. We believe change should start with industry leaders rather than with fringe or marginal players, and ClearBridge is following how a clothing behemoth like Spain-based Inditex (OTCPK:IDEXY), best known for its Zara brand, is using its leadership to improve its ESG rankings among its peers and benefit the entire industry.
Examples of Inditex’s environmental leadership include its use of sustainable fibers with low impact on the environment, its innovation in next-generation fibers and its use of recycling. Among its short-term goals are 100% responsibly sourced linen (it reached 100% for cotton in 2023) and a 25% reduction in water use by 2025. For 2030 it aims to improve biodiversity across 5 million hectares, reduce emissions by 50% across total product life from design to recycling (and by 90% by 2040), and move to 100% fibers with low impact on the environment.
Social leadership is equally important: Inditex is dedicated to remedying the poor social image of the industry with a comprehensive audit of all external suppliers. This will affect millions of people. The company is already a recognized leader for its internal human resources credentials for talent development, diversity and engagement of its 170,000 employees. It is now turning its focus outward on the entire ecosystem for responsible clothing manufacturing. Its “Workers at the Centre” program for supply chain management involves due diligence on all 1,700 suppliers, inspecting human rights, living wages, respect, and health and safety. It has spoken with 1.5 million people so far with the goal to reach 3 million people by 2025. Monitoring visits improved from 540 in 2022 to 820 in 2023.
While these improvements are laudable, we recognize there is still a lot of progress to be made, and some commitments could be made more credible with more detail provided on how they’ll be met. Yet given the extreme fragmentation of the fashion industry, we believe Inditex’s scale and forceful implementation of better sourcing and manufacturing should have an amplified positive impact on the whole industry’s supply chain.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
ClearBridge Sustainability Leaders Strategy Q4 2024 Commentary (Mutual Fund:LCISX)
fcafotodigital
By Benedict Buckley, CFA, Dimitry Dayen CFA, & Mary Jane McQuillen
Sowing Seeds for Success in a Growing Field
Market Overview
Despite inklings of a market broadening in the fourth quarter following the U.S. election and a further interest rate cut, equity returns remained momentum-led with relatively narrow leadership. Gains outside of mega cap growth stocks were more modest for the quarter, with the all cap Russell 3000 Index benchmark advancing 2.63% — its growth subset rose 6.83%. The small cap Russell 2000 Index returned only 0.33%. The Magnificent Seven stocks accounted for 29% of the Russell 3000 to finish the quarter, compared to 27% on September 30. A rate cut came amid strong economic data that began to support the case for a slower easing cycle from the Federal Reserve than had been expected. This, along with potentially reflationary policy from the Trump administration, such as tariffs, as well as slight upticks in inflation data, put some upward pressure on longer-term interest rates, causing some weakness in economically sensitive and rate-sensitive value sectors. The Russell 3000 Value Index returned -1.94%.
The narrow market continued to prove challenging for our diversified portfolio of sustainability leaders, which trailed the Russell 3000 Index, while sentiment for some sustainability-related stocks like renewables soured following the Republican victory in November. Our diversification helped in mitigating this risk, we believe, as our exposure to pure play renewables has been minimal and we have sought balanced exposures across industries, styles and market capitalizations. That said, we have been observing a potential market trough for opportunities.
Main detractors for the quarter were concentrated in the health care sector, where our overweight was also a headwind, as potential regulatory pressures on pharmacy benefit managers and negative overall sentiment toward the sector weighed on holdings CVS Health (CVS) and UnitedHealth Group (UNH). Diabetes and obesity drug maker Novo Nordisk (NVO) declined following a disappointing clinical trial relative to company-set expectations for a next- generation weight loss drug. We believe investors overreacted to the slight miss of its efficacy targets and believe a close evaluation of the data shows the drug is likely to be at least as effective as or superior to its leading competitor.
Benchmark performance was led by the consumer discretionary sector, where travel and consumer stocks such as holdings Booking (BKNG) and Amazon.com (AMZN) fared well with investors optimistic that robust consumer spending would continue beyond the holiday shopping season. The other main contributor in the sector was Tesla (TSLA), which rose 52% as investors chased the open-ended optionality of Tesla’s autonomous driving leadership and robotics strategy; not owning this was a relative drag on portfolio performance.
We found better overall participation in the communication services sector, driven by strong showings from Alphabet (GOOG,GOOGL) , which rebounded nicely after showcasing several new AI product innovations and a research breakthrough in quantum computing, and new position Reddit (RDDT), a global online platform of communities where members engage in authentic conversations, explore passions, research new hobbies, exchange goods and services and create new experiences. Reddit is a unique destination for community and conversation on the internet. As the platform has grown, management has significantly increased initiatives around content safety, relevance and moderation, making Reddit a safe space for communities to engage and where users can monitor for inappropriate content as well. Given the adverse social aspects of many social media businesses, Reddit’s transparency and content safety stand out from the group, which should continue to help drive engagement and users.
In addition to Reddit, we were active in adding five new holdings in the quarter. Extending our additions to software in 2024, as we have found the sector’s role in the next phase of AI adoption overlooked, we bought end-to-end software-as-a-service (SaaS) platform ServiceNow (NOW). The company’s platform is becoming increasingly mission critical to its enterprise clients (98% customer retention) and is displacing legacy solutions and manual processes given its strong value proposition and a broader trend toward software vendor consolidation. ServiceNow also has one of the most credible and monetizable generative AI use cases in its AI agents.
In health care we exited medical technology company Hologic (HOLX), whose long-term growth has been trending down, and added pharmaceuticals distributor McKesson (MCK), the latter having the largest specialty drug and oncology business in the U.S., which is the fastest-growing, highest-margin segment of drug distribution.
In financials we trimmed strong 2024 performers Hartford Financial and JPMorgan Chase (JPM) and diversified our financials exposure with the additions of life and group insurance company MetLife (MET) and Bank of America (BAC). Rising interest rates make MetLife’s retirement products both more attractive and more profitable, and the company has structurally improved its return on equity and derisked its business relative to the past. Bank of America is similarly a derisking story: most broadly it has meaningfully derisked its balance sheet following the Global Financial Crisis; it has also significantly improved its loss ratio relative to peers. We view the bank as well-positioned to deliver above-peer earnings growth as it is underearning meaningfully on spread income after prematurely extending the duration of assets early in the tightening cycle. Coupled with stabilizing/improving trends on the funding side, this should result in a long runway for gradual net interest margin expansion.
Finally, we added Chewy (CHWY), a pure play e-commerce company focusing on pet products whose growth is being driven by this underpenetrated e-commerce category and pet ownership normalizing from the post-COVID and inflation-driven slowdown.
Outlook
Despite a challenging year for diversified portfolios in an extremely concentrated market, the Strategy was able to deliver strong absolute returns for the year via diverse exposure to sustainable companies across all sectors. We believe this approach should be able to generate superior returns over long time horizons by capitalizing on opportunities to address global challenges and by avoiding risks associated with irresponsible business practices. Although the market could remain highly concentrated in the quarters to come, concentration has reached historically extreme levels. Broader earnings growth after multiple years of superior mega cap earnings growth should lead to wider equity market participation in 2025 with the laggards of this cycle (small cap, mid cap, value) catching up on a relative basis, to the benefit of our all cap portfolio.
A market concentration mean reversion could begin to play out in 2025 due to fundamental drivers like relative earnings growth. We have been actively sowing the seeds for success in such a market throughout 2024, adding 15 new names across seven sectors, where our disciplined fundamental research process has enabled us to identify attractive investment candidates with leading environmental, social and governance profiles. We have likewise maintained a strict sell discipline, exiting 10 holdings as we actively recycled capital from strong performers as well as cases where our thesis has not played out. Sustainability themes captured by the U.N. Sustainable Development Goals such as mitigating and adapting to climate change, health and well being and sustainable food systems remain key investment opportunities for the portfolio as we look through potential near-term policy noise to the large market opportunities for addressing these pressing challenges.
Portfolio Highlights
The ClearBridge Sustainability Leaders Strategy underperformed its Russell 3000 Index benchmark in the fourth quarter. On an absolute basis, the Strategy had gains in four of 10 sectors in which it was invested (out of 11 sectors total). The main contributors were the financials and IT sectors, while the health care and materials sectors were the main detractors.
On a relative basis, overall stock selection and sector allocation detracted. In particular, stock selection in health care, IT and consumer discretionary, overweights to health care and materials and a communication services underweight detracted from relative results, while stock selection in communication services and financials proved beneficial.
On an individual stock basis, Broadcom (AVGO), JPMorgan Chase, Amazon.com, Morgan Stanley (MS) and Alphabet were the largest contributors to absolute performance. The main detractors from absolute returns were positions in Novo Nordisk, CVS Health, Danaher (DHR), BALL and Enphase Energy (ENPH).
ESG Highlights: Public Equities Amplifying Positive Impact
Large companies with complex global operations may sometimes present challenges for sustainability-minded investors. In some cases, because a larger company’s business is more complex than smaller, pure play companies focused on one particular sustainability need (addressing unmet medical needs or enabling renewable energy, for example), its sustainability contributions might be misunderstood or overlooked. Yet some well-known companies can have lesser known sustainability strengths, and these may be all the more impactful due to their large scale. The importance of scale represents a key tenet of ClearBridge’s approach to ESG integration, as companies can make a positive impact simply because of their global reach, their deep supply chains and the depth of their involvement in the communities in which they operate.
A mega cap company like Amazon is a complex and very large company that may seem difficult to own in sustainable portfolios, as investors might be concerned about its overall carbon footprint and environmental impact, as well as working conditions, given the size and speed of the workforce. Amazon has drastically improved its capital allocation and profitability since 2022 under new CEO Andy Jassy; much of this has been driven by ongoing efforts at margin improvement through retail regionalization, scaling its advertising business and improving costs. Complementing these fundamental and governance improvements is Amazon’s growth as company for which sustainable improvements strengthen the business case, with potential for positive change that benefits multiple stakeholders (employees, customers and shareholders).
Since 2019, ClearBridge’s sector analysts have been engaging Amazon on the most material and relevant activities that could pose risk to the company in terms of operations and societal impact. These areas include climate change and climate targets; labor topics such as worker health and safety and unionization; packaging and materials; responsible AI; and disclosure. During our multiyear engagements, Amazon has agreed to disclose more data around each of these issues. In addition, Amazon reaches out to us throughout the year (and vice versa) to consult us on its sustainability progress and goals. Our most recent engagement, in September 2024, was on climate strategy and covered science-based targets, last-miles-driven, renewables and EV investments and AI power needs.
Sustainability disclosures are significant for shareholders as they help benefit the bottom line over the long term, and Amazon’s progress on several sustainability initiatives, such as reducing and innovating on packaging materials and increasing their circularity, are meaningful considering the scale of its operations. Amazon is the second-largest private employer in the U.S., with over 1.5 million employees: increasing wages, providing immediate family benefits and free tuition, and focusing on worker safety at these volumes positively impacts their many employees. The company delivers over 600 million packages per year with less materials and filling. It uses machine learning algorithms to determine the most efficient packaging for each order and so it can minimize empty space in boxes and optimize shipments to require less space in vehicles, reducing the number of vehicles on the road (Exhibit 1). AWS, meanwhile, is the largest cloud provider in the world, and is designing the latest protocols on addressing responsible AI. We believe progress made on these sustainability topics will have a material positive impact.
Exhibit 1: Amazon Reductions in Single-Use Plastic and Packaging Weight
Source: “How Amazon is improving packaging and boosting sustainability,” Oct. 2024, Amazon.
More Than a New Coat of Paint
As the world’s largest paint and coating company, Sherwin-Williams (SHW) may suffer from negative sustainability perceptions due to their paint products being derivatives of petrochemicals like propylene. The industry has, however, been increasingly replacing hydrocarbon-based solvents with water-based ones, which have no harmful volatile organic compounds (VOCs) — in particular architectural paints, which are two-thirds of Sherwin-Williams’s business. Some waterborne solvent products made by Sherwin-Williams and others include air-purifying and sanitizing paints that reduce VOC levels from sources such as carpeting, cabinetry and fabrics in addition to fighting bacteria.
Sherwin-Williams further distinguishes itself with a sustainability-forward salesforce that helps its customers become more efficient. It stands out as an engaged supplier to its customers, providing education and recommendations on best practices using its products that can help its customers overcome labor shortages with paints that require fewer passes, for example, and use less material. In a recent engagement with the company, we also learned how it supports new accounts (small business owners) with consulting resources such as the digital infrastructure, invoices and accounting basics needed for new contracting businesses to succeed long term.
In terms of how to recycle or properly dispose of excess paint, Sherwin Williams volunteers many of its stores across the U.S. as drop-off locations for unwanted or leftover paint through its partnership with PaintCare, a nonprofit organization.
While the company’s execution on its stated sustainability goals such as carbon emission reductions has been slower than might be hoped, we recognize such large goals take time. Upgrading LED lighting kits for all paint store color displays, investing in renewable energy to power its facilities and growing its paint recycling program are positive signposts for Sherwin-Williams, as its recently appointed CEO — a woman (only 6% of CEOs at the companies in the S&P 500 are women),1 — continues to foster a winning culture of product innovation and service excellence with positive environmental and social impacts.
Change Should Start with Industry Leaders
Modern clothing manufacturing and retail is often considered riddled with environmental and social problems such as resources use, waste, pollution, overwhelmed landfills, child labor and unfair labor practices. However, a clothing manufacturer leader like Inditex is actually an agent of change and improvement in a problematic industry. We believe change should start with industry leaders rather than with fringe or marginal players, and ClearBridge is following how a clothing behemoth like Spain-based Inditex (OTCPK:IDEXY), best known for its Zara brand, is using its leadership to improve its ESG rankings among its peers and benefit the entire industry.
Examples of Inditex’s environmental leadership include its use of sustainable fibers with low impact on the environment, its innovation in next-generation fibers and its use of recycling. Among its short-term goals are 100% responsibly sourced linen (it reached 100% for cotton in 2023) and a 25% reduction in water use by 2025. For 2030 it aims to improve biodiversity across 5 million hectares, reduce emissions by 50% across total product life from design to recycling (and by 90% by 2040), and move to 100% fibers with low impact on the environment.
Social leadership is equally important: Inditex is dedicated to remedying the poor social image of the industry with a comprehensive audit of all external suppliers. This will affect millions of people. The company is already a recognized leader for its internal human resources credentials for talent development, diversity and engagement of its 170,000 employees. It is now turning its focus outward on the entire ecosystem for responsible clothing manufacturing. Its “Workers at the Centre” program for supply chain management involves due diligence on all 1,700 suppliers, inspecting human rights, living wages, respect, and health and safety. It has spoken with 1.5 million people so far with the goal to reach 3 million people by 2025. Monitoring visits improved from 540 in 2022 to 820 in 2023.
While these improvements are laudable, we recognize there is still a lot of progress to be made, and some commitments could be made more credible with more detail provided on how they’ll be met. Yet given the extreme fragmentation of the fashion industry, we believe Inditex’s scale and forceful implementation of better sourcing and manufacturing should have an amplified positive impact on the whole industry’s supply chain.
Benedict Buckley, CFA, Director, Portfolio Manager
Dimitry Dayen CFA, Director, Portfolio Manager
Mary Jane McQuillen. Head of ESG, Portfolio Manager
Past performance is no guarantee of future results. Copyright © 2024 ClearBridge Investments. All opinions and data included in this commentary are as of the publication date and are subject to change. The opinions and views expressed herein are of the author and may differ from other portfolio managers or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.
Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2025. FTSE Russell is a trading name of certain of the LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is/are used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.
1https://research.com/careers/female-ceos-of-the-sp-500
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
#ClearBridge #Sustainability #Leaders #Strategy #Commentary #Mutual #FundLCISX