Måns Carlsson
Senior Research Analyst

In this Insights article, Måns Carlsson-Sweeny, Senior ESG research analyst, looks at how Environmental, Social, Corporate Governance (ESG) research can be used to identify mispriced stocks. He outlines key ESG drivers in the retail sector, and how analysis of these leads to better informed investment decisions. The article also highlights a number of emerging investment risks applicable to the retail sector.

Using ESG to find mispriced stocks

We divide companies into ‘investment grade’ or ‘not investment grade’ based on their environmental, social and governance (ESG) profiles. Based on this proprietary analysis, the average relative total shareholder return (TSR) for Australian and New Zealand retail stocks that are investment grade has outperformed that of stocks that are non investment grade in both the short and the long-term. The difference in average relative TSR for investment grade stocks versus non investment grade stocks over five years is 47%.

The ESG profiles are results of detailed analysis of sustainability drivers at an industry level and intangible drivers at the company level.

Research shows that for the typical listed company, the majority of value comes from so-called intangible drivers. For retailers, some of the key intangible drivers include corporate governance, staff engagement, technology and innovation, customer satisfaction, occupational health and safety and supply chain management. In other words, these drivers represent a wide range of information that you don’t necessarily find in traditional financial reporting or in traditional broker research.

While there might be relatively weak links between individual intangible drivers and short-term earnings or share price performance for retailers compared to other sectors, a retailer’s overall ESG performance can be a good proxy for management quality.

In addition, ESG analysis can detect investment risks before they blow-up and identify cases where current business models are not sustainable in the long-term.

More structural changes than ever: adaptation and innovation are key - but many are playing ‘catch-up’

Retailers are under more structural change than ever. Technology change, changing consumer behaviour and preferences as well as globalisation are underpinning a number of trends affecting Australian and New Zealand retailers.

Examples include more competition from online and international retailers, driving price harmonisation and risk of downward pressure on commoditised goods, media fragmentation, which means retailers need to re-think their advertising strategies and the risk of wholesalers moving online.

Evolution favours those that are able to adapt. Properly used, technology can increase interaction with consumers, improve customer experience, create operational efficiencies and boost sales. However, on the whole, Australian retailers have been too defensive and too risk averse, which shows in the lack of innovation and under investment. As a result, many are now playing catch up. While focus on technology and innovation is no guarantee for success, lagging behind can be recipe for failure.

Combined, these changes highlight the need for retailers to understand their customers better and adapt to the new environment with greater emphasis on technology and innovation. In some cases, the structural changes also represent opportunities, such as selling to new offshore markets although building brand awareness online can be an expensive exercise.

Evolution favours those that are able to adapt. Properly used, technology can increase interaction with consumers, improve customer experience, create operational efficiencies and boost sales.

However, on the whole, Australian retailers have been too defensive and too risk averse, which shows in the lack of innovation and under investment. As a result, many are now playing catch up. While focus on technology and innovation is no guarantee for success, lagging behind can be recipe for failure.

Some retailers waited very long before they embarked on omni-channel strategies, which means they now face execution risk and potential margin dilution in the short term.

Most listed retailers now have transactional websites (although exceptions still exist and some might still be missing out on sales opportunities), but online sales mostly account for 1-2% of sales.

Online sales versus retail sales (monthly)

Source: NAB Online Retail Sales Index Monthly update – August 2013

In contrast, consider how Pumpkin Patch in New Zealand built on its experience in catalogue sales and its online revenue is currently above 10%. Flight Centre is another interesting example in terms of innovation and adaptation. Its blended travel strategy enables customers to switch between sales channels (e.g. online and in-store), which can give it a competitive advantage in the travel sector.

Many Australian and New Zealand retailers have lagged international peers when it comes to capturing and capitalising on customer insights. Some retailers have the right assets, but the value does not lie in the data but in how a company capitalises on the data.

However, there are those that adapted relatively early. For instance, Specialty Fashion Group now has a large customer database with over 4.5 million active members who account for approximately 80% of sales. The company can track customers through the omni-channel journey, capitalise on customer insights and use it for direct marketing. Interestingly, the company’s omni-channel customers spend considerably more than their single-channel customers.

Capturing and capitalising on customer data is not without risk though. Current privacy laws might be inadequate when it comes to dealing with re-identification from major data. This could become a brand and legal risk, particularly if the data is sold on to others for advertising.

Workplace performance can be a leading indicator of customer satisfaction

Retailers also need to increasingly see staff as key assets: keeping vital talent such as in-house designers and a motivated sales force with comprehensive product knowledge can make a major difference in a highly competitive marketplace.

Staff engagement is a highly intangible driver, but companies that get it right can see higher productivity, lower staff turnover and absenteeism, better innovation as well as lower injury rates. Importantly, staff engagement can also link with customer satisfaction.

Investors who do their homework can identify trends at an early stage.


  • The retail industry is subject to more structural change than ever, but on the whole the Australian and New Zealand retail sector has been complacent and is now playing catch up in face of greater competition. While new initiatives on innovation on technology are no guarantees for success, lagging behind can become a recipe for failure.
  • There are fewer links between individual ESG factors and earnings and share prices in the retail industry compared to many other sectors. However, overall ESG performance can be used as a proxy for management quality.
  • ESG leaders in the retail sector are on the front foot of staff engagement and focus on creating retail ‘careers’ for their staff, which can result in increased staff engagement, higher productivity, lower absenteeism and better financial performance.
  • The factory accidents in Bangladesh have been a catalyst for greater focus on supply chain risk management. However, many retailers still have a hands-off attitude on supply chain risks and their ethical sourcing frameworks are focused on local legal compliance only.
  • The retail sector has a high proportion of insider ownership, but the poor board independence, the risk of value-destructive related party transactions and a number of issues with remuneration structures in the retail sector mean a risk for minority shareholders.

To read more, download the full article (PDF 208KB)

About the Author

Måns Carlsson-Sweeny is the senior ESG Research Analyst at AMP Capital. Måns is responsible for the analysis of ESG issues and sustainability drivers for a number of sectors, as well as regularly engaging with companies on ESG issues.


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