Podcast Notes: Lauren Taylor Wolfe at Impactive Capital
ESG, if you haven't heard of it,
stands for Environmental, Social, and Governance. No one knows exactly what it means. It has no set definition or metrics. But that's where the money is going so people listen, adapt, and act accordingly. Here is a deep dive on a bunch of the literature.
Podcast: Lauren Taylor Wolfe, Portfolio Manager of Impactive, an activist investor with an ESG lens. She's being interviewed with Ted Seides, who was the guy who lost the $1M bet against Warren that his basket of hedge funds would outperform the S&P. He lost.
The podcast is worth the time. I've done a deep-dive for those who prefer the notes.
How is Impactive different than the rest?
In the past, people viewed ESG with a risk-orientation. But it can be used as a tool to drive business durability. We think it will be a source of profits and value. For any company to take it seriously, it has to be linked to a business rationale.
They use the SASB Materiality Map. Analyze the metrics by industry and sector. Do we agree with these items? And If so, what is the highest level of priority to drive return for that business? Look for where actions on ESG overlap with NPV positive actions in another circle. Impactive focuses on where those sectors intersect.
Portfolio: Impactive has 8-12 positions at any point in time; . Examples of the investments and theses include:
Wyndham - Largest hotel business in the mid-section of that market. Believes the mid-sector will outperform. Very cash generative. They could deploy capital; Impactive focused on the environmental side. They spent on lighting and HVAC, which can be 10% of cost per operation for the franchisees. Impactive addressed products that they could implement based on the payback period (e.g., LED lighting, motion detector). Payback is 1-2- years with 100 to 200 basis points of margin opportunity.
Asbury Automotive: Seventh largest auto-dealer with locally granted monopolies. Bought shares at 6-7x earnings. Vast majority of EBITDA is parts and services. It’s sticky, recession-resistant. Cars are more silicon than steel these days. A fender bender costs far more because the body of the car is more technology dense. Just over 30% ROIC over the cycle and the return comes from the parts and services with >50% ROICs.
The main issue is labor shortage. The labor dynamic is that there are far more mechanics retiring than they can attract to the job. How percent of mechanics are women? ~2%. Flexible shifts, four day work week, special benefits, equity opportunity for long-term mechanics allow Asbury to attract and retain more technicians, including many more women.
Advanced Drainage: High-density piping. Sold into all markets. 5th larger recycler in the US. Most of their products are made of recycled plastics. 70% share. High-Density Plastics have taken share from the incumbents (concrete and metals). Yes, questionable where we are in the residential cycle but it is the dominant player in its sector, and sector tailwinds are coming. Taking share over time as using their products results in 30% in savings in labor. They haven’t even told their ESG story. Tailwind to growth because of labor savings and growth. Municipalities and states will demand more products are used.
Why could ESG investing flop?:
There is skepticism. The ESG focus used to be exclusion/inclusion funds. When you limit your universe you are going to limit your return. And the ESG trend could get derailed by funds not putting up the returns. You can’t pursue ESG for ESG's sake. You have to show business value.