Sprouts Farmers Market – a diamond in the rough
Doing your homework pays off. Looking where others don’t works too. Finally, patient and consistent engagement can lead to success, These are the lessons I have (re)learned from our multi-year investment in Sprouts Farmers Market.
I have already blogged about Sprouts in the past and it is a truly fascinating company with an unusual business model focusing on providing its customers with access to cheap fresh fruits and vegetables. For whoever has a minute to spare, I would wholeheartedly recommend to revisit this short text first. In this blog, however, I would like to take you on a brief journey in time to show you what we did with Sprouts and how our investment process works in real life.
When we first invested in Sprouts in 2016, it was a relatively unknown company, far away from the radar of most sustainability focused investors. It also attracted little interest from various sustainability rating agencies and those that did notice Sprouts, tended to rate it poorly. No wonder, Sprouts was a relatively new and small company and its sustainability policies and disclosures were still in its infancy, far behind some of its larger peers in US food retail sector.
However, when we first saw Sprouts, we ignored all of it and focused solely on the core of what the company is: a natural and organic food retailer putting access to cheap and healthy foods at the heart of its business model. Sprouts Farmers Market was really unusual in the context of a sector that tends to have highly processed packaged food as its main revenue driver and we could not believe that the company was not getting more recognition for its strong sustainability credentials.
Not getting sufficient credit for your sustainability efforts can be a big problem for a company. Because of the explosive growth in sustainability focused investing in recent years, ESG capital1 now forms a significant chunk of all global capital, even expecting to reach a third of all global Assets under Management by 2025. Not being able to attract this enormous investor base means less prospective demand for company’s share and consequently lower valuation multiple.
Luckily, PGGM is positioned to represent patient and long-term focused pension capital and this lack of broad recognition did not prevent us from including Sprouts in our sustainability-focused equity fund. Furthermore, we have started our long-term engagement with Sprouts encouraging them to work on their policies, improve their disclosure and generally work harder to become an ever more sustainable company.
Our (and Sprouts’) efforts have finally payed off late last year when the company has been upgraded to AAA (highest rating possible) by one of the most prestigious sustainability rating agencies, catapulting Sprouts overnight to a position of absolute sustainability leadership in its sector.
There is a growing body of academic evidence suggesting a positive correlation between company’s sustainability progress and higher returns2. In fact, Sprouts’ share price has increased by almost 50% last year, contributing nicely to PGGM’s portfolio return and our client’s pension ambitions.
It pays off to look where others don’t and we are happy we have discovered this little diamond in the rough before anyone else knew it.
1. ESG capital is a general term defined by the Global Sustainable Investment Review as either negative/ exclusionary screening, positive/best-in-class screening, ESG integration in investment process, or impact investing. With this definition, PFZW and PGGM would be classified as 100% ESG capital as we use either of these approaches in all our portfolios. From simple exclusion in our passive portfolios to directed impact investing in certain active portfolios
2. Does Positive ESG News Help a Company’s Stock Price?
ESG and Financial performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015-2020(pdf)
Has ESG Affected Stock Performance?
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