Vish Hindocha: Hello, and welcome to another episode of the All Angles podcast. On today's episode, we have Rob Wilson. Rob is the Director of ESG Integration at MFS^®. And in a fairly wide-ranging conversation, we end up talking about Rob's passionate subject around social factors and how we should think about the concepts of human rights, worker safety, and integrate those into investment analysis. Rob talks about the ways in which he thinks differently about those subjects, and some of the really interesting case studies and examples that he's working on right now in order to bring that to life. I hope you enjoy the conversation as much as I did.

You currently have the title of Director of ESG Integration, which is incredibly important in working across the investment team here at MFS. But I wondered if you could just help us back up a little bit and give us a potted history of how you got to here. What are some of the more formative experiences for you in getting to this point so far?

Rob Wilson: I went to Boston University. I worked at Bain & Company after I was at BU. And then after my MBA, I went and worked at American Century as a sort of traditional equity analyst. And it was really during that time at Bain and at American Century where I started to see, I think, some of the challenges that businesses were beginning to face at that time in terms of increasing competition from overseas, driving them to really have to make decisions in a lot of cases that I don't think were necessarily in the best long-term interest of the entire business or of the employees.

Especially during my time as a traditional analyst, I more and more found myself asking management team questions like, "Okay. So where do you think margins can go in the next two, three, four quarters?" Right? And that's not MFS's style of investing. It was the fund that I was on. But I think a lot of investors have that kind of mentality and approach across the industry, and I just felt like the answers and the way that I was frankly pushing the management teams to focus on that kind of thing to make me as an investor happy was, in a way, almost kind of contributing to the destruction of the thing that I loved, which was business and capitalism.

And so, I started looking into what it meant to be in sustainable investing or in ESG, and I started that process in 2007. I had a few conversations with people at that point. It was really all about, "What do we exclude?" And that wasn't really interesting to me, because I've always been an analyst at heart. And fortunately, as I really started to move on, learn more, go to some conferences, I came across this job at MFS, and what they were looking for was not someone who could help them create a new product or decide what certain funds shouldn't own.

But instead, they wanted someone who had been a traditional equity analyst who could come in and really help the team to understand how they need to be modeling and valuing ESG and sustainability risks. And to me, that was just incredibly exciting. And so, it really kind of, I think, pulled together a lot of parts of who I was, my love for business, for investing, for kind of seeing economic growth, but seeing it in the right way, and doing it in a way like at MFS, where we're thinking about the long-term impacts of the business decisions that are being made rather than just the next two, three, four quarters.

Vish Hindocha: You've described some of, maybe, the frustration or feeling like something was missing from some of those conversations. I'm just curious, as you look back on that time, was there a catalytic event, or was there a specific meeting or a mentor or a moment where that really came to the fore for you?

Rob Wilson: Yeah. It's funny that you ask, actually, because there absolutely is. So I was a generalist when I was at American Century. And so, I was looking at companies across all industries, and it was a really amazing piece of experience for me, because I could then come in here at MFS and work with a lot of different analysts. I knew the industries and that kind of thing.

But towards the end of my time there, I was looking at a company in the tech industry. And our fund, again, was pretty high turnover. It was a price momentum and earnings acceleration kind of driven fund. And we had owned this tech company for sort of four or five quarters, and it had really been outperforming. I liked the name. We did really well in the name. It was a large position, but they were starting to get to a point where their market share and the industry that they were serving was bumping up into that 65, 70% range, having moved from 30 to 40.

And my sense was just, "You know what? There's only so much further you can go in terms of market share gains here. In many industries, customers want more than one option in the industry." And so, I was really advocating for selling the position, and I was getting a lot of pushback from the portfolio manager, who was running the fund at that time. Great guy. Really good friends with him. So it was nothing personal. It was just, he was disagreeing at that time.

And so, we went through. We got another earnings report. And as is often the case in a shorter-term kind of focused strategy, the company missed by two cents, and the stock was off 30%. And I remember going in and talking to the PM, and he just stopped me, and he was like, "You know what, Rob? I'm sorry. You were right, but I thought we could get one more quarter out of it."

And for me, that was the watershed moment, honestly, of saying, "Wait a minute. What am I doing?" We're here. We're investing on behalf of people that really are looking for us to grow their money. And we did that generally, but that's what we were trying to do there. We were saying, "Can we get one more quarter out of it?" It just didn't sit right to me, and that's really what pushed me to say, "All right. What's out there from a sustainability perspective?"

Vish Hindocha: That's great. So you join MFS as a sort of integration specialist and, as you've described, working across the platform, and there's that cultural alignment at looking at long term. As you look from your purview, what's kind of catching your attention right now, Rob? What's piquing your interest, or what has piqued your interest over the last few years?

Rob Wilson: Yeah. Well, it's funny, because being here at MFS, as you said, very long-term-oriented investment manager, obviously, and I think that fact does have an impact on the kinds of companies we own. So when I got to MFS back in 2013, I thought, "Wow, I'm going to be spending a lot of time on mining and energy companies," and that kind of thing. And it hasn't been the case.

A lot of those companies historically have not been well-liked by our team, because the way that I usually put it is they take your money and they dig another hole in the ground with it rather than give it back to you. And so, the business models have been more difficult, I think, for the team to get comfortable with. The long-term value creation has been less clear, and the ability to predict things like changes in commodity prices is just something that, oftentimes, we're a little less focused on trying to do.

So what that meant is that we owned, when I first came here, and still really do, a lot of companies in health care and in staples, and in technology, and consumer discretionary. And really, those areas, there are certainly environmental impacts there, without a doubt. But those areas are really dominated by social topics and product quality, and how you treat employees, and data security, these kinds of things. And so, that's where I found myself spending a lot of my time when I started, and I still do, and I find it to be the most interesting area, frankly, for me.

I mean, obviously, climate is a space we spend a lot of time on. So I have a lot of experience there. But the passion, I think, for me is really in taking some of these other problems that also feel fairly intractable in many cases and trying to put them in terms that our investors can say, "Okay. Here's again how I'm going to model or value this differently." And I think that's very difficult in the social space. And so, it's very interesting to me as a result.

Vish Hindocha: Human rights and other things are definitely at the forefront of not only clients' minds, but also regulators, market makers around the world. What's some of your thoughts on how the intersection of investment and human rights needs to work together? Where are we in that journey?

Rob Wilson: People, when they think about human rights, they often think about that in, let's say, an emerging markets context. And for me, that's one thing I've always really tried to avoid, because there are human rights issues across developed, emerging, all markets really today, and they differ in severity. So I'm not going to try to pretend that increasing a minimum wage in the United States has the same impact as improving access to water and sanitation in a frontier market. So I want to be clear that that's not what I'm saying.

But I do believe that we need to kind of think about human rights a little bit more broadly, and we need to bring in conversations on how developed market employees are being treated. And I think if we start to do that, then you really start to see the breadth of what the human rights discussion can be, and you have a lot more angles and areas on which you can really start to get into it.

So just this morning, we had a call with Tesco regarding the way that they manage their employee base, some of the legal issues that they have going on right now, some of the data that they don't disclose that we feel like we need to really truly understand the firm's culture and that experience as a frontline employee. We've had a lot of those kinds of conversations in the US and in developed markets, because they are very, very relevant to the way that we need to model the cost base for these companies, looking forward.

Now, that said, I mean, equally, we've had plenty of conversations with the Nestlés of the world and Mondelēz about the chocolate or cocoa supply chain and what that looks like, and how difficult it is to extract modern slavery and child labor out of that supply chain, and there's been others as well, cotton and that kind of thing, where those issues have been front and center.

Unfortunately, in a lot of cases, I think we found it harder to wrap our arms around, how material is that? How do we model and value it? Whereas when we're talking about human rights from an employee perspective, I think you see that direct link a little bit more clearly, and I think it makes it a little easier to encourage an actual kind of modeling and valuation kind of decision based on that. So let me stop there. I don't know if I'm kind of touching on all the areas of that question.

Vish Hindocha: No, it's super helpful. One question I always like asking investors, such as yourself, what is something you think about this topic, like how human rights is integrated into investment analysis, that is different or maybe even contrarian to what the conventional wisdom would be? Is there anything that pops into mind for you?

Rob Wilson: I need hard data, quantitative information to really help me make an informed decision. And I believe that sometimes, again, well-meaning, other participants in the sustainability industry are looking for disclosures, often qualitative or commentary from management teams. And that's important. We need that. But if we don't also have some quantitative factors alongside that, it becomes really, really hard to get your arms around the topic.

And so, the way that I often describe it is like this. A management team could come to us and say, "We have this amazing new product. It meets customer needs. We have this feedback from our biggest customer who says what a great product this is." And we would want to listen to that as investors, and we'd want to poke around there. But we'd also want to ask, "Okay. Well, what's the revenue base of that? What's the revenue growth that's happening there? What are the gross margins? Because that's going to then help us see, is this a truly differentiated product or not?"

And in a lot of ways, I think that's what maybe the sustainability industry struggles with, is there's a lot of request for words, and you go out and you see the sustainability reports that are 100, 150 pages, but there's not as much around the data. And that's what we're really trying to work with people on. Okay. Even if it's something as simple like . . . Let's be creative, right? In what percentage or how many times has your supply chain turned up an instance where people were not paid a minimum wage, or where overtime was required?

How many suppliers have you discontinued for not rectifying situations? That kind of thing. Be creative. Give us some numbers. Allow us to track that. I think companies are nervous about doing that. They're much happier to just give the qualitative, but we really need both. So for me, that's one thing that I find myself just pushing constantly, and a lot of more what you might call industry groups that I just don't hear others pushing quite as much.

Vish Hindocha: One of the sort of pieces of threads of analysis that we published, your work on actually, was around modern slavery. I wondered if you could share maybe some of the industry or sector analysis that you and the team have done around something like modern slavery, and how has that informed, maybe, decisions on investment thesis or the types of engagement that we want to have with some of those companies? Could you just bring that to life a little bit around how your drive to data and data-driven decision-making is affecting our day-to-day work and our analysis of some of those themes?

Rob Wilson: Sure. So one thing that I'll go back to, because it's been a really important topic for a lot of names that we've looked at, is wages in the United States, and really kind of employee satisfaction at a frontline worker place within the companies that we own. And so, a few years ago, I did an industry piece looking at some new data that we have. So now, in the United States, companies, in their proxy, are required to let us know what the median employee pay is for the organization.

What's nice is that in retail and a lot of consumer discretionary, where this is a concern, that median employee is almost always a frontline employee. Right? If you think about that kind of business, there's a few executives, there's some management, a little bit of headquarters, but the vast majority of their people are out in stores around the United States, Canada, maybe some other locations.

And so, that new data point, which started being disclosed in 2017, allowed me to say, "Okay. Let's pull some of this together and look at the differences that we're seeing in pay between Home Depot, Walmart, Target, T.J. Maxx, a variety of different retailers, restaurants, leisure companies, and let's try to combine that pay data with, where we can, Glassdoor ratings. We know those aren't perfect, but we have them, and thousands of them for companies, like retail companies, and let's try to combine that where we can with other data points, like the diversity of the workforce or the employee turnover, if that's disclosed."

Still isn't often in a lot of those industries, but in some places, it was. And that analysis, I think, really helped us latch onto a couple of companies that were doing this very well, and others that maybe weren't doing it quite as well. And so, for example, for a time, we were really leaning into Home Depot as a company where we saw the kind of investments that they were making, leading to what seemed to be better store productivity, better same-store sales growth, the kinds of things that you want to see in terms of driving the real kind of health of the business.

At the same time, we weren't seeing it in some other places, some of the dollar stores, some of the discounters, those kinds of things. And I think in those cases, you have seen a reversal in the low wages that were maintained for a long time in those businesses, starting to move higher now, because it's more than just the wage. When people aren't getting paid enough, you don't have to just start paying them more. You also deal with things like theft, which often happens, by employees of an organization and other things. They're trying to get paid in ways that aren't right, essentially.

So it was a really, I think, important, helpful piece of work.

Vish Hindocha: It's interesting to think about how the psyche of investors in general is evolving and accepting of... that these things really do matter for the long term. I'm just curious, what are some of the nuances that you feel stepping into an engagement where you know some of the social topics are likely to come up? Is there anything that you've learned along the way? Anything that you do differently today, or as other investors or listeners are going to start engaging on those topics, what are some advice maybe that you would have for them?

Rob Wilson: Maybe I'll answer that in a minute, but I want to go back maybe to something that you said at the beginning, ahead of that question, which is the idea that more portfolio managers, investors are kind of looking at this, thinking about it. That's the case at MFS, right? Again, we have a long-term thought process. Most of the PMs here are going to own something for five to eight years. Right? That's quite long-term.

The rest of the market, though, I don't think has changed that much. And I think we're seeing this in a lot of cases. Right? I mean, if you look at some of our peers who jumped into some of the things like, I'll say it, CA100+ and are now jumping out, I wonder how intentional some of our peers have been about saying, "We're doing this because our investment team really believes in it and believes this is going to make for the best outcome for our clients over the long term in terms of risk-adjusted performance."

And so, I'm not so sure that the broader investment industry has changed all that much. And you see it, right? I mean, you talk to, again, the dollar stores or some of the discounters, right? I mean, for them to reinvest in labor to try to solve some of the problems, right? That's an immediate negative reaction by the marketplace, even though it's what the business needs to do to survive for the long term.

We have an opportunity still. Yes, there's more focus on sustainability today than there has been in the past, but I think this is as rich of an opportunity for us as investors as it ever has been, because there's still, I think, a lot of lip service. There's still a lot of, as I said earlier, okay, share some qualitative comments that might feel good as improved disclosure from the company, but don't actually help investors make any better decision.

And so, it's just something that . . . I don't know. As you said that, I really wanted to kind of come back to, because it feels more authentic to me, honestly, that we've got even probably a better opportunity to make money on sustainability today, because 10 years ago, 12 years ago, when I started, we didn't have a lot of disclosure. Now we've got a lot more disclosure. I think people are still kind of paying attention to it, maybe not. And so, that creates a really nice environment for us as investors.

Vish Hindocha: And I'm really glad you did, Rob. That's really, really powerful to think about the arbitrage opportunity or the ability to do better materiality discovery, and therefore how we differentiate in a very competitive environment that is active management. And coming back to the second part of my question, how does that shape the dynamics in which you have to engage with them constructively and thoughtfully over time if they're hearing different messages from different investors? How does that engagement look?

Rob Wilson: How that looks for us now, and again, not for me, because I think one of the key things that I want to make sure is clear is that none of us on the sustainability team are ever doing an engagement on our own. The analyst is always there, usually leading it, often a portfolio manager as well in the discussion, maybe multiple. Right? So that's an important distinction that I think, again, is unique for MFS.

Now, how is it different? So as I just said, at the end of this, we've got a lot more data than we ever did. And so, what we can do now is we're not just making a qualitative argument to a management team that they need to focus more on something. Right? We're instead able to say, "Hey, here's what we see. This is data you've disclosed, or otherwise reliable data. Help us understand why this doesn't suggest there's a problem or a risk here, or a sustainability issue."

And I'll just, I guess, maybe... I'm not going to say the name of the company right now -  I'll just call it a consumer discretionary company. We met with them yesterday, and we only had a half an hour, but it was with the CEO and the COO.

And so, we really wanted to make sure that we got the questions in around, again, their employee base, because what they're pitching themselves as is, "We used to be poorly run. We are now changing. We are like the industry leader." Okay. The industry leader is a company we've respected for a long time. We own a ton of it at MFS as a result of that, and the company has really performed well because there are some clear tailwinds to the business, especially post-COVID.

But we go into the meeting yesterday, and we say, "Okay. We've heard what you've said about your business changing, right? This is entirely a people-oriented business, however, essentially, and here's what we see. Your Glassdoor ratings are at less than 3.3. Your two key peers, including your primary peer that you're comparing yourself to, are at 3.5. Your employee turnover is 68%, 69% in the most recent year. It's been trending up, and it's been consistently double your peers, who are in the low 30% range."

"Your employee pay has now just barely caught up to the lower of those two competitors and isn't where this primary peer is. And last but not least, we look at your health and safety record. So your lost time incident rate, the amount of time that employees get injured and then can't come to work, is 3, 4x what your peers are, and increasing year over year versus the rest of the industry, or these two other competitors, seeing it fall towards zero. So help us square that."

And that's a question that the management team can't put aside. They can't just put on their ESG hat and answer it in a fluffy way. They tried to give some answers that really didn't work. Now, in a half an hour, we couldn't litigate all those things. They talked about how Glassdoor probably isn't accurate, because you don't include X or Y. Went back to the drawing board yesterday, included those things, and it doesn't change the picture.

So like all engagement, it's going to continue to be a multistage kind of situation, but it's the type of thing that myself, Kristov, the analyst who covers it, we're working daily on this one, because it's an important name for it and it's going to come up in a sustainability review that I do a week from yesterday, and I'm going to propagate this alternative view across the organization.

And again, this is what makes MFS special, honestly. Kristov is not like, "Why are you stepping on my territory?" He is, "Okay. I wasn't looking at all of these data points, but this really helps me understand it." He's the one. I wasn't running the engagement yesterday. He built those questions in, after he and I had talked to it, as primary questions for the discussion. He was the one pushing the dialogue with the management team.

So we talk about culture at MFS, and it's sad to me that I don't think we get enough credit with our clients for the culture that we have. But that ability for me to press him, Kristov, and for him to be okay with me, saying, "Hey, listen, I got to bring this up in these annual sustainability reviews," you're not going to find that at a lot of other investment management shops, where people are just like, "I get it. You're trying to help us make the best investment decisions possible. Let's work on this, and it's okay." You need to bring that up in other places. So anyway, again, I don't want to get too much of a monologue going on here. I'm afraid I've done that already, but you're bringing up some passionate subjects for me, obviously.

Vish Hindocha: Yeah. No, no, I love it. It's incredibly rich to hear you talk about . . . And again, thank you for sharing those examples, even the ones that are right hot off the press in terms of how we're using data, and the better data that we've talked about all the way through, in conjunction with the fundamental analysts that cover the name and make sure they lead the engagement, and how we use that to better inform that dialogue so that we can't get brushed aside, and that we're talking about some of the hard facts in the case, which is really, really exciting. It's been great talking to you about all of these wonderful topics, and I'm sure it would've been extremely helpful for our listeners.

Speaker 3: The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security, or as an offer of securities or investment advice. No forecast can be guaranteed. Past performance is no guarantee of future results.

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