Buy Now, but Who Pays Later?
At Ethical Partners we view the many issues relating to sustainability as factors that contribute to risk in the investment case, and we are constantly looking for new risks in our portfolio and in our investable universe. Furthermore we are looking for how we can create positive outcomes for shareholders and the wider community from the recognition of these issues. In that vein we feel it useful to walk through one such example to bring you along on our analytical journey.
Does the prolific growth of Buy Now Pay Later operators represent a sustainability risk to retailers?
We are currently assessing the role of Buy Now Pay Later (BNPL) operators in the economy and how that may affect our portfolio (we don’town any BNPL operators but own several retailers). Simply put, the Buy Now Pay Later offering has some characteristics of a credit card and some of a traditional Lay-By product, but in short allows the consumer to purchase and take home a good or service immediately and pay for it in instalments over the subsequent weeks and months. The significant role they are now playing as a medium for which retailers are interacting with a growing consumer base cannot be ignored. This is the lens for which we will assess this topic. This week ASIC released a report with some damning statistics (albeit muted conclusions) into the BNPL industry which has heightened our concerns.
Specifically from the report we are concerned by the conclusion that a majority of customers acknowledged the offering meant they would spend more money (64%) on more spontaneous (81%) and expensive items. Furthermore, almost one quarter of users made some payments to the BNPL providers from their credit cards (translating to an increased interest burden).
Central to our investment process is meeting with management teams. It is now common place to hear from listed retailers that APT and other BNPL providers have been a significant positive factor in their online sales growth. Establishing that BNPL is of growing influence is Step 1. Unfortunately the report released last week by ASIC (referenced above) provided some distressing examples of customers where the provision of BNPL services was clearly not in their long term interest. Thus we reach Step 2 - an identified risk.
ASIC’s report noted that typically retailers were forced to distribute all advertising material provided by the BNPLs and actively promote the product in store and online, notably almost one in five BNPL users said that a sales assistant had encouraged them to use the BNPL offering.
Our Investment Process is about constantly challenging ideas and this is clearly an issue that needs to be addressed. BNPL is a fast growing and dynamic area which poses important questions for our process.
We are currently discussing these issues with the companies in our investable universe to understand the potential risks involved.Furthermore, we will be encouraging a more active dialogue between the companies we are invested in that operate in the retail space and the Buy Now Pay Later operators. We will endeavour to a) address our portfolio positioning in consumer discretionary stocks depending on the conclusions and b) encourage a more mindful and holistic approach to the provision of a product that shares some characteristics with unsecured credit, and we will keep you informed of our findings.
Finally, the Ethical Partners team continues to look out for other emerging issues and one is the role of data privacy and the provision of consumer data to 3rd parties. It is a wide ranging issue covering the health, finance, retail and technology sectors and we are currently undertaking research on this area.
Link to full ASIC Report: https://download.asic.gov.au/media/4947835/rep600-published-28-11-2018.pdf
Ethical Partners Funds Management
During September 2020 the Fund returned -3.40% versus the S&P/ASX 300 Accumulation Index of -3.60%, outperforming by 0.20% (after fees). Overweight positions in Insurance stocks and an underweight position in Construction stocks and Healthcare detracted from performance while overweight positions in Industrials (specifically Building Products) and underweight positions in Information Technology and Energy contributed to performance
Emma McCarthy recently joined Ethical Partners. Emma is a passionate final year law student and joins us as Sustainability and Advocacy Assistant. We are honoured to share with you her reflections on the recent UN Global Compact conference, and how it inspired her, as a new recruit to the global sustainability and human rights community, on her journey to fight for change.
During August 2020 the Fund returned 4.10% versus the S&P/ASX 300 Accumulation Index of 3.05%, outperforming by 1.05% (after fees). Overweight positions in Consumer Staples and Industrials added to performance while stocks in General Insurance and Building Products detracted from performance.
It appears that the Australian economy will be asked to grow itself out of debt post COVID rather than experience an increase in taxes once the economy is more stable. So what are the long term projects that would change Australia for the better? It was quite timely indeed then that the Australian Energy Market Operator (AEMO) recently released its 2020 Integrated System Plan (ISP). It appears to us that AEMO has put down the framework for how Australia will operate with less coal fired electricity generation given we have an aging fleet which will be gradually de-commissioned over the next 20 years.The AEMO Plan is a whole of system blueprint for the evolution and change the electricity market will experience in the 20 years to 2040. It expects 63% of the current coal fired power stations to close by then based on company disclosures and end of life assumptions. Herein lies Australia's great stimulus opportunity.