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 December 2020 the Fund returned 2.11% versus the S&P/ASX 300 Accumulation Index of 1.32%, outperforming the market by 0.79% (after fees). Overweight positions in Renewable Energy and Transition Commodities and an underweight position in Healthcare contributed to relative performance while an overweight position in Food Products and an underweight position in Information Technology detracted from relative performance.
Ethical Partners has made a submission to to the inquiry on the Climate Change Bill. In our view it is clear that we desperately need whole of government support around the important elements of this bill.
Biodiversity is a very important area of engagement for us at EPFM, and an area of increasing interest for investors. Experts believe that we are in the midst of the Earth’s sixth mass extinction event -some 75 per cent of terrestrial and 66 per cent of marine environments have already been severely altered by human activity and one million species face extinction – many within decades.
During October 2020 the Fund returned 2.85% versus the S&P/ASX 300 Accumulation Index of 1.89%, outperforming the market by 0.96% (after fees). Overweight positions in Insurance stocks and an underweight position in Metals & Mining contributed to relative performance while overweight positions in Consumer Staples and Media & Entertainment detracted from relative performance.