The recent case of the UK-based fashion house Boohoo has shone another spotlight onto the importance of responsible investing AND the resulting fallout if companies are found deficient on the ESG front. Boohoo’s share price is now down 43% from its recent highs, as three major retailers announced plans to drop the brand over as yet unproven allegations of low pay and unsafe conditions at a UK supplier. This once again highlights the perennial difficulty of ESG investing and the gathering of relevant information to make the appropriately informed decisions. In this case, Boohoo has no corporate bonds outstanding, but issuers in the bond markets have taken swift actions to dissociate themselves, such as Next plc which has temporary suspended Boohoo products from its website.
The vast majority of asset managers (including AEGON AM) will use third party providers as a sense check to aid their own in-house ESG analysis. A quick perusal today of two of the main ESG rating providers shows that in the case of Boohoo, one rates the company highly whilst another ascribes a medium risk assessment.
This poses a challenge to effective ESG investing especially the “Social” element. Experts and the company’s customer base have not sniffed out these issues and analysts sitting in Edinburgh, London or New York are also likely to struggle. Increasing disclosure by companies may just be paying lip service to the issues. What is clear is that one can’t rely solely on third party assessment and this reminds us of the advantages of being an active and often sceptical independent investor.
As themes of ESG and responsible investment become ever more popular, scrutiny from all angles will increase and this is where the glimmer of hope lies; the rating agencies are paying ever more attention to ESG issues and we anticipate that ESG gradually becomes part of the annual audit process in many jurisdictions. However, the more sceptical have commented that as both accountants and rating agencies are paid by the institutions they are assessing, the final assessments might not be as independent and impartial as required.
In a corporate world with global supply chains resulting in a proliferation of subcontracting and foreign jurisdictions, there will always be Boohoo scandals to be uncovered, and not just in the retail sector. However, the market response to these issues and the public demand for ever more scrutiny means that corporations worldwide should be paying more attention to these issues in order to continue raising ESG standards across the board.