Blinded by the light

Another online retailer in hot water recently is, of course, Boohoo. The company faces allegations that suppliers may not have paid the minimum wage, but the case has also exposed investors. This week the FT reported how some investors have grown increasingly dependent on rating agencies when it comes to guiding investment decisions, especially when selecting companies for responsible investment portfolios.
Yet heavy reliance on ratings alone is looking far less credible as a number of highly rated companies have been relevaled to have poor environmental, social or governance behaviours. Earlier this month, PIRC reported on the downgrading of mining firm Rio Tinto which held top scores on human rights issues at the Corporate Human Rights Benchmark at the time it blew up two sacred aboriginal sites.
This week, the FT reports that fast fashion retailer Boohoo boasted MSCI’s double-A rating – the second highest available – and had an above average score for labour issues during the period that the Sunday Times reported suppliers were underpaying workers. Boohoo was able to make its way into numerous ESG funds thanks to such favourable assessments by MSCI, leaving investors exposed to the retailer’s share price crashed which came after the Sunday Times’ devastating expose. Clearly this raises questions about the efficacy of some ratings, but surely investment decisions must be based on varied, reliable sources. In fact in the case of Boohoo, which disputes the validity of the Sunday Times report, a simple search of the company’s website should have raised questions about how clothes were sold so cheaply, especially if the suppliers were based in the UK rather than Asia. Reading the FT might also have been a good idea, since the Pink ’Un had previously reported on labour practices in Leicester.
Some investors did give the stock a wide berth. Sharon Bentley-Hamlyn, founding partner of Aubrey Capital Management, said she had rejected Boohoo long before slave labour accusations were made. She says: ’There were always doubts in our mind about Boohoo. The company produces very cheap, disposable fashion, which is neither environmentally nor financially sustainable unless it can be produced even more cheaply – or, as we have subsequently discovered – by [allegedly] paying employees well below the minimum wage, in working conditions which put their health at risk.’
And, tellingly, Ms Bentley-Hamlyn says Boohoo – and the disgraced payment processor Wirecard – were relatively easily avoidable investments, ’assuming you were not blinded by the overstated financials or rocketing share prices’.
Similarly technology analyst Neil Campling at Swiss asset manager Mirabaud predicted a share price of zero for the fintech a year before it collapsed.
The point is that ratings are not the problem, though we would say that as our governance ratings on Wirecard, and NMC Health, were low! However, due dilligence has to be part of the process too. As we’ve said before, you cannot meaningfully engage on labour issues without talking to workers themselves. This critical yet basic step is still left out by too many investors.

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