ESG Indexes Search for Both the Good and the Bad

By October 16, 2017Impact Investing
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We are living in an era where corporate reputation is of utmost importance. We are also living in an era where multi-national corporations have become so colossal that global governance simply cannot keep up.


Last week U.S. credit bureau, Equifax, revealed bad news for millions of U.S. consumers: a massive security breach that had leaked the personal information of 143 million people, inclusive of social security numbers, driver’s licenses, birth dates, you name it. For context, 143 million is about 44% of the entire U.S. population, and, as is often the case, those consumers with lower financial literacy and resources will, unfortunately, suffer deeper losses.

Equifax is the oldest of the three main U.S. credit bureaus, aggregating information on over 800 million people for insurance and credit reports.

“The Equifax data breach poses serious problems for consumers of all socio-economic levels, but in particular, those consumers who are less educated on the repercussions associated with data theft and identity theft. We are deeply concerned that Equifax – and all credit reporting companies – are not doing enough in a timely manner to protect under-served consumers who have been victimized by this data breach and stand to suffer the most.” – Thomas Hinton, CEO, American Consumer Council

Companies make mistakes. The implications of some mistakes are larger than others, but the response to the mistake is always imperative. Equifax asked its customers to give up their right to sue the company in exchange for credit monitoring services. The company retreated from this stance shortly after, but the response has not yet been forgotten. Also not forgotten is the fact that Equifax let six weeks go by before announcing the breach. On the positive side, the company’s interim CEO Mr. Paulino de Rego Barros Jr. wrote a nice apology in the WSJ and other media outlets, and the company is indeed developing FREE services to let consumers lock and unlock credit card file access.

BEHAVIOR, REPEATED

As reported on Fox News, “Scandal 101: Equifax repeated Wells Fargo’s mistakes,” we have witnessed an unfortunate repetition of behavior.

You might recall hearing about a certain $185 million scandal involving fake accounts last year.

What happened? Well, the story is that employees inside Wells Fargo created millions of falsified accounts and credit card applications. Associated with these accounts were fees for customers which helped augment sales figures for said employees. As result, 5,300 employees were fired and the company forced to pay a $185 million fine. Also as a result, the investment community was in a flurry of anger (rightfully so).

Adding insult to injury, just one month ago Wells Fargo admitted it had found an additional 1.4 million fake accounts, totaling to approximately 3.5 million fake accounts. What does this mean? About a year after its first congressional hearing, Wells Fargo is back in the hot seat.

Who cares? The investment committee, apparently.

Hindsight is 2020…and so is the MSCI ESG Index

Interestingly, if one had been following the MSCI ESG Index, one might have had a bit of foresight into both the Equifax and Wells Fargo Scandal. In fact, Equifax is what is known as an extreme underperformer according to both MSCI ESG Research and Sustainalytics, ranking in the lowest decile out of 93 firms. MSCI ESG Research downgraded Equifax to its lowest rating “CCC” well before the scandal hit. When asked why, their response was because of Equifax’s insufficient security and privacy matters, and also because the company had previously been fined for its marketing of credit score products. (Remember, ESG indexes do not exclude companies, but rather provide a comprehensive universe, which is why the companies are still included in the index…just in last place, if you will.)

One might conclude that because two renowned predictors shared similar opinions about Equifax and Wells Fargo, these companies would surely be missing from ESG portfolios, right? Wrong. Somehow, both Equifax and Wells Fargo were included in top portfolios.


The moral of the story is that looking at ESG data on badly behaving corporations such as Wells Fargo and Equifax was predictive before their respective crises hit.  The two companies had terrible ESG scores based on governance insights that had already been acknowledged. Yet, many portfolios had these companies involved. Note to the investment community – the existing research speaks great truths! Take notice.

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Author Jennifer Ballen

Jennifer is the Global Manager of Packaging and Circular Economy for AB InBev and the Founder/Writer of www.thesustainableinvestor.net, an editorial blog composed of narrative and economic analysis which demonstrate that profitability and environmental/social impact need not be mutually exclusive. Jennifer is also the Co-Founder of "Before It's Too Late", a virtual reality prototyping lab, highlighting climate change stories, simulations, and solutions, aspiring to change the climate narrative by closing society's empathetic distance from it. Jennifer's interests include impact investing, the greening of sports, renewable energy, and corporate implementation of sustainability. Jennifer started her career at Morgan Stanley Investment Management in New York City and is currently a Level III CFA Candidate. In 2014, Jennifer became trained as a Climate Leader with Al Gore's Climate Reality Leadership Corps, in Rio de Janeiro, Brazil, taking a global leadership position in climate advocacy. In 2016, the Center for Development and Strategy recognized Jennifer on its "30 under 30" global list of sustainability leaders for her expertise in Corporate Social Responsibility (CSR). Jennifer is the Co-Author of the 2017 MIT published Case Study "First Solar", and holds a B.S. in Finance and Marketing from Lehigh University (summa cum laude honors), and an M.B.A. from MIT Sloan School of Management.

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