In a space such as ESG (environmental, social & governance) investment, which has garnered much attention and inflows in recent years, it can often seem that people are just waiting for a big scandal to emerge.
Yet for Aberdeen Standard Investments UK equities investment director Louise Kernohan, recent allegations faced by online fashion retailer Boohoo have proved a cautionary tale.
It had been a strong start to the year for Boohoo despite the pandemic. In a trading update for its first quarter in June, the group reported that in the three months to 31 May it had seen a 45 per cent year-on-year increase in total revenues, reaching £367.8m.
However, allegations in the Sunday Times newspaper on 5 July highlighted poor working conditions at a factory in Leicester where Boohoo-branded garments were found.
While the retailer pledged to investigate how its garments were found at the factory by an undercover reporter and review relationships with any suppliers working with the manufacturer, the allegations took a toll on the company’s share price. It fell by more than 40 per cent in the days after the article appears.
Later in July, the firm announced a full independent review into its Leicester supply chain and reconfirmed its commitment “to the highest standards of ethics, compliance and transparency”.
While it has recovered somewhat, Boohoo’s share price is currently 14.22 per cent lower than it was three months ago with the review ongoing.
Price performance of Boohoo over 3mths
Source: FE Analytics
Boohoo had been a top-10 holding for Kernohan’s ASI UK Responsible Equity fund, representing 3.19 per cent of the portfolio at the end of June, according to FE Analytics. However, by the end of July the online retailer had been removed completely from the portfolio.
Speaking to Trustnet earlier this month, Kernohan said that she had sold the stock as soon as practically possible after the Sunday Times allegations were made.
She said: “It’s been a really difficult one, and one where I’ve done a lot of soul searching afterwards about what I should have done differently.
“We, as a house, have been engaging with [Boohoo] a lot about their supply chain and I would recognise that their disclosure wasn’t quite what we wanted.
“They didn’t show that they had a clear understanding of their supply chain, but it was a project that we were working on. We saw that they were making a bit of progress, but slower than we would have liked.”
Kernohan said she had already began selling down the stock ahead of the Sunday Times article – moving from 3.2 per cent weight to a 2 per cent – but sold out completely after the allegations came to light.
“With hindsight, obviously, we wished we’d sold out of the whole lot but it never quite works like that,” she explained.
“When the allegations came out, it was actually really disappointing because we invested in good faith, believing that they that they were responsible in their supply chain and that they were on project to be able to prove that to us.”
The fund manager said after the news broke she spoke with Boohoo’s management but had been left “frankly disappointed by the lack of urgency”.
“They said they would undertake investigations but [that] it could take some time,” she added. “That has been accelerated, but their initial response we felt just wasn't strong enough.”
For Kernohan, the episode has reinforced her view on running an ESG strategy and how important it is to focus on companies that she believes are behaving responsibly.
“The businesses that run themselves really responsibly are those that are going to do best,” she explained. “If, for example, your business causes too much pollution or markets a bit too aggressively and irresponsibly – those things can bake-in short-term profits but ultimately that’s not a sustainable model.”
And, increasingly, that’s what Kernohan believes the asset management industry is coming to understand: that ESG is not just what the client wants or about being a good person, but something that can have longer-term benefits.
Nevertheless, the manager said the catch-all term ‘ESG’ can mean different things for different businesses and as such it forms part of the analysis process for her 16-strong UK equity team.
“It has some negative screening so it can't invest in, for example, in alcohol, companies that do animal testing, tobacco, gambling, those sorts of things,” said Kernohan.
“Also, it's aiming to choose the companies that are more responsible and manage their ESG risks particularly well, but as a style factor.”
She continued: “And if you look at it that way [as a style factor], it’s actually quite similar to the ASI UK Equity fund [which focuses on quality stocks]. I would say that they’re both doing well because they’re focused on sustainability.”
Performance of fund vs sector & benchmark under Kernohan
Source: FE Analytics
Under Kernohan, ASI UK Responsible Equity has made a total return of 11.51 per cent, compared with a 9.23 per cent fall for its average IA UK All Companies peer and an 11.47 per cent loss for the FTSE All Share benchmark. It has an ongoing charges figure (OCF) of 0.87 per cent.