Case Studies

Know What To Look For

Integrating ESG factors in your investment decision-making can steer you away from high-risk opportunities. Even some funds labeled as socially responsible are using ESG indexes and still yielding low ratings. This takes a trusted advisor to analyze the ESG landscape, go deep on ESG issues to ensure that a portfolio is living up to its name.

We demonstrate some very high profile case studies with ESG red flags as an example of how your investment advisor can steer you away from high-risk opportunities if they know what to look for .


Vale Mining Disaster in Brazil

January 2019: An example of poor business stewardship and failed ESG standards is Brazilian miner Vale. The January collapse of a dam at one of Vale’s properties killed close to 300 people and is considered Brazil’s worst industrial accident. News reports say the company knew the dam was a problem, and a Brazilian judge ordered Vale to pay all compensation for damages related to the break.

This has reopened de­bate about the role of investors in policing standards and there is growing demand for strategies that incorporate ESG metrics to evaluate risks across the mining industry. Vale was recently ranked by Australian bank Macquarie as the second worst ESG performer amongst miners, scoring badly in fatalities, environmental fines, reporting and low percentage of women in their workforce.

The tragedy has prompted demands for improved disclosure about safety practices at waste dams from mining companies across the world. The impact of the disaster affected global markets and investors, with pullout from Vale from Union Investment, Germany’s third largest asset manager, as well as Kommunal Landspensjonskasse, Norway’s largest pension fund, stating loss of faith in the company’s ability to operate safely. PRI, April 2019

Volkswagen Dieselgate

September 2015: German car manufacturer Volkswagen came under fire from the EPA as a violator of the Clean Air Act after admitting defective devices were installed on 11 million vehicles to cheat on emissions tests, leading to a 40% drop in stocks and the CEO’s resignation. In April 2017, a US federal judge ordered Volkswagen to pay a $2.8 billion criminal fine for “rigging diesel-powered vehicles to cheat on government emissions tests”. CEO Winterkorn was charged in the United States with fraud and conspiracy.

Had the company been properly assessed with the alternative data sets followed by ESG indexes, some of the flagged risks could have been identified. Faults in the product management team, the company’s deterioration of corporate governance practices, elevated warranty expenses and lack of transparency were all negative signals that Volkswagen was a high risk investment. Integrating ESG factors in the decision-making process could have aided investors in selling or completely steering away from this company. Compliance Week, September 2018

PG&E and Wildfires

PG&E is a great case study that emphasizes that not all ESG ratings are alike, and why you need a company like ESGA to help you navigate the data for the broadest and most strategic approach. The utility company had good ESG Rating yet disaster was imminent and in plain sight for anyone to discover.

The California power company has been devastated by wildfires that ripped through the state in 2017 and 2018. PG&E’s liabilities are estimated at $30 billion and a bankruptcy protection filing is still in the courts. Its stock had tumbled 89 percent from its high on Sept. 11, 2017 and has seen spikes but is still unstable. The initial blame on fires was climate change but it was later revealed it was equipment failure.
PG&E shows how tricky it can be to foresee a company’s pitfalls, even after they show up well in some ways. PG&E’s ESG scores from several major data providers, such as RobecoSAM and Sustainalytics, were above average in 2018. In a summary of ESG ratings compiled by Bloomberg, PG&E scores better than average among its peers for environmental factors. They had a favorable sustainability score because they were converting people to alternative energy fast. But this didn’t mean the most important risks had been accounted for. PGE had self-disclosed for the past couple of years that their risk of fire was extremely high, exposing this as a high-risk investment. Market Watch, February 2019

Equifax Data Breach

July 2017: In the fallout from Equifax’s 2017 data security breach, many were angered to learn that though the credit bureau publicly announced the breach in September, it had known about it since late July. This failure to immediately notify consumers that the breach had compromised the personal information of millions of Americans helped further damage public trust and sent the company’s stock prices tumbling. It was uncovered that before the breach occurred, Equifax had been warned about its vulnerability to data theft.

This mishandling and subsequent damage angers consumers and hurts an organization’s reputation. It led to lawsuits and expensive settlements and in turn, affected share prices. Equifax’s declining ESG data points were sell signals.

Many funds labeled as socially responsible contained shares in companies ranked as poor managers of ESG issues, some still holding Equifax shares—even after the company received its high-risk, low rating. This takes a trusted advisor to analyze the ESG ratings, and within ESG funds. ESGA will go deep on ESG issues to ensure that an impact portfolio is living up to its name. Impact Investing Exchange, January 2018