A UK online retailer was rated by external research providers as among the top 15% of retailers from a sustainability perspective, with its supply chain identified as a key strength.
No major concerns were highlighted except that the company lagged competitors in addressing the environmental impact of ‘fast fashion’ and had potential risks around data privacy.
Our ratings told a different story
In contrast, our sustainable investing ratings system rated the company as a ‘D’ – our lowest possible rating.
While other research providers had identified the environmental impact risk, they had not flagged the scale of financial and reputational risk from poor supply chain management. The latter risk was made apparent to us through the company’s above-industry margins, which could be explained by poor working conditions and the payment of below-minimum wage in its UK supply chain.
Our predictions were proved correct in July 2020, when the company’s market value fell by one-third in just a few days, following reports of poor sanitation in supplier factories – potentially leading to the spread of COVID-19.
An early warning for investors
Our proprietary SI ratings system helps us better understand a company’s ESG issues, which are often missed by external ratings providers.
As a fundamental bottom-up investor, we can evaluate a company’s ESG claims in the context of its business fundamentals and factor in issues that are most relevant for the company.
This makes our ratings not only company specific but also forward-looking, and therefore more useful for investment decision making.