Investment managers must not rely on ESG ratings to flag all of the underlying problems at investee companies, a senior PRI figure has warned.
In an update on Wednesday (19 August), Peter Dunbar, a private equity senior specialist at the PRI used the recent Boohoo.com scandal as an example of a company which was highly rated on ESG by agencies, but had bad practices lurking in its supply chain, unchecked.
“Many asset managers blindly accepted those high ratings and did not see the evidence which was in plain sight,” he wrote. “They just needed to do a little of their own research.”
In July, ESG Clarity highlighted the challenge faced by those issuing ESG ratings. Boohoo.com had been highly rated but found itself ensnared in a media storm after an investigation in The Times uncovered workers at supplier factories were being paid way below the minimum wage.
Dunbar, a former ESG manager and chief operating officer at Fundamental Private Markets, called for investors to do more to understand supply chains, saying the Boohoo case showed that there are many “lessons to be learnt”.
He added that private equity, compared to listed equity, may give investors the opportunity to scrutinise investments a little more as it is “ideally situated to ensure that target portfolio company supply chains are competently due-diligenced, and well-monitored post-investment,” he claimed.
“Unlike in public equity, there are no ESG ratings to rely on; research and thorough due diligence are key tools that private equity investors need to use to mitigate these risks and prove their ESG credentials to LPs.”