SRI Screening Predicted the Downfall of Equifax...a Year Ago
Everyone is familiar with the troubles that have plagued Equifax (the credit reporting agency) in recent weeks, but many still think the disaster came right out of the blue. However, if you were a follower of socially responsible investing (SRI) or environmental and social governance (ESG) screening for securities about a year ago, this news makes perfect sense today...and you would have avoided the loss of a lot of money.
Late last week, this article from the Wall Street Journal (which I highly recommend you read) explained exactly why Socially Responsible Investing screens are vitally important and should continue to be important at major brokerage firms.
Back in May 2017, I had the privilege of meeting Linda-Eling Lee, who is the global head of MSCI's ESG research and she discussed many of the risk metrics used to evaluate holdings of socially responsible portfolios. It was only recently reported (again) that back in August 2016, MSCI issued a reported that noted Equifax as being "ill-prepared to face the increasing frequency and sophistication of data breaches." MSCI also discovered that the company showed no documentation of regular cyber-security audits, offered no training for their employees to recognize the risks of a breach, and no emergency plan to respond to an intrusion. Naturally, MSCI gave Equifax a score of "0" on its privacy and data security fortitude.
This downgrade resulted in the company being removed from MSCI's ESG indexes and the chart below shows where these events took place, prior to Equifax's meltdown a year later. While it is true that the stock rose in value between now and then, if this was funding your retirement at the moment, you'd be right to be very annoyed.
This wasn't the first time MSCI found a company in violation of governance and ethics. In fact, MSCI downgraded Wells Fargo & Co. in November 2015 after noticing a high level of customer service complaints, several months before the bank was fined for “widespread illegal” sales practices.
What's the point here? The big idea is that "values will always equal value" in the stock market, and when lies and deceit are found it is important that ESG research firms sound the alarm.
According to Jon Hale, head of sustainability research at Morningstar: "If you’re an investor or asset manager and you see these rock-bottom evaluations of Equifax, it had to have given you pause...this is an instance where ESG analysis was really ahead of the curve." Quite frankly, it should be and will keep on getting better. In fact, more than 20 new ESG/SRI ETFs have been launched since the beginning of 2016 and they keep growing at major brokerage firms.
I'm working on several major projects in the field of socially responsible investing and I cannot wait to share them with you in the coming months -- it is my goal to make this the norm, and not a way of doing "green" investing.