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How extra financial information provides signals to the quality of corporate ESG

La Financiere Responsable is a specialist ESG asset manager with an award-winning approach to integrating financial and extra financial analysis. Investors and analysts are sometimes unsure as to what constitutes extra financial information, and how it should be interpreted. Here LFR President Olivier Johanet outlines factors that played a part in LFR’s stock selection in recent months.

Holistic Environmental, Social and Governance (ESG) analysis is a rich source of information for investors. But it is necessary to ‘de-crypt’ the signals coming from corporates used to providing simply numerical, financial information. Here are a few examples where LFR declined to invest, or sold its position, after adopting this approach.

  1. Daimler refused to provide information. Following the revelations from Volkwagen of the fitting of software designed to misreport vehicle carbon emissions, LFR asked another high-end car-maker Daimler for ‘extra financial’ information on carbon reporting. The company declined to provide it, and was consequently de-selected from our portfolios

  2. The aerospace company Zodiac did not compile or report on the incidences, severity or frequency of work accidents, because it believed none had occurred. LFR considered this poor governance and poor social awareness and consequently excluded the stock from its investable universe. The same firm could not account for delays in the manufacture and delivery of key parts to client airlines, a core part of its business.

  3. The German car parts firm Elringklinger reported an impressive improvement in profitability in an increasingly competitive market. However, an in-depth review of governance at the firm indicated that the founder, near retirement and without an obvious heir, had personally picked an employee as his successor. LFR thought a fundamental change to the business was imminent, and preferred not to invest.

  4. Vallourec, which provides premium tubular solutions for the energy market, issued a series of statements over a two-year period indicating how well they were coping with the additional costs of international expansion into the United States and Brazil, yet shareholders kept hearing of difficulties within the Board of Directors. LFR sold the stock at €33; within five years it was trading at €4.20.

  5. The management of digital security firm Gemalto issued a series of contradictory statements about the evolution of the US market, a critical target for the firm. LFR quickly sold out its position given the apparent confusion over strategy.

The lesson from these extra financial indicators is that investors should look at more than ‘the numbers’. Signals may be weak, but they are there. The analysis may be difficult to do, but it is vital. Too often, standardised, ‘industrialised’ information relevant to the past is wrongly taken as a pointer to the future. Furthermore, LFR has found that companies that resist sharing information about their ‘E’, ‘S’ or ‘G’ policies are often struggling to address them, adding to investor risk.

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