Wirecard has forced many investors to ask tough questions of their own practices. In hindsight its problems may be obvious, but the electronics payments company did not necessarily appear to be in breach of ESG considerations.
An inevitable question following this high-profile scandal is therefore whether ESG-focused funds could foresee such difficulties and how sustainable frameworks dealt with the potential hazard that the stock represented?
Did ESG screening help?
From ESG perspective, there are obvious challenges thrown up when historical problems come to light. Was there a way to detect the issues at the company? Does this event show that frameworks still need to evolve?
There may be clues in the behaviour of managers who sold out in time.
Sudhir Roc-Sennett, who is head of thought leadership and ESG at Vontobel’s quality growth boutique, said the firm owned Wirecard around eight years ago, however they sold out because it became really hard to understand.
‘From the bottom-up it was really hard to invest in Wirecard, just because we couldn’t understand it. We were coming out of the meetings more confused than we were going into them.’
He added that the firm is big investors in MasterCard and Visa, the rails on which payments operate, as well as merchant acquirers that sell payment services to big networks.
Making sense of ESG scores
Roc-Sennett added that rating scores are an interesting area of discussion. He gave the example of MSCI ESG giving Wirecard a middle-of-the-road BBB score, while also highlighting the FT investigation.
‘Because the scores look at a lot of different things, you can dilute the real red flag, with no news or good news. If you take 20 different issues and you weight them evenly and only one of them is really bad and the rest of them are okay - your score is going to be okay.’
Roc-Sennett added that for ESG scores are a starting point, not the end point. They bring good discipline, they look at a broad array of issues and create frameworks of thought.
‘They are very helpful, but not something for us to hardwire into or rely on, because it just the structure is too broad. It is useful for finding red flags for us then to dig deeper.’
Probably one of the key elements when it comes to ESG assessment is revisiting your initial thesis. Hendrik-Jan Boer, head of sustainability equity at NN Investment Partners, said his team had historically held Wirecard and in the past there were good reasons to do that.
He said Wirecard seemed like an interesting company that had a decent economic model and interesting returns profile. There were no major controversies or doubts to start with regarding its operations.
However, when the first articles started to appear in the Financial Times about fake business numbers that didn’t seem to add up, that gave Boer and the team something to dive into and rethink their conviction on the stock.
‘If the governance is not okay and the company doesn’t seem to make any progress in how they explain the data they provide to us – it is affecting a major cornerstone of the investment case. It is like fundamentals in building your house: if that is not fine - then the rest cannot be very successful either.’