Typically it is when the company’s business practices are dangerously negligent, causing a major accident or human rights breach. Controversies can also occur when a company – sometimes unintentionally – is caught up in allegations of corruption, breach of privacy, unfit products or misleading marketing. They span the entire spectrum of environmental, social and governance (ESG) issues, and inevitably lead to prosecutions, civil lawsuits or regulatory sanctions. All imply reputational damage which would lower the value of the company’s equities or bonds, making it important for investors to factor them into their ESG analysis.
The two biggest corporate controversies in recent years outside of criminal frauds or the 2008 financial crisis were both based on negligence. The Deepwater Horizon oil platform explosion in the Gulf of Mexico in 2010 killed eleven people, caused a massive oil spill, and resulted in USD 40 billion in reparations. The death toll in the Rana Plaza building collapse in Bangladesh in 2013 was far higher, as 1,134 workers died, and the repercussions were more far-reaching. Most of those who died were low-income workers making clothing for Western fashion chains, causing some high street names to reevaluate the human rights credentials of their entire supply chains.
A common controversary in the modern era has been falling victim to cybersecurity breaches through hacking, negligent loss of personal data, or criminal activity such as ‘phishing’ for bank account details. Robeco sets great store in checking the cybersecurity preparedness of the companies in which it wants to invest as a routine part of ESG analysis, involving a cyber expert in its investment process since 2017. This ‘white hat hacker’ investigates the degree to which potential investee companies might appeal to hackers, and which business units are at risk. Cybersecurity was one of five engagement themes in 2018.
Specifically looking for corporate controversies forms part of a three-point process for selecting companies for Robeco’s Sustainable Development Goals strategies. If a company has experienced some sort of scandal, it makes it less likely to be included in an SDG credits or equities fund, although many other criteria are also evaluated.