No scandal: investors want to invest in corruption-free companies – even if improvements have been made
- This is Good Money Week (2-8 October), a national campaign promoting responsible investing
- Our survey reveals that avoiding corruption is a top ESG priority for HL clients – 83% of our clients ranked it ‘extremely’ or ‘very’ important
- 68% of clients said they would avoid companies that had been through a scandal, while 22% would consider investing if they felt improvement was on the horizon
Dominic Rowles, lead ESG analyst, Hargreaves Lansdown:
“’No scandal’ is the clear message from HL clients when it comes to making responsible investment choices. Our survey has highlighted that avoiding companies with corrupt practices is one of the most important environmental, social and governance (ESG) related priorities for HL investors – with 83% of our clients ranked it ‘extremely’ or ‘very’ important. Not only that, but most (68%) prefer companies with a completely clean record and will avoid companies that have been through a scandal, even if they’re improving. Less than a quarter (22%) would consider investing in a company if they felt improvements were being made after troubled times. The message to companies is simple: transparency, ethical behaviour, and good governance practices are essential in attracting and retaining investors.
It’s easy to see why investors feel so strongly. History is littered with corporate scandals that have cost unsuspecting investors billions. One of the most famous was US electricity turned energy trading firm Enron. The company used an array of fraudulent accounting techniques to appear hugely profitable, even on projects that had barely begun. When the company’s misdeeds became public knowledge in 2001, it collapsed, taking its auditor, Arthur Anderson, with it.
But corporate scandals aren’t consigned to the history books. In June 2022, energy firm Glencore was convicted of a decade-long bribery scheme to secure access to oil and generate illicit profit across operations in Nigeria, Cameroon, Ivory Coast, Equatorial Guinea and South Sudan. The resulting fines and financial settlements are expected to top $1.5bn. Even before the scandal, some investors had concerns about the quality of the firm’s corporate governance processes. This created the potential for unethical behaviour and poor decision making.
How can investors avoid corruption and scandal?
Integrating ESG analysis into your investment decisions is a great way to reduce your chances of being exposed to corporate scandal. If a company is well-managed and managers receive adequate challenge, that reduces the potential for individuals to get away with acts of fraud or deceit. It also means managers are more likely to take action to limit the company’s environmental and social impacts.
This week is Good Money Week, a national campaign promoting responsible investing. If you don’t have the time or knowledge to carry out ESG analysis for yourself, you could consider a fund which does the heavy lifting for you.
Legal & General Future World ESG Developed Index
The Legal & General Future World ESG Developed Index invests in more than 1,400 companies across the developed world.
Violators of the UN Global Compact (a UN agreement on human rights, the environment, labour and anti-corruption) are excluded, as are companies involved in tobacco and those making controversial weapons (like cluster bombs and anti-personnel mines). The fund also avoids companies that earn more than 20% of their revenues from thermal coal and oil sands.
FSSA Asia Focus
Martin Lau is the lead manager of this fund. He is a highly regarded Asian fund manager and has invested in the region for more than two decades.
Their philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and engage with companies to make sure they’re run in a way that’ll benefit all shareholders.”
