What happened with Boohoo? ‍

Shareholders have been saying ‘Boohoo’ after the Sunday Times alleged that the company’s products were effectively being sourced from a modern slavery factory in Leicester.

That is a trite statement, but it does succinctly highlight an issue of importance to the company, the fashion industry in the UK, and more widely to the new range of ‘ESG’ funds, which have emerged in recent years to invest monies on an ethical basis.

Cunningly, the Sunday Times introduced an undercover reporter into a factory allegedly supplying Boohoo. He was paid £3.50 per hour, which is half the legal minimum wage in Britain.

It also emerged from the Sunday Times report that employees in the Leicester factories were working in cramped conditions, breaking social distancing guidelines, and helping to spread COVID-19 in the city.

Boohoo has said that the supplier was trading under the name of a previous compliant supplier and has launched an independent investigation into its supply chain. But this hasn’t yet helped to resolve the issue.

Standard Life Aberdeen (SLA), the investment company, last week ditched their shares in Boohoo, saying that Boohoo’s response to the allegations was ‘inadequate in scope, timeliness and gravity.’

This is a significant move from one of the UK’s biggest managers. Other shareholders have said they are placing faith in management, pending its review of supply lines.

What is ESG?

ESG, or Environmental, Social, and Governance funds are supposed to put ethical considerations above purely financial ones.

‘Environmental’ denotes concern for the environment and sustainability; ‘Social’ deals with the treatment of workforce; and ‘Governance’ covers matters like how the Board operates, Audit and Remuneration Committees, and other areas of corporate responsibility.

ESG and the Fashion Industry‍

The Financial Times said in a leader column last week that, ‘It should not have taken a global pandemic to force ESG funds to get wise to the perils of fast fashion.’

Fast fashion is surely the inverse of sustainability, with its insistence on cheapness, faddishness, fast delivery, ‘throwaway-ability’ and the use of social media.

The FT has shown foresight over fast fashion, with an investigation into Leicester factories not paying the minimum wage back in May 2018 (just as it showed with Wirecard, the German payments operator that collapsed after a fraud a few weeks ago – but that’s another matter).

That article focused on a Boohoo dress being retailed for £6, which one UK supplier said he couldn’t produce for less than £6.45. It also quoted the CEO of retailer Esprit as saying, ‘I’d rather manufacture in Bangladesh than Leicester because they’re far further advanced’ in terms of issues of labour protection.

The FT’s exposé followed a Channel 4 investigation into Leicester factories not paying minimum wage in 2010 and 2017, and a University of Leicester study that found two thirds of the city’s garment staff were not receiving the minimum wage.

Putting this together with the fact that Boohoo sourced a third of its product from the UK (which means Leicester), these latest allegations should not have come as a surprise.

All this comes after controversy at Boohoo’s AGM in June, where a proposed bonus scheme was put forward that could pay senior management £150m dependent on future share price performance.

Behind the ESG Badge

At Capital International, when researching stocks, we assess and score companies for their ESG characteristics as part of our selection process. It is now common for most fund managers to use ESG metrics to shape investment decisions. It is likely that Boohoo would have scored poorly under most ESG metrics, so this begs the question of how this stock has found its way into ESG badged or focussed funds.

The irony of ESG funds is that they don’t just put consciences at ease, but have actually performed better than standard, or non-ethical, funds in recent years.

Part of this may be due to a ‘self-fulfilling prophecy’, whereby huge amounts of money flow into a select group of ESG accredited stocks. This drives their share price up, while at the same time money flows out of ‘non-ethical’ investments, like oil, tobacco and mining stocks, driving their share prices down.

Wirecard too was held in many ‘ESG’ portfolios.

It is clear that funds badging themselves as ESG need to demonstrate that their selection process is rigorous, with no potential for criticism that they are merely masquerading under the ‘ESG banner’.

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‍Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.