In this weekly feature, FSA shows a potential investment that a firm has declined on the basis of ESG criteria. The purpose is to highlight firms that are actually putting into practice an aspirational ESG policy.
ESG assessment led by: Gabriel Wilson-Otto, BNP Paribas Asset Management’s head of stewardship for Apac
Company: A mainland China-based mid-cap, renewable energy sector, assessed for one of BNPP AM’s thematic funds.
China leads the world in production of clean energy, which government policies have firmly supported through subsidies and manufacturing incentives. The government has also been investing around $100bn annually into domestic renewable energy companies.
With the Chinese state providing fundamental support, companies in the sector seem like appealing investments. The renewables label also attracts ESG investors, but this relatively new sector in China requires more than a checklist to ensure companies are not greenwashing.
Wilson-Otto’s team went deeper on the company’s governance and discovered:
1) a disconnect between subdued cash-flow growth and robust sales growth
2) a rapid build-up in trade receivables
3) the vast majority of the company’s sales were generated form related party transactions with the company’s parent entity
4) the company’s chairman was also the ultimate controller of the parent entity
The firm’s ESG governance assessment seems similar to standard due diligence work. But Wilson-Otto explained that the ESG and investment team are integrated. If the investment team finds something odd, the ESG team does deeper analysis on the red flag issue.
“We see more of these issues than the investment team and therefore are in a position to give them insight and guidance.”
Given the concerns that were uncovered, the portfolio manager decided not to invest in the company, according to Wilson-Otto.
“The company was subsequently suspended from trading following a sharp decline in its share price and a formal investigation into the affairs of the company was launched by the regulator,” he added.