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.
Lead analyst: Rob Wilson, ESG research analyst at MFS Investment Management
Company: A mid-cap US-based IT company that is a government contractor. Evaluated for an MFS equity fund.
MFS’ ESG team identified a series of data security failures by the company, which presented a significant risk to its valuation.
“The repeated failures led our IT services analyst to question the company’s risk management and internal control practices,” Wilson said.
He said red flags were raised during “controversy analysis”, which involves monitoring news sources and identifying companies involved in incidents that are likely to negatively impact the ESG profile.
MFS uses information from both third-party “controversy aggregators” as well as its own research, he added.
“In this instance, under close inspection, we found a pattern of controversies that gave us cause for concern regarding the company’s internal controls, which were later called into question by a major customer.”
The company had both physical (offline) and online data security issues, Wilson said, but he declined to give details.
“Although the information [on security failures] was available to the broader market, investors had apparently not connected each individual incident or considered what those incidents may have indicated about other internal processes.
“We often find that investors do not always pay close attention to all pieces of relevant public information available.
“Investors do not always interpret the information available in the same way and can miss signals regarding other aspects of the business or management quality.”
The firm’s IT services analyst gave the company a 2 rating, which means it is not recommended for investment.
According to Wilson, “the company subsequently announced that it was being investigated by the US government in relation to internal control issues, which we believe was signaled ahead of time in their poor management of data security risks” and a drop in the company’s stock price followed.
