Cover Story
Just as important as
avoiding companies with
low governance scores is
looking closely at those
that are working hard to
improve in this area
decile have underperformed over the
past six or seven years. So if you want
to invest in that type of company, you
have to be pretty sure about the other
types of financial characteristics.”
Just as important as avoiding
companies with low governance scores
is looking closely at those that are
working hard to improve in this area.
Lode says this is because investors
tend to put a risk premium on a
company with poor governance
levels, for example.
“In financial theory, people talk
about a high discount rate for higher
risk, so we identify companies that are
trying to change. You get rewarded
when investors re-evaluate these
companies with a lower discount risk.”
Social work
While the benefits of focusing
on good governance are not
difficult to grasp – the quality of a
company’s management team, how
it is remunerated and the degree
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LIES AND STATISTICS
Gergel says investors should not
consider ESG scores as the be-all and
end-all and in some cases they can be
misleading.
For example, the manager recently
held a meeting with Shell about its
involvement with onshore operations in
Nigeria, for which it has been criticised
due to widespread instances of oil
leakage, theft and corruption.
However, Gergel points out that the local
population is keen for Shell to stay put.
“Shell is probably the most reputable
operator of onshore assets in Nigeria and
people are worried that if the company
pulls out, which would be the easy
option, there would be more corruption
and less of a focus on standards,” the
manager says.
“So whereas Shell’s ESG score might go
up if it pulls out, it would be likely to have
a detrimental effect on the community.”