Boohoo case highlights ESG risks of UK retail stocks

28 Jul 2020

With social risks expected to rise in a post-Covid world, investors in Boohoo have received a harsh lesson in what can happen if they downplay supply chain problems of stocks in their portfolio.

As the lockdown that was ordered in response to Covid-19 was eased at the start of July, a spike in the illness in Leicester quickly followed. An investigation into the outbreak found that many of the sufferers were connected to a clothing factory.

It supplied Boohoo, a budget fashion brand aimed at women under 30. A closer look unearthed evidence of staff paid an average wage of £3 per hour, those without the right to work in the UK worked for as little as £1 an hour. This is half the hourly minimum wage for the Chinese city of Shenzhen, according to a report by campaign group Labour Behind the Label.

The risks of investing in Boohoo should have been no news to investors. Initial concerns about clothes factories in Leicester were raised in the media in 2018, slave labour at Boohoo and other UK fashion retailers were also mentioned in a 2019 inquiry of Environmental Audit Committee at the House of Commons.

Nevertheless, major shareholders in Boohoo include Jupiter, which holds a 10% stake through it’s recently acquired subsidiarity Merian Global Investors, Invesco which holds a 6.5% stake through Oppenheimer Funds, Aberdeen Standard Life Investments, Baillie Gfford and Premier Miton.

Jupiter, Aberdeen and Premier Miton confirmed that they had been in touch with Boohoo executives to discuss supply chain concerns.

Aberdeen Standard Life Investments also had exposure. By the time it announced it was exiting the business on 10 July, the value of its investment halved to 249.5 GBX.

In just two days £2bn was wiped off Boohoo’s market cap.

Aberdeen Standard’s deputy head of UK equities, Lesley Duncan, confirmed that the firm invested on Boohoo at its 2014 IPO, at which point it passed an ethical screening assessment.

“In the last few weeks our concerns have grown on the progress being made, which even before recent developments, had negatively impacted our conviction levels in the company,” she said after the crisis broke.

“Having spoken to Boohoo’s management team a number of times this week in light of recent concerning allegations, we view their response as inadequate in scope, timeliness and gravity,” she adds.

The Boohoo story is far from over. While some asset managers have decided to dump the stock, Jupiter among others has increased its exposure in a bid to benefit from falling share prices.

While the case of Boohoo was particularly damaging, any investor in UK retail firms should see this as an opportunity to review governance standards in their supply chains. According to a 2016 survey of 71 retailers in the UK, 77% admitted that their supply chains involved some form of slavery.

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