This social crisis has had repercussions for financial players, and raises the question of how well they take sustainability issues into account. Indeed, financial players taking environmental, social and governance (ESG) criteria into account base their analysis of a stock on ratings and aggregate scores created by data providers. These scores are built up from raw data (such as the percentage of women in the company or the gender pay gap, for example), which are then aggregated and weighted according to the materiality of each indicator to form an ESG score. However, these scores may contain an element of error due to the methodological choices made when constructing them. This is notably reflected in Orpea's quarterly report[2 ] published in September 2021, according to which Orpea was ranked among the best-rated companies in its sector and benefited from an improvement in its rating (between 2019 and 2021) by the rating agencies Vigeo Eiris and ISS ESG.
The Orpea case therefore reveals structural weaknesses in the use of ESG data by investors. Indeed, investors should not rely solely on ESG scores without integrating their methodology. Moreover, taking into account a single data source exposes them to the risk of blind spots. ESG scores materialize certain ESG themes and offer a more macroscopic view, but consequently lose granularity and transparency, limiting investors' ability to pick up on weak ESG-related signals. What's more, the creation of ESG scores by data providers involves choices that do not necessarily reflect the most material issues from an investor's point of view, and therefore do not fit in perfectly with their vision of sustainability. Finally, ESG scores currently lack a variety of data typologies such as controversies, for example, making ESG analysis static and one-dimensional.
We will therefore address these issues to better understand how the tools currently available to investors have failed to detect Orpea's social risk. In this way, we will suggest ways in which investors can change their practices, and present a more concrete approach to creating ESG metrics that are more educational, committed and capable of avoiding such holes in ESG analysis.
Firstly, while the implementation of an ESG scoring methodology, or the use of a proprietary methodology from a generalist ESG data provider, enables companies to be more easily compared with one another, the aggregation of multiple raw indicators into ESG scores inevitably leads to a loss of information. Indeed, although the issues and risks of controversy linked to the Ehpad business sector were clearly identified by the data providers, the risks specific to Orpea were much more difficult to identify through ESG scores. This loss of information is closely linked to the lack of understanding of the underlying raw indicators. In addition, the multiplicity of environmental and social themes within a score makes it difficult for investors to read and understand changes in the score. For example, an improvement in Orpea's social score could be linked to better gender parity within the company, and not to an improvement in residents' living conditions. The lack of transparency resulting from the choice of methodologies and indicators makes it difficult to detect weak signals associated with social risk at Orpea. What's more, the relevance of these indicators may vary according to the sectors analyzed, since companies do not necessarily address social issues in the same way. Selecting the most material indicators for each activity should therefore become a key point of ESG analysis for an investor.
The construction of an ESG scoring methodology necessarily implies choices and convictions, and conversely, implies analytical blind spots. Indeed, scoring methodologies reflect the ESG philosophy of their creator, and therefore the choice of indicators. For example, an ESG data provider might consider that the most material element in the creation of a governance score is the presence of a remuneration policy linked to environmental objectives, which could run counter to the ESG convictions of an investor judging another element to be more material. This subjectivity sometimes leads to bias and blind spots in an issuer's ESG analysis. An American supplier may therefore have a different view of certain themes than a European supplier. For example, according to a European vision, good management would be defined as allowing employees to flourish, whereas according to a more American vision, results would condition the quality of management. This is typically the case with governance in the Orpea assessment. Indeed, corporate governance was presented as a strong asset in terms of ESG performance. For example, at MSCI[3], one of the leaders in ESG ratings, Orpea was rated A and presented as a leader in its sector in terms of corporate governance. For the majority of data providers, this good governance rating was attributed to the large number of independent directors on the board and the presence of internal controls, whereas governance is paradoxically called into question in this case, since there have been breaches of staff rights which have a direct impact on residents' quality of life.
High-quality ESG analysis also requires the integration of a variety of data typologies, so as to incorporate several dimensions of analysis , enabling different perspectives on a company's strategy. These different angles of analysis can be, for example, the assessment of the impact of investments, but also of risks, both on sustainability factors and on the investment itself. In the case of Orpea, close monitoring of controversies, i.e. the occurrence of any event with a negative impact on sustainability factors, would have enabled us to detect the risk that Orpea entailed. Indeed, the inclusion of controversies in an ESG assessment makes it possible to integrate dynamism by dissociating two angles of analysis: a short-term vision and a long-term vision. Most ESG data providers have, on the whole, been able to overlook reported controversies concerning questionable practices within Orpea's nursing homes, as in the case of Sustainalytics, which, according to Novethic[4], gave Orpea a controversy risk rating of 2 out of 5, equivalent to the industry average. Some suppliers had, however, identified controversies linked to Orpea, notably concerning the quality of management and the lack of human and material resources. It should be noted, however, that these controversies did not have a significant impact on the ESG rating of these suppliers' shares. So there's no guarantee that investors today are sufficiently integrating the various types of ESG data into their scoring methodologies.
The Orpea scandal shows how important it is for investors not to rely mechanically on ESG scores without understanding their construction, but to take ownership of the ESG data available to them. Investors must therefore avoid a dead end by relying solely on ESG scores from data providers whose methodologies they do not master. On the contrary, our analysis of the Orpea case shows that investors need more committed and educational ESG metrics to avoid blind spots in ESG analysis. These metrics therefore need to be more granular to detect weak ESG signals, and the themes integrated into the metrics must also be in line with the investor's vision of sustainability. Last but not least, these metrics need to use a variety of data typologies to provide a comprehensive view of a company's strategy.
At WeeFin, we believe that investors need to reappropriate their ESG data and implement a sustainable, transparent investment strategy that reflects their image. To meet this challenge, we have developed our SaaS platform ESG Connect. We enable financial players to centralize all the data sources of their choice in order to create a methodology aligned with their convictions. Using granular data, users can build their own ESG scorings by selecting the indicators that make sense to them. Financial players can thus analyze the impact of their financial portfolios on the environment and society in a more relevant way and in real time. WeeFin gives investors the technological keys to easily integrate ESG indicators into their investment decisions, enabling them to improve their impact.
