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Investors, Wowed by Boohoo’s ESG Standing, Missed ‘Clear Red Flag’

Investors who snapped up Boohoo’s shares because of the ultra-fast-fashion e-tailer’s robust ethical rating—if only on paper—missed a “clear red flag,” according a leading London-based financial broker.

In a research note published Tuesday, Liberum criticized some of the apparel group’s institutional investors for not questioning its limited disclosures on the sources of its wares, which are characterized by their bargain-basement prices, quick turnarounds and trend-driven designs.

Mere weeks before Boohoo was slammed with renewed allegations about exploiting the workers who make its clothes, rating and index provider MSCI had placed the e-tailer, which also owns the Karen Millen, Nasty Gal, PrettyLittleThing and Warehouse brands, in the top 15 percent of a peer group based on its environmental, social and governance (ESG) ranking. Boohoo had garnered a double-A score, MSCI’s second-highest ranking, marking the firm as above industry average in terms of supply-chain labor practices.

But Liberum says the system for grading companies on the ESG curve is riddled with loopholes that companies can exploit. Disclosures are voluntary, meaning if a company had something to hide, it would “simply choose to disclose only favorable information.”

Indeed, Boohoo disclosed less than its competitors across five categories examined by Fashion Revolution’s Fashion Transparency Index, which annually rates some 250 of the world’s largest brands and retailers based on publicly disclosed social policies.

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It was “noteworthy that the company scored zero points in the traceability section” and ”simply did not provide any information that would have allowed investors and customers to trace the origin of its clothes,” Liberum said. By glossing over this fact, shareholders had “missed a clear red flag,” it added.

Liberum had downgraded its rating on Boohoo shares from “buy” to “hold” earlier this month after the latter’s entanglement in a supplier scandal involving alleged poverty pay and unsafe working conditions in the English city of Leicester, which has seen a localized surge in coronavirus cases that some have blamed on garment factories operating at full capacity and without proper safety measures despite the nationwide lockdown designed to curb the spread of the contagion.

“Press articles highlighting breaches in Leicester’s clothing factories have directly implicated Boohoo,” Liberum said at the time. “These allegations are just that, at this stage, and this is not the first time Boohoo has had negative press on ethical, social and corporate governance issues, such as failing to meet National Minimum Wage levels.”

“With an investigation requested by the Home Secretary into the matter, we think Boohoo should show leadership and once and for all deal with these concerns head-on,” Liberum added.

Boohoo is set to publish a roadmap for its independent supply-chain review later this month, with the first update arriving in September.

“The group will act decisively on the independent review’s findings and look to embed its recommendations into its strategic planning to help restore confidence in the Leicester garment industry and increase transparency for all of our stakeholders,” Boohoo wrote in a stock exchange filing Tuesday.

Analysts have cautioned, however, that the e-tailer may face permanent damage from the imbroglio even as it vows to set up a 250-worker-strong “model factory” in Leicester to counter criticisms.

“Many questions are yet to be answered,” Barclays told the Telegraph on Saturday. “At this stage, we think the most prudent approach is to look at a wide range of scenarios.”

Barclays slashed its forecast for Boohoo’s share price from 470 pence ($6.09) to 350 pence ($4.54) until the investigation is complete, but the investment bank also warned that other probes by Parliament, the Gangmasters and Labour Abuse Authority, Leicestershire police, the Leicester city council, the National Crime Agency, the Health and Safety Executive, Leicestershire fire and rescue and Immigration Enforcement could further imperil Boohoo’s shaky standing depending on those outcomes.

Other investors have taken a more determined stance. Edinburgh’s Aberdeen Standard Life, one of Boohoo’s biggest shareholders, sold two-thirds of its stake this month after describing the e-tailer’s response as “inadequate in scope, timeliness and gravity.”