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Vident highlights governance as top priority in ESG investing

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The three pillars of ESG investing, environmental, social, and governance, are all important, but Vince Birley (pictured), CEO, Vident Financial, which runs a suite of ETFs, says that it is governance that has an outsized impact on corporate performance. 

“Bad or questionable governance practices can quickly cause irreparable harm to the interests of shareholders and even if you care about ESG factors, without good governance, it will be harder to incorporate the environmental and social issues,” says Birley.

Birley explains that their investment approach prioritises leadership and governance. The firm’s strategy focuses heavily on governance in ESG, overweighting in countries and companies with strong leadership and governance that promote greater prosperity.
 
He uses the example of Tesla. “Tesla’s ESG rating is either very high or very low. This depends entirely on how the agencies rate the different factors. We were not an investor in Tesla because the governance scores are too low, nor were we invested in Wells Fargo or Equifax. These companies were thrown out on the basis of our governance scores.”
 
Another example used by Birley is that of Facebook explaining that that the breach of trust incurred by the company not only affects users, but also hurts shareholders as well. Following the disclosure of its most recent scandal, Facebook saw its shares drop, wiping $90 billion off its market cap. 
 
Vident looks at a number of different factors in their investment approach. Some key governance indicators include board engagement, tenure of the board, genuine diversity rather than box-ticking and making sure it is independent. “A big flag for us is if the CEO is the chairperson, and we are very interested in CEO pay and the ratio of pay between the CEO and CFO. This is a big metric for us.”
 
One of the big scores in the company’s governance analysis is in forensic accounting. “We look for indicators where there may be excessive revenue growth. For example, Equifax had long trends of excessive revenue growth that were raising flags in our indexes. These were signals to us that they were spending more time engineering their financials than engineering the security on their databases,” adds Birley.
 
Birley describes his concern that the term ESG is too generic and that combining it into one metric is not the answer. “You can’t just label a company based on an ESG score when each score might be weighted completely differently.”
 
However, Birley is encouraged by the fact that investors are engaging with companies and questioning their ESG strategies rather than boycotting them altogether. “The trend is moving away from rejecting ownership of a company in protest, to having a seat at the table and actively attempting to influence better leadership, governance and responsibility for people and the planet,” he adds.

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