(BFM Bourse) – The bursting of this heavy affair with the publication of the book-investigation The Gravediggers revealed the limits of an ESG approach based solely on agency assessments. With lessons for investors.
Calling the Orpea affair a shock wave is an understatement. Since the publication of the book-investigation The Gravediggers, the stock price plunged about 95%. From a reputational crisis, the Orpea affair turned into a financial crisis because the controversy arose just before the surge in inflation which knocked down the group’s model, undermined by its debt and a large park. real estate.
To the point that Laurent Guillot, the new general manager of the group (the former was dismissed then Orpea filed a complaint against him for facts that may relate in particular to breach of trust or corporate assets), mentioned on BFM Business this week a model “of land with an additional activity of care and support”. “When I arrived [en juillet, NDLR]the financial situation of the company was already catastrophic”, he argued.
“Before the book scandal The Gravediggers, there would never have been any question of considering a bankruptcy of Orpea. A crisis of confidence undermined all of the company’s valuation factors, because beyond the issue of reputation, embezzlement and fraudulent practices were revealed. The quality of its service was called into question, as was the sustainability of its business model. This triggered an awareness, with fears of regulatory tightening, that the company could not carry out its mission and that the profitability of its assets suffers”, summarizes Léa Dunand-Chatellet, manager and director of responsible investment at DNCA Finance
The group is now saved, an agreement on its financial restructuring having been tied, with the key to a heavy dilution (more than 99%) for the shareholders. For Yi Zhong, an analyst at the independent research firm AlphaValue, the losses suffered by bondholders and creditors constitute a “lesson for the entire sector”. “ESG risks can become extremely costly. Orpea’s lack of ethics and the resulting overhaul of industry standards is also a reset for all retirement homes whether listed or not. “, she explains in a recent note.
The defeat of ESG ratings
The outbreak of the Orpea affair has, in fact, highlighted the dangers of ESG (environment, social, governance, extra-financial criteria), creating an important precedent.
“Orpea is an ESG bankruptcy. There were other controversies before this affair. We can think of dieselgate. But this controversy had been important because of its significant quantified cost. However, with the Orpea scandal, in addition to beyond the immediate financial impacts, the novelty is that the reputational risk is now material on the stock market”, underlines Léa Dunand-Chatellet, manager and director of responsible investment at DNCA Finance.
The Orpea affair also undermined a certain idea of the ESG approach because the company was rated relatively well by the agencies. So that Agefi evoked “a defeat” of these ratings.
“ESG rating agencies had rather positive opinions of Orpea. The main reason remains that its core business, namely support and care for the elderly, is an integral part of the challenges of sustainable development, and therefore ticked naturally the right box, in the same way for example as a company specializing in renewable energies to the challenge of energy transition. But the mistake is to look only at the theme of the activity and to neglect how the company manages its activities and compliance with corporate responsibility criteria such as social or governance issues”, explains Léa Dunand-Chatellet.
Methodological limits
“Orpea had a fairly rich and transparent ESG communication, which allowed it to pass the filters of rating agencies which base their assessment on the quality and transparency of written reports. But beyond this information, it lacks the essential, namely the knowledge of the leaders and the site visits to take an interest in the reality on the ground. Moreover, in the case of Orpea, weak signals alerted to fragile management with the regular publication of press articles on the living conditions of the residents or even the social climate”, also develops the manager.
We surveyed several ESG rating agencies. ISS ESG declined to comment. Moody’s explained to us that it was “inaccurate” to claim that Orpea was “highly rated”, pointing out that it gave the company a “limited” ESG rating (Moody’s ratings range from “low” to ” advanced” through “limited and “robust”). This assessment of Orpea reflected “weak” and “limited” performance in “several categories of the ‘social’ pillar”, also argues Moody’s.
Axel Pierron, associate director of Sustainalytics-Morningstar, another agency, agreed to answer us in detail. It also recalls the context. “Orpea had been assessed by our ESG rating analysts as one of the best in its sector, but within a sector which had a high level of risk, close to tobacco. Overall the level of risk on Orpea was “medium “, and the company ranked above 6,000th place out of the 13,000 companies we followed (less than 2% of them display a risk deemed “negligible”)”, he notes.
“Let us also specify that the risks that we had identified on Orpea are those that actually occurred, namely the quality of products and services and the management of human capital”. The expert also explains that “certainly the Orpea risk has been underestimated, but it should be emphasized that the very principle of the risk is that it is impossible to determine precisely when it will materialize or its exact magnitude”.
While acknowledging some pitfalls. “I understand the frustration of investors. Our methodology tries to capture reality as well as possible, but it remains something complex and by definition imperfect. Above all, our ratings have limits that must be recognized: they will never replace the visits to the company’s sites, which we are unable to produce at the risk otherwise of greatly increasing the cost of access to ESG ratings. The Gravediggers represented three years of investigation”, he underlines.
Lessons to be learned
So what lessons should we learn from this crisis? “If there is a lesson to be learned from the Orpea affair, it is that ESG investors must understand the reality of a company on the ground and have a deep knowledge of society without delegating their analysis. to a rating agency. Otherwise you outsource the added value of the extra-financial analysis which must be at the heart of the management process in order to be controlled”, replies Léa Dunand-Chatellet.
“We must also pay attention to ‘weak signals’, i.e. for example the recurrence of negative and controversial articles appearing in the press. We had thus identified that a sword of Damocles was hovering over Orpea and had a bad opinion on society for a long time,” she adds. The manager also recommends paying attention to certain indicators. “Companies already communicate on many ESG points. But the Orpea case shows that attention must be paid to tangible criteria from a social point of view such as the rate of staff turnover, absenteeism or the absence of conflicts. social,” she continues.
For his part, Axel Pierron explains that “after the Orpea affair, we have changed our methodology”. “We have thus given more importance to whistleblower programs for companies, to know if they publish the number of alerts concerning them, if these programs are anonymous and if no reprisals then affect these launchers, if they are sufficiently protected”, he cites as an example.
Furthermore, “the Orpea affair showed that there was a need for education on our part, the rating agencies, with both individual and professional investors, because confusion has been observed: our ratings assess an ESG risk on a company’s financial metrics but does not present a company’s ESG performance,” he adds.
ESG profit warnings?
The case could also set the stage for some tension in corporate communication. “Given the importance that a subject like the trajectory of CO2 emissions has taken on, we can very well imagine that in the future companies will issue ESG ‘profit warnings’ on their objectives in this area. This scandal marks a change in how investors take reputational issues into account”, explains Léa Dunand-Chatellet.
To return to Orpea, the group claims to have modified its practices and advocates in its “refoundation” plan a “change of method” turned towards ethics, acknowledging that it has not taken sufficient care of its employees. The group thus intends to recruit, train and retain its employees and intends to provide better care and support to its residents, patients and their families.
“We have hired 800 people every month since September, month after month, the management rate between January 2022 and today has increased by 10%, the food budget for January 2023 has increased by 35% on a year, we give ourselves the means”, detailed the general manager, Laurent Guillot, this week on BFM Business. “Is it enough? Everything is not yet in place, it is not in all establishments because it takes time, that we have recruitment problems” but “we are doing everything we can”, assured -he.
Julien Marion – ©2023 BFM Bourse
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