Equifax’s data breach that potentially exposed the personal information of 145.5 million Americans has wreaked havoc on the credit bureau’s reputation and its stock price. Among the company’s largest shareholders are institutional index mutual funds focused on large-cap and mid-cap stocks, a staple of investment portfolios.
The attack also shines a spotlight on the merits of incorporating environmental, social and governance (ESG) factors into the investment process. By monitoring these non-financial factors, prospective investors could have formed a clearer picture of the true risks of investing in Equifax—risks that traditional financial analysis may have overlooked.
To this end, MSCI, one of the leading providers of ESG data and company ratings, has monitored Equifax since 2012. MSCI’s ESG rankings, which range from AAA to CCC, are based on a company’s exposure to ESG-related risks and its ability to manage those risks relative to peers within its sector. MSCI originally assigned a B rating to Equifax.
In August 2016, it downgraded the credit bureau’s rating to CCC—its lowest ranking—following a data breach that exposed the salary and tax data of over 400,000 employees of an Equifax client.
“Equifax’s data security and privacy measures have proved insufficient in mitigating data breach events,” said MSCI in this report. “The company’s credit reporting business faces a high risk of data theft and associated reputational consequences.”
As recently as January, Equifax was fined by the US Consumer Financial Protection Bureau for misleading practices related to marketing of credit products and credit scores.
In contrast, Experian, also a provider of credit reporting services, has an A rating from MSCI. Experian scored in the top-quartile for financial product safety, and privacy and data security, while Equifax was placed in the bottom quartile. Additionally, Experian stood in the top quartile for corporate governance, while Equifax was in the third quartile.
At NEPC, we believe ESG factors can have a material impact on a company’s performance. Portfolio managers and asset owners are increasingly adopting the view that non-financial factors can influence a company’s success and, therefore, its investment value.
In our view, ESG analysis can help identify and avoid short-term risks and, as a result, potentially benefit long-term performance. We incorporate ESG considerations into our investment process as we examine how asset managers are utilizing ESG analysis in their strategies.
For more information on how to assess your investment portfolio, please reach out to us.