04 Dec 2018

Ghosn Baby Ghosn – what happens when governance goes bad?​


For Marketing Purposes

FOR QUALIFIED INVESTORS ONLY– This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA).

francois millet

François Millet

Head of ETF and Index Product Development
Lyxor Asset Management

When governance goes bad, portfolios can suffer. We spoke to François Millet, Head of ETF and Index Product Development, on the ETFs he’d use to make a difference – both personally and societally. 

On 19 November, it emerged that Carlos Ghosn – chairman and CEO of the Renault-Nissan-Mitsubishi consortium – had been arrested under suspicion of financial misconduct relating to the under-reporting of his compensation and his personal use of company money. Long perceived as a successful and charismatic business leader – a man instrumental in the turnaround of Renault and Nissan in the 1990s and early 2000s – it came as a huge shock to the business community. Corporate governance and the dangers of leaving too much power unchecked in too few hands are once again in the spotlight.

Since the news of his arrest, Ghosn has been ousted as both Chairman of Nissan and Chairman of Mitsubishi Motors. He remains Chairman and CEO of Renault at time of writing, pending more clarity.  For his part, Ghosn denies the charges and nothing has been proven against him as yet. Regardless, shares in Nissan, Renault SA and Mitsubishi Motors have fallen by 3.4%, 4.5% and 3.4% respectively following the news, and have yet to recover their losses.1

These events were unexpected, but not entirely unique given they echo the excesses of the Enron era – so what can you do to try to get a more rigorous grip on governance in your portfolio?

Putting the G in ESG

With news of the devastating impact of climate change on our environment filling media outlets on a daily basis, the E in ESG tends to be the most closely scrutinised. Yet here’s a great example of how important it is for investors to pay attention to governance as well.

If you hold a fund with hundreds – if not thousands – of stocks, you’d be forgiven for not having the time or expertise to carry out a thorough due diligence of each and every one of them based on their ESG metrics. The good news is, there are experts who have that kind of know-how. When choosing the strategy underlying our broad ESG ETFs, we chose to partner with index provider and ESG research specialist, MSCI.

MSCI has over 40 years of experience in collecting, cleaning and standardising data on ESG policies. In building their ‘best-in-class’ ESG Leaders benchmark series, their goal is to include companies with the highest ESG rating in each sector, with a 50% sector representation vs. the broad parent index.

At this level already, neither Nissan nor Mitsubishi Motors make the cut for the ESG Leaders indices. They both have an MSCI ESG Rating of CCC – the worst possible ranking. In Nissan’s case, this mainly has to do with weak governance practices, safety, and emission falsifications. Mitsubishi Motors’ score relates to similar issues around poor business ethics, fraud, and a fuel test manipulation controversy.


Chart source: MSCI, November 2018. Past results are not a reliable indicator of future results.

Why it’s worth going the extra mile

Here’s where things get interesting. Renault, according to MSCI, scores well in areas like safety and clean tech. So, while not securing the top AAA rating, it still fares relatively well with an A – which is enough for it to feature in European MSCI ESG Leaders indices.

It is possible to take it further however, and adopt MSCI’s ESG Trend Leaders series. Not only do these benchmarks require a high ESG score, they also take that score’s trend into account. If a company has improved its ESG score over a one-year period, it is more likely to be included in one of these indices but a downward trend reduces that likelihood.

Renault, as we’ve said, has a decent ESG score and was in fact rated AA at one stage, but because of “concerns over potential conflict of interests in the role held by the Chairman, Mr. Carlos Ghosn”, and additional concerns over governance practices linked to its complex ownership structure, MSCI downgraded its rating before news of the scandal actually broke.


Chart source: MSCI, November 2018. Past results are not a reliable indicator of future results.

The key single risk factor identified by MSCI’s ESG research was corporate governance. The downward trend reduced Renault’s overall score, meaning it was not present in the MSCI ESG Trend Leaders benchmarks tracked by our World ESG and EMU ESG ETFs. That’s not to say using Trend is a perfect way to avoid issues of poor governance and there is always the risk that something could slip through the net. It could however give you a headstart.


Source: Lyxor International Asset Management, Bloomberg. Share performance in local currency terms. Data period from 16/11/2018 to 27/11/2018. Past performance is not a reliable indicator of future results.

Why choose Lyxor for ESG?

The MSCI ESG Trend Leaders benchmarks are designed to identify those companies with a robust ESG profile today, as well as the capacity to improve it. This extra step can help detect and eliminate controversial companies by considering their ESG trend. Those companies committed to improving the world around them are hence more likely to be included. MSCI data shows that rewarding ESG momentum can potentially improve company performance more than excluding or just tilting weightings towards companies with a high ESG rating alone.

Our Lyxor MSCI ESG Trend Leaders range is:​

  • Far reaching: World, EMU, USA and Emerging Markets exposures available1
  • Innovative: one step further by taking into account ESG momentum as well as ESG rating
  • Unique: the first and only ETFs in Europe tracking these benchmarks1

These strategies exclude companies involved in weapons, alcohol, tobacco, gambling and nuclear power.

FOR QUALIFIED INVESTORS ONLY– This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA).

This document has been provided by Lyxor International Asset Management that is solely responsible for its content.

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Conflicts of interest

This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.