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At Orenda, we aim to provide detailed analytics which present how our ESG data can accurately predict market performance based on a company’s corporate actions which directly impact its Environmental, Social or Governance standing. In this use case, we are analyzing Wirecard AG; a German payment processor and financial services provider which was caught conducting a series of accounting scandals resulting in the insolvency of the company.
In the Spring of 2020, Wirecard AG was accused of committing a series of accounting fraud scandals that were suspected to have been taking place for years, likely dating back all the way to 2015. The allegations stated that the company had been reporting inflated earnings and cash flow figures. It was reported that investors had to rely upon adjusted versions of the company’s financial statements to determine its performance, making it much easier for Wirecard to cover up its wrongdoings.
In January of 2019, headlines began to release worldwide revealing findings within Wirecard’s financial reports. It was suspected that the company was artificially inflating its profits, resulting in noticeable irregularities. It was also reported that investigators were leaked information via whistleblowers within the company, which was later proven to be true.
At this time, Wirecard representatives continued to deny the allegations against the company. However, in June of 2020, Wirecard filed for insolvency after it had officially been revealed that €1.9 billion had been “missing”, and CEO Markus Braun was both terminated from his position, and arrested. Company COO Jan Marsalek, who was promptly suspended from the management team in light of these revelations, fled the country and as of the time of writing, still has a warrant out for his arrest to this day for alleged white-collar crimes.
When comparing Wirecard’s market performance with Orenda’s ESG data, we discovered significant relations in the trends over time.
The chart below displays Wirecard’s stock price over time vs Orenda’s Governance score calculated for the company. As you can see, Orenda’s indicator was able to accurately predict the extreme drop in share price prior to the reaction in the market. By April 30th, Orenda’s score was rapidly decaying – indicating that a share price drop was likely imminent. Subsequently, on June 17th, Wirecard’s stock price took a massive hit, falling from $104.04 to $6.40 in less than two weeks.
Additionally, in figure 2 we observed similar results when comparing Wirecard’s stock price over time vs Orenda’s overall ESG scores (consisting of an equally weighted average of Environmental, Social, and Governance scores). Orenda’s indicator began to decay on the 25th of April; almost two months prior to the market reaction where Wirecard suffered its massive drop in value.
The objective of this case was to identify the correlation between Orenda’s ESG performance data and the change in company stock price during a corporate event, in this case a corporate scandal of financial misconduct. As presented in the data above, we can conclude that by employing Orenda’s ESG performance data, we are able to make a clear and reliable connection between market impact and ESG-focused corporate events. As such, we can confidently back ESG performance data as a beneficial tool to be implemented into traditional financial investment processes.