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Is Kingspan the next Boohoo?

Following allegations made at the inquiry into the 2017 Grenfell Tower fire, the insulation specialist could find itself out of favour with ESG investors
Is Kingspan the next Boohoo?
  • Kingspan says it had no knowledge that its insulation boards were used in Grenfell’s cladding system
  • But the inquiry has raised serious questions about Kingspan’s approach to safety and corporate culture

Fast-fashion retailer Boohoo (BOO) saw its shares plunge earlier this year amid revelations about the mistreatment of workers in its supply chain. An independent report headed up by Alison Levitt QC confirmed the allegations of poor working conditions which had been enabled by weak oversight arrangements. The ensuing storm saw retailers such as ASOS (ASC) and Zalando (DE:ZAL) remove Boohoo’s products from their websites.

The retailers weren’t the only ones to jump ship. The controversy also sparked an exodus from ESG-orientated funds, with Standard Life Aberdeen (SLA) selling most of its holdings in the company. Less than a month after Ms Levitt’s findings were published, ‘Big Four’ accountant PwC also resigned as the group’s auditor. Boohoo has since run a competitive tender process to find a replacement, and while it is unclear who the bidders were, it is concerning that the group has failed to secure the services of another one of the larger accountancy firms. Instead, it has selected a much smaller and lesser-known player, PKF Littlejohn, as its auditor.

Boohoo has taken measures to improve its supply chain standards. Andrew Reaney, director of responsible sourcing and product operations, recently told MPs that the group had terminated agreements with 64 garment suppliers over concerns about labour standards. Still, the shares have yet to fully recover from the storm.

Even before Boohoo’s shortcomings came to light, the argument that a purveyor of cheap and disposable clothing was a good ESG investment rang hollow. But the case for insulation specialist Kingspan (KGP) seemed more convincing. The International Energy Agency (IEA) estimates that the buildings and construction sectors account for more than a third of global energy consumption and almost two-fifths of carbon emissions. As more countries target net zero emissions, Kingspan’s insulation products and ‘building envelope’ solutions offer a way to reduce the energy usage of both existing and new buildings.

But some alarming developments have emerged from the public inquiry into the 2017 Grenfell Tower disaster that claimed the lives of 72 people. Boohoo’s problems could pale in comparison with the scandal engulfing the green construction favourite.

 

‘A raging inferno’

Kingspan’s Kooltherm K15 insulation boards were installed as part of Grenfell’s cladding system, accounting for around 5 per cent of the building’s rainscreen insulation by area. The group says it had no knowledge that its products were used in the tower until after the fire had occurred.

While that may be so, the company had been marketing K15 as suitable for use in tall buildings on the basis of a successful fire safety test conducted in 2005. But this related to a previous formulation of the product. When the new product was tested in 2007, then technical director Ivor Meredith described the outcome as a “raging inferno” with the test having to be extinguished early because “it was endangering setting fire to the laboratory”. Mr Meredith said that the company was “stretching the truth” with its fire safety claims and “produced documentation and […] inferred to the industry that our product could do something that potentially it couldn’t.”

When construction company Bowmer and Kirkland raised concerns about whether K15 was suitable for use above 18 metres, business development director Philip Heath emailed his colleagues saying, “I think [they] are getting me confused with someone who gives a dam [sic].”

The controversy doesn’t end there. Kingspan hired a public relations company following the Grenfell disaster to help lobby MPs not to ban combustible products in high-rise buildings. Internal communications suggest that the company manipulated fire tests on insulation materials made by rivals to ensure they would perform poorly.

Kingspan has apologised for what it describes as “shortcomings and unacceptable conduct”. Only one head has rolled thus far – Peter Wilson, manager of the insulation boards business is stepping down.

 

How have investors reacted?

Kingspan is a popular pick among ESG funds who largely seem to be adopting a ‘wait-and-see’ approach before making any definitive investment decisions. The company is a top ten holding of top performer Baillie Gifford Positive Change (GB00BYVGKV59) and Baillie Gifford says it has “discussed the inquiry with Kingspan and continue[s] to monitor the situation closely.”

Liontrust Asset Management (LIO) has been invested in Kingspan for 15 years, holding the company across several funds including the UK Ethical Fund (GB00B8HCSD36). It is also waiting for the full outcome of the inquiry before making any decisions.

“Serious allegations have been raised during the Grenfell Tower Inquiry but given that this Inquiry is ongoing, we do not feel it is appropriate for us to comment on any of these subjects at this stage,” said a Liontrust spokesperson. “Like everyone else, we must await the conclusions and recommendations of the Inquiry.”

The WHEB Sustainability Fund (GB00B8HPRW47) has struck a slightly different tone, with managing partner George Latham saying that its holding “is clearly under review at this stage.” Mr Latham has called the accusations “pretty shocking and unexpected” and says that while WHEB is waiting for this part of the inquiry to end before making any changes, “should the evidence become too compelling then we would consider taking action beforehand”.

We have previously been attracted to Kingspan’s structural growth drivers amid rising urbanisation and the need to address climate change. But the inquiry has already led to serious misgivings about its corporate governance and there could be more damage to come. It remains to be seen how much top management knew about the safety issues. Chief executive Gene Murtagh was copied into emails about the group’s post-Grenfell lobbying efforts and it’s not a great look to have sold over €3.4m-worth of shares a little over three weeks before the inquiry began.  

Kingspan’s shares have now lost more than a quarter of their value since early November, although they are up overall since the beginning of the year. While its long-term growth story may still pan out, this scandal is likely to hang over the shares in the short to potentially medium-term. It might therefore be wise to bank any profits now and sell at 6,155¢.

Last IC View: Hold, 6,896¢, 21 Aug 2020