The Orpea Affair: Investors' responses to a social scandal

The book-investigation “Les Fossoyeurs” (Gravediggers), published by the French journalist Victor Castanet last January, had a bombshell effect due to the sordid facts uncovered. The mistreatment of elderly people in the Orpea group’s retirement homes is at the centre of the revelations. Testimonies speak of residents being malnourished, left without proper care and living in undignified conditions. Beyond the emotion aroused by such a social scandal and the State’s response in terms of sanctions and regulations, the question of investor responsibility also arises. How should companies respond effectively when their investment priorities are to integrate ESG considerations and promote positive social impact?

A focus on cost reduction in a highly risk-sensitive sector

With 4.2 billion euros in revenues in 2021, more than 1,000 facilities in 22 countries providing approximately 105,000 beds, the French private group Orpea is a world leader in the residential care home industry. Due to the ageing population, the whole sector is evolving in a very lucrative industry. The number of people over 65 today is 750 million and will exceed one billion by 2030. Their high incomes and requirements, at least in OECD countries, represent significant opportunities for Silver Economy players, such as residential care homes (EHPADs, in French).

Nevertheless, the exposure to social risks is significant, whether it be the residents’ well-being or the working conditions and trade union rights of the nursing staff. The problems encountered by these private companies did not originate during the Covid period; they have beenreportedfor years by parents of residents, associations, trade unions and the employees themselves. A systematic cost-cutting strategy by the management of residential care homes is often cited to explain these shortcomings. However, in contrast to thisreturn logic that has been taken to the extreme, a growing number of responsible investors see the care and support of the elderly as an area where returns can be combined with positive social impact. In fact, for years, Orpea or its competitor Korian were leading players in various sustainable financial products. To a large extent, this selection was based on the supposed positive contribution of these players to the UN Sustainable Development Goals (SDGs), and in particular to SDG 3 on good health. The very good ESG ratings awarded to Orpea and Korian by extra-financial rating agencies have also played a role and of course raise questions about their fallibility.

Investor responses

The consequences of these revelations were not long in coming. Orpea’s share price, as of 4 March, has lost 57% of its value since 20 January, its CEO has been quickly dismissed and the French State has announced the opening of investigations, as the visits reported in the past failed to reveal anything...

Reaction from responsible investors has been varied. The sale of the stock was the option chosen by stakeholders such as the insurance giant MAIF or managers specialising in the “Silver Age” theme, such as CPR AM or Tocqueville Finance, a subsidiary of the Banque Postale. Sycomore AM, a recognised ESG pioneer in France, also sold its holdings in Orpea. The rationale, which is understandable, is to exclude controversies from one’s portfolio, especially when they reach such a serious level and can indirectly damage the managers’ reputation. Other active managers have chosen to remain in the company’s capital but on the condition that structural changes are carried out. This is the case for Mirova, another specialist in sustainable finance, a subsidiary of Natixis and the third largest shareholder (4% of capital), which has asked the board of directors to change its articles of association and transform Orpea into a société à mission. This new company legal status brings together profit and social or environmental objectives. Orpea has already responded favourably to this request. The argument here is to maintain a significant equity position in order to exert a positive influence on the company.

Both strategies are defendable. The most important thing for an active manager is to base his decision on thorough ESG research and solid conviction. This means, in particular, exchanging views with management and other stakeholders on a regular basis, asking critical questions, measuring ESG performance on the basis of relevant indicators, and identifying potential future problems in advance. In the case of companies such as Korian or Orpea, social dialogue with stakeholders, including employee representatives, is essential. The analysis should also include social indicators such as employee turnover and job satisfaction.