In 2007, McKinsey & Co. the consulting firm, published an article entitled ‘A cost curve for greenhouse gas reduction’. In it the authors ranked technologies for reducing greenhouse gas emissions according to the cost of abating one ton of carbon dioxide equivalents (tCO2e). The stand-out technology – by some margin – was building insulation. Insulating buildings properly is not just a no-brainer from a greenhouse gas reduction point of view. It also has significant social benefits. Occupiers of well-insulated buildings enjoy healthier lives with lower levels of hospital admissions compared to poorly insulated buildings, particularly among vulnerable communities.
It is rare to find a business wholly focused on developing and selling products with such a significant positive social and environmental impact. Still rarer to find a business that also seeks to embed sustainability across their operations. With their ‘Planet Passionate’ programme, Kingspan was just one such company. In their 2020 annual report the company estimated that their products will help to save 164 million tonnes of CO2e while also recycling 573m billion plastic bottles into insulation material. A ‘darling’ investment for investors of all stripes – but particularly for those for whom sustainability and climate change is a core focus.
WHEB was no exception. We first purchased the company in 2014 and held it continuously until February of this year. Over that time the company’s share price more than quadrupled from €14.50 to over €60.
The Grenfell Tower fire
On 14 June 2017, a fire broke out in the Grenfell Tower, a 24-storey block of flats in West London. The fire caused 72 deaths, with a further 70 injured. The fire was the deadliest residential fire in the UK since the Second World War.
The fire started in a malfunctioning fridge on the fourth floor. From there it spread rapidly up the building’s exterior. This was due to the building’s external cladding and a layer of insulation separated by an air gap. The fire burned for 60 hours before being extinguished.
The Grenfell Inquiry
In WHEB’s quarterly report covering the fourth quarter of 2020 we detailed the principal findings of the official Inquiry into the causes of the fire. This Inquiry is still on-going. It is worth reiterating that Kingspan had no role in the design or planning of the cladding system at Grenfell Tower. They provided no specific advice to those working on Grenfell Tower and only a small quantity (5.2%) of the building’s insulation consisted of Kingspan’s K-15 insulation panels.
The initial findings from the Inquiry appear to indicate that the primary failings at Grenfell were due to the cladding system as a whole rather than a specific failing in the Kingspan product. The cladding system that included the K15 Kingspan panels was not compliant with Building Regulations for buildings over 18 metres in height. Tests showed that the use of K15 panels in the cladding system did not impact the outcome of the Grenfell fire. The outcome would have been the same whichever type of insulation material had been used.
Safety shortcomings at Kingspan
Nonetheless, the Inquiry did uncover some areas of significant shortcomings at Kingspan. Kingspan admitted that K15 insulation panels sold between 2005-14 had not been subject to critical fire safety tests. Tests had been conducted on a previous version of the product, but after modifying the manufacturing process in 2006, tests were not rerun on the new product. Kingspan has now re-run the tests and confirmed that the product passed.
In addition to poor oversight of product safety protocols at the company, there was also evidence that Kingspan executives sought to ‘game’ product safety standards. Non-standard products were used in tests and product literature was, by the company’s own admission, not sufficiently clear or emphatic in explaining the limitations of the safety tests performed by Kingspan. This was particularly acute in applications for use on buildings over 18 metres in height.
More worrying still was the attitude of Kingspan executives in the UK. Concerns about the safety of K15 products being used in buildings over 18 metres in height were raised by Kingspan employees as well as by customers and external consultants. These were not taken seriously and in some cases were aggressively rebutted.
Kingspan provided an initial statement to the Inquiry in which it acknowledged weaknesses in their product safety testing and in marketing literature. At the company’s 19th February financial results, a further statement was made outlining additional actions that the company plans to take including implementing the recommendations of an independent review. These actions include improvements across several areas of concern.
The company, for example has committed to implement rigorous product safety systems which will be reviewed every two years by third party experts. There will be a marketing integrity manual and an updated code of conduct with strengthened protections for internal whistleblowers. There will also be strengthened governance with a new sub-committee of the Group Board monitoring compliance and product testing, accreditation and marketing. A Group Head of Compliance will be appointed reporting directly to the CEO. The company’s UK fire testing facility will be used to further best practices in building fire safety.
WHEB’s analysis and decision to sell
We first heard about the potential impact of the Grenfell Tower fire on Kingspan in August 2017. In a meeting with investment analysts the company said that they were aware that their product represented 5% of the insulation materials used at Grenfell. The Inquiry would reach its conclusions relatively quickly they believed and they were ‘very relaxed’ about the impact on them. They welcomed what they saw as an inevitable tightening of regulations on building safety, believing that their product set was ‘the most tested internationally’. The next time the company mentioned Grenfell was in their evidence to the Inquiry in November 2020.
Since November, we have been in regular contact with the company’s Investor Relations team. We have developed our own framework for what we consider to be best practice in product safety and have compared Kingspan’s historic behaviour and their response to Grenfell against this framework. We have also shared our analysis with the company.
In our view, many of the commitments that the company has made are impressive. Regular third-party audits as well as explicit board oversight and accountability for product safety represent strong responses. It is also clear from the company’s statements that they believe, that Kingspan’s products and behaviour were not the cause of the Grenfell Tower fire. They do though clearly accept that there were decisions and behaviours within the UK Insulation Boards business that were wrong and for which they have apologised and sought to implement corrective actions.
Nonetheless, our overriding concern, and one that is not fully addressed by the company, is that there was, in our view, a culture within the UK business that saw regulation as an impediment to doing business. There is clear evidence that senior leaders in the UK business sought to manipulate tests to provide positive results. There is also evidence of management seeking to bully and threaten employees and put pressure on external consultants and clients who raised safety concerns.
On the evidence presented to the Inquiry, these attitudes were widely held across many senior managers in the UK business. Several communications were also copied to senior executives at group headquarters including the group CEO Gene Murtagh. The insulation boards business was the most profitable part of the Kingspan group. The UK is a sizeable portion of total Group revenue. In our view, it is hard to accept that there was not direct interest from group executives. If there wasn’t, there certainly should have been. It is highly unlikely, we believe, that these cultural issues were confined to the UK business. Compounding this concern was the decision by the company to appoint the CEO’s brother to the Board. This appointment was announced with the annual results in late February. In our view, this was a missed opportunity to make board appointments which present the clearest possible signal of independent governance.
As a consequence, we have concluded that we are unable to continue to invest in Kingspan. We don’t believe Kingspan are in any way directly culpable for the Grenfell Tower fire. We do believe however, that the culture within the UK business enabled – even encouraged – an attitude that prioritised commercial advantage over product safety. Furthermore, based on the evidence presented at the Inquiry and our knowledge of the business, this culture was at least tacitly endorsed by group management. We do not believe that the proposed remedies go far enough to address these concerns.
Notwithstanding the positive steps the company has taken, and the undoubted positive role the products play in improving building efficiency, we have chosen to sell the company from our portfolios. We fully exited our position on the 26th February 2021. We have communicated this decision, and our reasoning, to the company. We hope that, in time, further changes will be made in the culture and governance of the business that will allow us to view the company as an exciting investment for our investment strategy once again.
 Data from FactSet
 This has been derived from the work of Lucia Suhanyiova, Amy Irwin and Rhona Flin, ‘Product safety culture: a preliminary study in the UK manufacturing industry’, Journal of Risk Research, 19 August 2020