What to do with the S in ESG?
This article was written in Dutch. This article is an English translation.
Environment, Social and Governance are often mentioned in the same breath under the heading ESG. Due to the climate crisis, most attention is focused on the E. Transparency, bureaucracy and automation make the G comparable. But what do we do with the elusive S?
By Bouko de Groot
The EU has been trying for years to put the S in the spotlight. Almost ten years ago she already concluded that action in this area is widely supported, but that 'transparency, international involvement, awareness-raising and support' must be improved.
There are now various quality marks, national initiatives and standards (such as ISO 26000). And since January, the Corporate Sustainability Reporting Directive (CSRD) has been in effect to encourage companies to 'take social responsibility to improve their impact on their employees, their natural environment and their communities'1. But even in that S-focused approach, the E—the 'natural environment'—remains key.
After all these years of toil, governments are still undecided. Yet, for example, corporate social responsibility (CSR) is a must these days. Investors expect good communication about this in order to be able to make good comparisons. Therein lies the other challenge, because how and what do we measure to know more about the S?
Scientists do their best, but due to the lack of clarity they often do not get further than qualitative and methodological comparisons. An interesting recent study compared the CSR reports of listed companies.2 It shows that disclosure of the S 'is mainly used to build a positive corporate image rather than to provide valuable information or to lower the reading threshold'. The bottom line: The more pictures a report contains, the more likely that company's share price will crash!
If governments and scientists cannot agree, how should we give substance to the S of ESG? Financial Investigator asked eight experts.
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Leonie Jesse Associate Director, KPMG
How can investors interpret the S of ESG? 'Sustainable investing has taken off enormously in recent years. Investors are increasingly aware of the importance of environmentally sound practices and good governance. But let's be honest, one aspect often remains underexposed: the social dimension. Fortunately, the CSRD is about to change this by providing investors with in-depth insight into the social impact of their investments. With the CSRD and the emergence of the European Sustainability Reporting Standards (ESRS), investors finally have the tools to assess the social performance of companies. This opens up a world of possibilities. Investors will be better informed on topics such as social justice, diversity and inclusion, labor rights, and ethical business practices.' Where do the greatest opportunities and challenges lie in the area of the S? 'Obtaining reliable and comparable data remains an obstacle. Companies should be urged to report their social performance fully and transparently so that investors can make informed decisions. Investors can play a role in this by putting pressure on companies and advocating for improved reporting practices. In addition, there are opportunities to actively involve companies. Investors can attend shareholder meetings and ask critical questions about social issues. By exercising their influence, investors can encourage companies to take social responsibility seriously and strive for improvement. However, we must realize that it is a long-term process. It takes patience and perseverance to achieve sustainable social impact.' |
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Elizabeth Chiweshenga Senior Manager Sustainability, abrdn
How do you interpret the S of ESG? 'The S of ESG covers a wide range of topics that can impact a diverse group of stakeholders. This may include the relationship with the local community, supply chain management, data privacy, diversity and inclusion, working conditions, employee health and safety, etc. Context is essential for a proper assessment of this. Social challenges are often complex and persistent, so constructive dialogue is crucial. Corporate engagement is therefore the core of our approach. It helps us to fully understand social issues, assess the position of our investments in this context and influence positive change where necessary.' How do you measure or benchmark the S? 'For social research, we often rely on independent sources such as NGOs, trade unions, development organizations and universities. We monitor important KPIs for our investments using our internal analyzes and scores. Sometimes the progress of a company is relatively easy to assess on the basis of company information. Often a more versatile approach is needed. We then take geographic exposure into account, compare standards and practices of peers and evaluate critical assessments from (among others) third parties. This helps us to assess whether companies take sufficient measures to limit social risks. We also make our expectations clear through our voting policy and the positions we publish. We review all shareholder resolutions related to social issues and publish our voting decisions on our website.' |
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Carlo Funk Global Head of ESG Strategy and EMEA Head of ESG, State Street Global Advisors
How do you interpret the S of ESG? 'The social pillar of ESG offers a broad definition that encompasses diversity and inclusion, elements of human and labor rights, but also specific areas such as product safety, sales practices and employee well-being. Measuring and quantifying risks and opportunities for companies is crucial in investment decisions, but can still be challenging, especially in the absence of an internationally agreed accounting standard on ESG. We continue to focus on materiality by collecting a large number of data points and mapping them as material social factors in line with the definitions of the Sustainability Accounting Standards Board (SASB), which are now being incorporated into the International Sustainability Standards Board (ISSB).' How does the S relate to the E and G within the investment portfolio? 'The S-pillar is becoming increasingly important and relevant for sustainable investing as more investors seek numerical substantiation of the impact of ESG policies on a company's strategy and performance. We address the social pillar through our investment strategy and through effective engagement. Particularly in the area of stewardship, we can promote sound social policies to improve long-term value creation.' |
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Karlijn Van Lierop Director Responsible Investment, Head of Responsible Engagement Overlay, Columbia Threadneedle Investments
How can investors interpret the S of ESG? 'Social is an important and integral part of our investment, engagement and voting policy. Our starting point in engagement is that companies in which we invest comply with human rights, remedy violations and respect labor rights, in accordance with the UN Guiding Principles and OECD Guidelines. We expect companies to have robust social policies. Themes on which we focus with commitment are human rights, trade union law, slavery, living wage, data privacy, diversity, public health, equality and the 'just transition', the social dimension of our net zero commitment. In addition to engagement, Social is also reflected in, for example, our Social Bonds portfolio, with which we strive for positive social results in addition to financial returns.' What is the business case for the S? 'Better understanding of the financial materiality of social issues enriches the investment process and can reveal risks and opportunities. An effective framework for mitigating social risks requires thorough due diligence, constructive partnerships with suppliers in the supply chain and good working conditions. Investing in Social can yield social and financial returns. Paying a living income can break the cycle of poverty and prevent child labour. It also contributes to a stable workforce, motivated employees, continuity of processes and less turnover. Attracting and retaining talent and human capital management contributes to innovative strength, increased productivity and agility. These are important considerations for a company's long-term profitability. People and profit go hand in hand.' |
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Don Gerritsen Strategy Director and Responsible Investment Leader, Deloitte
How can investors interpret the S of ESG? 'The market for responsible investment is relatively young. The term ESG was introduced in 2004. That is less than 20 years ago. Of course, attention to ESG-related topics was already there before. Governance has always been an important consideration in investment decisions. Over the past 20 years, attention to E, environmental issues, has also increased significantly. Social themes, such as human rights, have only really appeared on the agenda of institutional investors in recent years. This trend has been reinforced, among other things, by the materiality of social themes from a double materiality perspective – as prescribed by the CSRD, the upcoming social EU Taxonomy and stakeholder dynamics around social themes. In order to adequately place these themes on the agenda, it is important that investors translate the most material social themes on at least three levels in their organisation. First, the business and investment strategy: 'How do we translate the most material social themes into concrete opportunities for the organization?' Second, the operational model of the organization: 'Who is accountable and responsible? What does the value chain look like downstream and upstream? How do we ensure optimum employee satisfaction?' And finally, the investment practice itself: 'How are social themes measured and valued? How are these themes integrated into investment decisions?' In this way, social themes get the attention they need.' |
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Arjan Ruijs & Marie Payne Respectively Senior Responsible Investment Officer and Responsible Investment Officer Sustainability & Strategy, Cardano
How do you interpret the S of ESG? 'Social considerations are an integral part of our sustainability policy. Currently, economies fall short on several social pillars, for example on inequality and access to basic services such as food, shelter, health care and education. This leads to social tensions and undermines the social license to operate of companies and authorities. These aspects play a central role in both our due diligence and our active ownership activities. For example: in our due diligence we look at how companies manage social and human capital. The lack of policies on data privacy, product quality, or community relations can create risks for society and therefore for your own business. Moreover, especially in times of labor shortage, it is important that companies take labor and human capital into account, both internally and throughout the entire chain. Companies that fail to do so may be excluded from investment. With active ownership, we encourage companies to take better account of social risks. We enter into dialogue with companies about social themes such as human rights, healthy food and healthcare. One focus area is a living wage, where we assess apparel companies through the Platform for Living Wage Financials. This shows that we can find ways to measure and benchmark the S in ESG.' |
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Gertjan Medendorp Senior Investment Strategist & MVB-specialist, Aegon Asset Management
How do you interpret the S of ESG? 'Our clients find it increasingly important that their investment policy contributes to a better world. We therefore advise them to minimize the negative effects on social themes, such as human rights violations, in their investment portfolio. We periodically screen all companies in our portfolios. This allows us to identify potential or actual violations of international norms and standards. We enter into discussions with these identified companies to limit or resolve abuses.' How does the S relate to the E and G within the investment portfolio? 'The S has been important for norm-driven engagement for some time now, we see the E mainly in the strategic asset allocation and the G forms an important precondition. However, we are also seeing more and more examples where the S is reflected in the investment portfolio in a different way. Within the government bond portfolios, for example, we consider the S to be important when advising on country policy. We consider the risk of prejudice to be particularly high with regard to human rights. We try to avoid holding investments in the portfolio that are morally reprehensible because they are associated with, for example, corruption and restrictions on civil liberties and political rights. In addition, social bonds are potentially an interesting alternative for investors who want to make a positive contribution by financing projects with a social impact.' |
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Patrick Heisen Partner, PwC
How can investors interpret the S of ESG? 'Impact: Investors can focus their investment strategy on specific social objectives that they want to achieve with social impact funds. On the basis of analyzes of, for example, countries with regard to (the transformation of) access to health care and education, an image is created of the extent to which an investment can contribute to the objectives. Integration: Investors can integrate S-factors into financial and non-financial risks material to investments. For example, this relates diversity and inclusiveness as the social factor to the market and reputation risk of an investment. By analyzing data from relevant S-factors, the risk picture of the investment in question is enriched.' What is the business case for the S? 'Walk the talk: Our research shows that the majority of institutional investors have decided to stop or are considering stopping doing business with an asset manager if they do not sufficiently integrate ESG into their company policy. It is expected that more attention will be paid to governance and social factors in the coming two years. Investing in companies: A healthy working environment, a living wage and strong employee rights cost money. However, companies that pay more attention to this are better positioned to be compliant, to prevent reputational damage and to retain their employees in a tight labor market. Investors in companies should consider not only the costs of such investments, but also the risks of not making them. When manifested, these risks can lead to visibly high operating costs.' |
1 EU commission staff working document ‘Corporate Social Responsibility, Responsible Business Conduct, and Business & Human Rights: Overview of Progress’
2 Zhang et al, Presentation of Social Responsibility Reports and the Stock Price Crash Risk (mei 2023): image recognition computer analysis of more than 7,000 CSR reports of Chinese A-share companies from 2008 to 2020
