ESG Feature – The S in ESG


could produce better social outcomes. “We have a duty to deliver long-term sustainable returns to our clients,” Riou says, “so we encourage companies to shift towards better social practices.” Yet improving their social profile has traditionally been a lower priority for corporates and sovereigns compared to environ- mental issues. Changes to our climate are rightly seen as one of the biggest threats to humankind, so the social element of ESG has never been at the top of the agenda. But there could be another reason for this.


“The S is a broad theme,” Riou says. “One of the major chal- lenges is the huge range of indicators it covers.” Climate change is a global issue, so a tonne of carbon in the UK is a tonne of carbon in Australia. But measuring social issues can vary from country to country. “The S is difficult to capture,” Riou says. “The minimum wage is different in Eng- land than in France, so you have to put a contextual lens on everything.”


Issues which fall within the social pillar of ESG are getting more press coverage, which is stimulating debate, but the envi- ronmental element continuing to dominate sustainable strate- gies is frustrating for Maria Ortino, a global ESG manager at Legal & General Investment Management (LGIM). “That is not to say climate change is not important, but the S pillar is just as important,” she says. Yet attitudes towards the social element of sustainable investing are changing, which is down to Covid. Riou says that BNP Par- ibas research discovered that investors were more aware of social issues following the first lockdown. “This was due to sev- eral things, such as people losing their jobs overnight.” “It also made people realise that there are imbalances in society, highlighting inequalities,” she adds. Yet this could cause conflict with investors needing to generate a certain return to pay members pensions and drive better social outcomes. Should they accept dividends from oil majors when some households are having to choose between eating and heating?


Don’t forget the G BNP Paribas AM has been active in the social thematic area for more than 10 years with Riou putting such aspects on par with energy transition and environment issues. “We have a convic- tion that companies nurturing social indicators will perform better over the medium to long term,” she says. “If you nurture the diversity in your company it will break group thinking and better reflect consumer needs. That is the link between the S and financial performance,” Riou adds. And there can be no link between the S and financial perfor- mance without the G. LGIM has focused on diversity for more than a decade. Employee relationships and taking care of sup-


24 | portfolio institutional | September 2022 | issue 116


Anti-microbial resistance is climate change and the


Covid pandemic combined. Maria Ortino, Legal & General Investment Management


ply chains were woven into conversations with company direc- tors. “We might have included that under the G back then, but it is now taking more prominence under the S,” Ortino says. “But the G is important,” she adds. “You cannot have a good E or S without a good foundation of governance. That takes it back to composition of the board and its oversight of the com- pany. If the foundation is not good, the work with the E and the S will fail. “The inter-connectedness of the E, S and G, with the G being the grounding, is essential,” she adds.


Healthy concerns With so many social issues making the headlines, investors need to ensure that they are not following what could be a short-term fashion. “The focus has been on diversity for a long time, but we are now moving to specific health issues, as well as income inequality,” Ortino says. “We need to be focused on several pillars at once and avoid the flavour of the month issue.


“These are long-term trends for long-term investment hori- zons,” Ortino says. “We are still engaging on diversity after more than 10 years.


“This is a multi-year issue, so I hope we are not putting an issue on the table that pushes other ones out,” she adds. Another multi-year issue is health, the importance of which was highlighted by the pandemic. Growing anti-microbial resistance is a serious issue. People could die from grazing their knee, unless new anti-biotics are discovered. Ortino warns against underestimating the severity of this prob- lem. “Anti-microbial resistance is climate change and the Covid pandemic combined,” she says. “It is a long-term issue, a systemic risk and will impact multiple sectors.” Managing this risk is not just about funding pharmaceuticals


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