The S in ESG – ESG Feature
or looking at the practices in farming and the wider food industry.
“Investors must use a two-pronged approach,” Ortino says. “We must not just engage with our companies but also with regional, national and supranational policymakers. And it also needs to be done collaboratively with other investors. We can- not do this just on our own.”
It is said that prevention is better than cure, so looking at how food and beverage companies are reformulating their prod- ucts, how they market them and who they are lobbying is important. “It goes back to that two-pronged approach of engaging with policymakers, and our investee holdings,” Ortino says. In the E, the material risk is not questioned, especially when it comes to climate change. Companies are responding to that through the information they are disclosing. “Anti-microbial resistance is where climate change was five to 10 years ago, where it is still challenged on if it is a material risk for inves- tors,” Ortino says. “The risk is real. If we don’t do something, we are going to be in a critical situation.”
Dirty work Yet there is one barrier investors are working to overcome when trying to produce better social outcomes: data, or the lack of it. “Gender data has significantly improved over the years following investor engagement. Similarly for ethnicity, even if we are not there yet. But for everything else under the S pillar it is difficult to get quantifiable, comparable and verifiable data,” Ortino says. “It is easier for the E because we have, for example, scope 1, 2 and 3 emissions data.” This is also a concern for Riou. “We look at gender diversity, but we would like to enlarge the theme to ethnicity and disabil-
ity. However, iIn several parts of Europe, it is not legal for com- panies to report on the ethnicity of its workforce,” she says. “There is no one-stop-shop for data from a social angle,” Riou adds. “Different data providers, provide different information. It requires tremendous work from our quant research team to make indicators comparable,” she adds.
This is a symptom of social investing being in its infancy. “Compared to ‘G‘, the ‘S’ is in much more of an initial phase,” Ortino says. “As investors, it is important that we do not hide behind a lack of verifiable data. We must get our hands dirty trying to identify the data we need and who can we push to pro- vide it.”
What’s next? So the social pillar of ESG is evolving to encompass new trends and is becoming more prominent. It has evolved since socially- responsible investing became a popular term in the 1990s, and it will continue to consider new issues. But what will investors be discussing in corporate boardrooms in the next 10 years? Under the S pillar, Ortino and the LGIM team will be focusing on anti-microbial resistance, nutrition, human rights, income inequality and diversity.
“I would certainly hope that we will have made progress on what we are looking at today. “I hope that anti-microbial resistance is part of company anal- ysis for investors,” she adds. Yet Ortino remains open minded that new challenges will arrive for socially-minded investors to consider. “We must also be open to challenges that we have not seen yet, while avoiding the flavour of the month,” she says.
We are evolving to another way of framing the S. It has taken many forms and is
not only about diversity. Delphine Riou, BNP Paribas Asset Management
Riou will also concentrate on anything related to the minimum wage. “Inequality of income is widening across Europe.” The rising cost of energy which, Riou says, will increase the cost of living. The digital transition will also be on her radar. “There will be a shift as jobs disappear because of artificial intelligence. This will be another critical issue. “These will drive major changes in company business models, and the first to be affected will be the employee,” she adds. “When we speak to companies, we want to know if, due to energy and digital transitions, they have an acute understand- ing of the skills needed in 10 years’ time.” While the E in ESG is about the planet, the S concerns the peo- ple living on it. These are difficult times and they will, it seems, get worse before they get better. Investors have a role to play here by engaging with the companies in their portfolio to erad- icate hunger, generate cheaper clean energy and provide access to healthcare. Fighting climate change is important, but we should not underestimate the positive impact that a sound social invest- ment policy can have. Just look at Argentina.
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