Feature


It appears that Primark was not robust enough in checking the company that was supplying it with cheap clothing. This over- sight


cost the retailer more than $11m (£8.4m) in compensation to the bereaved families and a further $3m (£2.2m) in aid to Bangladesh.


The price of trying to restore a tarnished reputation is high and can negatively impact a company’s financial performance and, ultimately, its valuation. Reputational risk is covered within the social pillar of an environmental, social and governance (ESG) analysis. While the ‘E’ focuses on environmental factors and the ‘G’ on a company’s integrity and transpar- ency, the ‘S’ is about people’s health, wel- fare and happiness as well as a company’s relationship with the community. Issues include equality, diversity in leader- ship, privacy, health and safety and employee development. In short, it’s treat- ing people, companies and the community fairly and with respect.


Climate change and corporate governance failings, such as car-maker Volkswagen’s emissions test scandal, have grabbed the headlines in recent years, but social issues are increasingly getting their fair share of attention too, be it privacy, low wages, obe- sity and tax avoidance. These are important factors for those invest- ing over the long term. They even have polit- ical will behind them. The UN-backed Prin- ciples for Responsible Investment, which promote ESG investing, are pushing for the transition


to a low carbon economy to


include social factors. This is linked to the jobs that will be lost following such a shift.


LEAP OF FAITH


Despite the rising public interest in social issues, they are not as popular as the E and the G in investment circles, says Mette Charles, senior investment research con- sultant at Aon.


“It is a big step for an asset owner to go from financial and risk mitigation to mak- ing an impact,” she adds. “Not many clients have made that leap.”


It appears that there is a huge educational need to help asset owners make that jump,


but, as Charles points out, there is another catalyst. “How motivated are asset owners to invest for the social good? The financial return maybe compromised and asset own- ers tend to be finance first.”


They may be lagging behind issues such as global warming and


transparency, but


social factors are in investors’ thoughts. Issues such as human rights and inequality are being raised more and more by Newton


steps they are taking to remove any poten- tial gap for inequality with regards to discrimination.”


MAKING AN IMPACT Social issues that have featured prominently in the news headlines in recent years include data security. Social media giant Facebook saw its value decline following allegations that it sold peoples’ personal


Some investors want more than just


a financial return. They want to have a social-impact return as well. Lloyd McAllister, Newton Investment Management


Investment Management’s clients, which Lloyd McAllister, a responsible investment analyst at the firm, puts down to a growing recognition that they can affect share prices. “Some investors want more than just a financial return,” he says. “They want to have a social-impact return as well.” Also witnessing social topics appearing more prominently on global agendas after living in the shadow of governance and environmental concerns for years is Carola van Lamoen, Robeco’s head of active ownership.


“It can be challenging to have evidence on the financial materiality of social aspects,” she adds. “Therefore it has been typically lower on the radar for ESG investors.” Growing awareness, according to Lamoen, is due to the launch of several initiatives, including the Platform Living Wage Finan- cials and Investor Alliance for Human Rights, as well as the #MeToo movement and regulators demanding more disclosure on pay and how trustees are dealing with financially-material risks to portfolios. MSCI’s vice president of ESG research, Leslie Swynghedauw, says awareness is growing on several levels. “There is pres- sure


on companies from customers,


employees and regulators to act on such issues and being more transparent on what


28 May–June 2019 portfolio institutional roundtable: ESG


data to third parties for commercial or political gain. Investors want to know how companies are protecting themselves from data security risks. Then there is equality, especially in senior management. Helena Viñes Fiestas, deputy head of sus- tainability and head of research and policy at BNP Paribas AM, says that this is a factor her colleagues look at when assessing an investment. “We expect companies to have a broad and comprehensive policy on diver- sity,” she adds. “We also want diversity of thinking and background, especially at board level.” Putting more women in senior positions is not about fairness, it could have a material impact on financial performance. Indeed, an MSCI study in 2017 found that retailers with at least three female directors make more revenue per employee. This research does not, however, prove a link between best practice and performance due to its limited sample size.


This is part of the problem with social met- rics. It is not easy to measure their perfor- mance or impact. If investors are assessing an investment only for its financial returns then there are years of accounts and reports to plough through before making a deci- sion. It is a lot harder to measure non-financial returns.


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