Feature


Those wishing to make such assessments may have to focus on the negatives, such as fines or costs linked to a controversy. It appears that one way of measuring out- comes would be to use the UN’s Sustaina- ble Development Goals framework.


(SDGs) as a


The goals that are investigable and provide a common language for investors, MSCI’s Swynghedauw says. “The typical value crea- tion,


with regard to social issues, is


improved reputation, higher productivity and better dividends,” she adds. “They are the metrics we would look at to measure a social impact.”


SEARCH FOR QUALITY


The task of measuring impacts is made harder thanks to a lack of quality data. “It is tough, but it’s getting better,” McAllister says, adding that the firm looks at informa- tion on pay and working conditions, but “only about 10% to 20% of the companies we look at provide that metric”. Investors cannot rely on the data compa- nies supply on their operations, so they check it against information produced by independent sources, such as ESG data providers, non-governmental organisations or trade unions.


“If there is a specific controversy, and some sectors are controversy prone concerning the social dimension, like pharmaceuticals and retailers, then we use multiple sources of information to cross-check to make up our minds,” says David Czupryna, SRI sen- ior client portfolio manager at Candriam Investors.


MSCI looks at the UN’s International Labour Organisation data sets to determine the likelihood of labour unrest for certain industries and in certain countries to assess the likelihood of being affected by strikes is higher than others. It also looks for contro- versial labour practices by scanning the news for cases brought against companies. Newton does not automatically exclude companies that it feels carry reputational risks. It works with them to improve the problem first. “We are far more use to soci- ety as an investor if we work with a company to improve things rather than walking away


and letting a passive investor just own the shares and not engage with the company,” McAllister says. He cites the example of the airline industry, where there have been a number of high- profile disputes between management and workforces, sometimes resulting in strikes. “The impact of such disruptions can be extremely costly for airlines in terms of loss of revenue, creating a business risk. We therefore look closely at a company’s his- torical relations with trade unions and indi- cators of employee satisfaction.” This engagement approach is shared by Robeco. “Behaviour is something that you can have a conversation about with compa- nies,” Lamoen says. “You can have a dialogue on improving that behaviour. It is our prefer- ence to get into a dialogue with companies instead of exclusion.” Candriam has removed “loads” of companies from its offering because of concerns over its social factors. Facebook is an example. “We didn’t feel that the company was doing all that it should to ensure that the privacy of the data entrusted by the user was warranted,” Czupryna says.


“This is about protecting the privacy of cus- tomer data,” he adds. “That is why we decided to exclude it from our list of eligi- ble companies.” More and more investors want Candriam to eliminate companies where the risks of human rights or labour abuses are acute. “This is becoming almost standard in the investment industry,” Czupryna says. “When it comes to ESG investing, not wanting severe human rights violations is usually first on the list,” he adds. “Gender equality is more of a growing trend.” BNP Paribas AM has removed companies from its investment universe because of social issues. “We have excluded compa- nies because of labour rights and human rights [abuses],” Viñes Fiestas says.


A GROWING MARKET MSCI aims to be more active on the pay


gap, amid growing concerns of the diver- gence between executive and employee sal- aries. It wants to find out how companies are sharing the value they create. The social impact of artificial intelligence is a focus for Robeco. The asset manager plans to engage with IT companies and social media platforms to ensure that tech- nological developments and applications are used responsibly. “Artificial intelligence technologies create opportunities for com- panies, but AI also poses risks to human rights, including the right to privacy,” Lam- oen says. For Aon’s Charles, getting companies to act on social issues may need investors to


It can be challenging


to have evidence on the financial materiality of social aspects. Carola van Lamoen, Robeco


emphasise the potential for reputational damage. “It seems to be the only way to compel those companies to start thinking about the overall ramifications of how they are treating their workforce. “When you have a good diversity policy, when you treat your suppliers well, when you have a good due diligence process for labour rights, when you pay your taxes and are more transparent you can make a good impact in society,” she adds. For McAllister, social investing has huge potential. “It has all the characteristics to be just as, if not more, popular than green investing. People tend to respond to human issues.


“If you are talking about climate change, you get more traction when you frame it in terms of air pollution and how it causes 7 million deaths a year,” he adds. “When things are more human-centric, they are more relatable to people. That is why it could become more popular than green investing,” McAllister says.


May–June 2019 portfolio institutional roundtable: ESG 29


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