ESG Investments: A Focus on the “S”

Environmental, Social and Governance (ESG) Investing has grown rapidly over the last ten years and the number of professionally managed portfolios that have integrated key elements of ESG assessments exceeds USD 17.5 trillion globally (OECD). It is an investment trend that we cannot ignore. Whilst the growth of environmental investments (under E) have largely been accelerated by the pandemic (The Financial Times), and board composition (under G) have been at the forefront of decision making surrounding investments (Jones Day Legal Firm), the S, known as ‘social’ investments is also set to grow. Social investment largely involves investing in the wellbeing and safety of people and is often referred to as human capital management.

Natixis Investment Managers reported last year that 7 in 10 investors want to invest in companies that have a positive social impact. Thus, socially responsible investments have come a long way from being a PR play to being a vital part of a company’s strategy to create and protect value (Deloitte). Thanks to the proliferation of social media, businesses have come under greater scrutiny when it comes to transparency and accountability regarding social welfare.  Social investment can cover a broad range of topics, including healthcare, racial disparities, education, childcare, diversity within the workplace and rehabilitation. Furthermore, financial services group Allianz discovered in a 2019 survey that 64 percent of millennials wish to make investment decisions centered on societal problems and believe this to be important. The S is a critically important part of ESG because socially-minded investors will want to see that their values are reflected in their investments.

We just have to look to last year and the death of George Floyd to see how companies are measured in terms of  ’S’ issues when it comes to ESG criteria. Whilst some many businesses made statements regarding their policies and commitments to racial injustice through social media in response to George Floyd’s death, others established that they will be held accountable to their statements, including their approach to racism and police violence. In response to this S&P announced it would review a company’s response to George Floyd’s death in the scoring systems for S&P 500 ESG Index (Jones Day Legal Firm).

Community outreach and engagement is also critical when it comes to evaluating social impact. Mona Naqvi, Head of ESG product strategy at S&P, runs the S&P 500 ESG Index commented that with regards to ESG criteria, ‘we do take into account things like how companies are behaving with respect to their raw stakeholders, so, not just their employees and their shareholders, but how do they interact with their broader community, which is really important in terms of building good will in stressful times’.  Alongside analysing commitment to the community, ESG investments must take into account diversity. Naqvi commented further, explaining that the S&P measures how a company hires, what it’s hiring practice is and is a company diverse throughout its broader business operations.

In response to this, many institutional investors have asserted the importance for companies to explain their commitments to racial injustice and how they establish themselves as an employer focused on employee development, culture, diversity and inclusion. Whilst the E of ESG has been a key driving force to investment decisions, the S is proving to be opportune as well.