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With the importance of socially responsible investing strategies becoming increasingly ubiquitous, advocates are focusing their attention on an area they deem less understood.
The social pillar of the environmental, social and corporate governance investment framework – known as ESG for short – has been termed “middle child” Mainly due to data challenges. As ESG has reached new heights in terms of widespread awareness on Wall Street and Main Street, those in the field now see an opportunity to better define and quantify the “S” pillar.
“There has been a lot of growth,” said Michael Young, director of education and programs at the Sustainable Institute Forum. “But of these three, it’s certainly the latest to be included in the investment process. And not everyone will use it the same way.”
For years, the social pillar has been considered relatively vague and difficult to quantify. BNP Paribas Found in 2021 More than half of the 350 institutional investors around the world surveyed believed that the “S” was the most difficult to analyze and integrate.
Additionally, climate and corporate leadership topics have generated increasing interest. This comes as climate change and racial justice have gained greater awareness in recent years, prompting investors and company leadership to pay more attention to how corporations perform in these categories. And this comes despite the fact that the ESG investing framework has run into political trouble.
Now, investors are trying to understand what the “S” means to them and how to best analyze corporate efforts in this area.
Defining and Quantifying ‘S’
The elevator-pitch definition for the social pillar usually goes something like this: It’s how companies interact with their communities, in the context of their workforce and the places where their business operates.
While data related to human capital and diversity has improved over the past several years, investing professionals still see a lack of standardized information that can make it difficult to integrate social topics. The patchwork of data can make comparisons between competing companies more difficult.
Looking ahead, Young said that a potential human capital disclosure rules Securities and Exchange Commission seen by lawyers, They are hoping that this rule will make a database of information companies report to the Equal Employment Opportunity Commission publicly available.
“That would be a huge catalyst,” he said. “This will be the first ‘S’ disclosure rule in the United States.”
In the absence of adequate standardized data, some people have gotten creative.
Marion McIndoe, head of ESG stewardship at Parnassus Investments, said data on the share of part-time versus full-time workers, benefits for contract workers and evidence of hiring best practices are all things worth considering. He said Parnassus often asks for engagement data from companies, while acknowledging that it is an imperfect way to measure performance.
When searching for information about a company, his team will check for publicly available fines or lawsuits against a company. Even reviews on Glassdoor or memes posted on social media platforms that touch on common topics can provide insight to the user, he said.
The company wants companies to know: “This thing matters — and you need to be held accountable for it,” she said.
Harbor Capital and Irrational Capital partnered to create exchange-traded funds thematically focused on employee satisfaction: these include the Harbor Human Capital Factor US Large Cap ETF and the Harbor Corporate Culture Small Cap ETF.
Appropriately, the funds trade under a variety of tickers – such as HAPI and HAPS – which use the same first three letters as the word “happy.”
Large-cap vs small-cap funds this year
The fund uses data collected by Irrational from more than 15 million employees at several thousand companies. This is useful because the firm believes that stronger employer-employee relationships can lead to better business performance and thus boost shares.
like big technology names Microsoft, Apple, Alphabet And meta These were some of the largest positions in large-cap funds as of mid-November. During this, untouchability, hb fuller, apple hospitality And evercore Are among the largest holdings in the small-cap version.
Elsewhere, socially responsible investors view the role of companies in the communities in which they operate as part of the “S”. McIndoe said companies can sometimes make the mistake of only doing charity work instead of being active members of the community.
“Charitable contributions and philanthropy are really great, but that’s not the ‘S’ of ESG,” he said. “The ‘S’ in ESG is about taking care of the people you trust and rely on as you plan your business strategy and operations.”
There can also be overlap between environmental and social topics that can sometimes lead to confusion, according to Yijia Chen, vice president of Calvert Research & Management, a firm that was an early proponent of socially responsible investing. In these cases, he said the social pillar plays a vital role in ensuring that the carbon transition is equitable and fair.
scary atmosphere
Globally, it appears that social topics will become more visible and important to investors over time.
This year, BNP Paribas found that investors around the world said the company’s commitment to labor issues would become sky Priority When taking proxy voting or investment decisions in the next two years. (BNP Paribas specifically assessed topics such as fair pay and equal treatment.) The firm also asked whether investors would rate the company for enhancing diversity, equity and inclusion efforts in the workplace, known as DEI for short. How do we see the importance of.)
But North American investors showed the opposite trend, with the survey finding that these issues would not be a priority over the next two years. This comes as ESG and DEI have become politically divisive and sparked debate among lawmakers over the past year.
Meanwhile, the reaction towards TargetThe proud collection of and Anheuser-BuschThe Bud Light campaign with a transgender influencer has become a symbol of how these so-called culture wars have bled into corporate America. RBC Capital Markets found that U.S. corporations are turning to terms like sustainability rather than ESG when discussing social responsibility on earnings calls.
While the ESG landscape has become politically fraught, some investors remain wary of reactionary steps like divestitures when they do not see a company living up to socially responsible values.
Instead, they argue that they can have a better impact by using their power as active investors to advocate for better policies. Many point to materialism and risk reduction as recurring reasons they bring up for companies as to why they should care about ESG issues.
Han Yik, senior adviser to the New York State Teachers Retirement System pension, told attendees at an ESG conference last month to think about divestment decisions the same way as how to handle trash in the backyard. Litter can be taken to a neighbor’s yard, or disposed of for the good of everyone.
“We are not supporters of disinvestment,” Yick said. “We think we can have more influence as owners of companies if we sell them to someone else.”
Although ESG experts grapple with data challenges and widespread confusion around the social pillar, they say its importance should not be a particularly hard sell.
“If you’re a business and you don’t take care of the natural human capital that your business depends on, you’re not going to be successful in the long term,” McIndoe said. “It’s just about scanning your landscape and making sure you’ll be successful in it for the long term.”