The ‘S’ in ESG

ESG investing is growing exponentially, driven by changes in demographics, and a realisation that individuals no longer have to sacrifice performance to invest with a conscience. The environmental agenda has received ever-increasing media attention regarding the climate transition, with the Paris Agreement and the United Nations climate change conferences catalysing the widespread implementation of Net-Zero policies. Sustainable investing has also gained traction with an increase in “green” Exchange Traded Funds (ETFs), and a growing trend of the divestment of assets in the fossil fuel industry, accompanied by a redirection of funds into clean energy investment. 

As consideration of the environment when making investment choices has become more mainstream, there has been a revitalised focus on the ‘S’ in ESG, the social aspects of conscious investing. Social factors include a company’s relations with both its workers and the organisations and people outside of it. Furthermore, it can entail actions such as ensuring that products and services do not pose safety risks and minimising exposure of supply chains to geopolitical conflicts.  

A classic example is companies following the Fair-trade initiative, which ensures better prices, safer working conditions, local sustainability, and fair terms of trade for farmers and workers, making them more attractive to both consumers and investors. Another example was Walmart’s move last year to make itself more attractive to socially-minded investors by restricting the types of firearm ammunition that it sells.

BlackRock CEO Larry Fink believes ‘a company that does not seek to benefit from the full spectrum of human talent is weaker for it’. In the 2021 edition of his infamous letter to CEOs, he requested companies to disclose their long-term plans to improve diversity, equity, and inclusion. However, this is often easier said than done. A 2019 survey by BNP Paribas revealed that 46% of investors surveyed (covering 347 institutions) found the ‘S’ to be the most difficult to analyse and embed in investment strategies. Social aspects are less tangible than environmental metrics or governance, and measuring qualitative data, such as happiness in the workplace, is difficult to measure with consistency. However, there are now funds that are trying to make it more tangible. 

Impax Asset Management set up the Ellevate Global Women’s Leadership fund in 2014. It was the first broadly diversified mutual fund to invest in the highest-rated companies for advancing women through gender diverse boards, senior leadership teams, and other policies and practices. It maintains other ESG standards, is fossil fuel-free, and actively engages with the companies that it invests in on diversity. The fund has boasted consistent financials with an average annual return of 9.99% since 2014, broadly tracking the MSCI World (Net) Index (10.66%) and the Lipper Global Multi-Cap Core Funds Index (9.32%). 

In the last month DWS, a German asset management company that previously operated as part of Deutsche Bank launched a new sustainable equity investment fund. The fund, DWS Invest ESG Women for Women, is managed exclusively by women and works on the belief that the social aspects of a company are a key performance factor. Alongside a classic fundamental analysis, it selects companies based on ESG with a particular focus on their ‘Social Commitment Score’. This score evaluates a company’s performance regarding the following five factors: working conditions along the entire chain, equal rights and opportunities, gender distribution at the management level, work-life balance, and flexibility of the working environment. 

Valerie Schueler, one of the lead portfolio managers, explains that social factors have a ‘positive effect on the productivity and profits of companies, which should also be reflected in a positive performance on the stock market in the long term’. Schueler backs up her claim by stating that ‘over a period of 5 years, U.S. companies from the S&P 500 Index that are well-positioned in terms of the “S factor” have performed better than the broad market.’

Socially aware funds, such as these, have huge potential for success as they ride the wave of moral investing. It will be interesting to see whether these trends build momentum for more socially aware funds to be launched, not just encompassing gender equality, but broader social aspects of the business.

By Alice Lane

Sector Head: Philipp Jiang

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