The current cost-of-living crisis has hurtled social concerns onto the front pages of the papers.
Young and old are all concerned, businesses are uncertain about their future, and in the words of shadow chancellor Rachel Reeves, “We’re facing a national emergency”.
These worries are all translating into client conversations, but perhaps understanding social concerns is something we’ve come across more than we realise?
By now we all feel somewhat familiar with the term ‘ESG’, but how many of us really understand what each aspect – especially the ‘S’ and ‘G’ – is, and what they stand for?
The ‘E’ bit is a lot easier, and clients seem familiar with it: a Deloitte consumer attitude survey concluded that 85% of those asked were making some changes to lead a more sustainable life – from recycling or walking the kids to school to buying an electric car or changing dietary habits. 34% were actively choosing brands based on their sustainable credentials and 28% were stopping using brands due to ethical concerns around the brand. (Deloitte/YouGov Survey 2,000 UK adults aged 18+ between 5 and 8 March 2021).
From an investment perspective those two choices look a lot like positive and negative screening – however consumers wouldn’t necessarily put it in those terms.
The concepts behind ESG aren’t always static, and we as an industry require flexibility and adaptation of these themes and notions over time. We live in an ever-changing landscape, with a rotation of themes creating noise in the media. Recently we’ve seen continued climate change concerns with COP26, oppressive regimes flagged with the Russia Ukraine conflict, and now the cost-of-living crisis increasing the prominence of the ‘social’ aspect of ESG. So let’s take a closer look at each in turn:
Across the industry, companies and individuals seem to find it easier to define what ‘good’ looks like when it comes to the environmental aspect of ESG. The environmental ideas also tend to remain stable over time without much alteration.
The ‘E’ focuses on the natural world and factors that affect it. We hear from a variety of sources on climate change: resource depletion; waste; pollution and deforestation, and we feel comfortable defining what we perceive ‘good’ to look like in these areas.
Social factors, or factors that affect the lives of people may seem hard to give examples of or define.
I think they are generally harder to have a standardised definition of ‘good’, but examples such as human rights: modern slavery; child labour; diversity and inclusion; working conditions and employee relations aren’t immune from exposure in the headlines.
On 25th September 2020 Boohoo Group PLC published the results of the independent review conducted. This review took place following a June report published by Labour Behind the Label (LBL) which looked at factory conditions in Boohoo’s supply chain. Allegations included workers in the Leicester factory being exploited and put at risk of catching Covid-19.
Ms Levitt’s Independent Review has identified many failings in the Leicester supply chain and recommended improvements to Boohoo’s related corporate governance, compliance, and monitoring processes.
Governance looks at factors affecting business – probably the part that clients are least aware of.
Issues include bribery and corruption; executive pay; board diversity and structure; political lobbying/donations and tax strategy. These are issues that don’t seem to excite the wider press as much as the ‘E’ and the ‘S’.
They are, however, just as important as environmental and social factors. Good corporate governance is key to ensuring the avoidance of some pretty nasty scandals and stands at the core of any business.
The lack of standardised disclosures when it comes to corporate governance issues can pose challenging when assessing the credentials of a business and determining what ‘good’ looks like.
Engagement with companies is key here to work with them to fully understand their policies and challenge where it is felt that these policies are not robust enough leaving them open to abuse.
The SDGs and how do they fit in?
The Sustainable Development Goals website explains: ‘The Sustainable Development Goals are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including poverty, inequality, climate change, environmental degradation, peace and justice.’
The SDGs are comprised of 17 goals set out by the United Nations covering a range of topics spanning across the ‘E’ the ‘S’ and the ‘G’ and these are used by both businesses and investment managers in different ways. The idea is that if we as the human race can give more consideration to the ‘E’, ‘S’ and the ‘G’, we will be on our way to meeting the SDGs by 2030 and therefore creating a more sustainable future.
No one wants a client call first thing on a Monday after they’ve read the Mail on Sunday and discovered they hold a company in their portfolio that’s had bad press for either the ‘E’ the ‘S’ or the ‘G’! The ‘E’, ‘S’, and the ‘G’ are of equal importance when it comes to us having the best chance of meeting the goals and in running your clients’ money in a responsible and sustainable way.