Investing in the ‘S’ in ESG

Factors affecting the quality of life in society are an important component of socially responsible investing.

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  1. Rob Morgan

Socially responsible investing is often associated with caring for the environment, but social issues are a key component too. Many millions of people worldwide live below the poverty line; one person in nine doesn’t have enough to eat, one in eleven has no source of safe drinking water and one in six children aged 12 to 15 is not in school. Investing sustainably also means addressing these, and many other, important issues affecting the quality of life in society.

Watch our ESG diaries video from Nerissa Parker: Discussing Social

 

Avoiding harmful activities…

When investing sustainably, some companies can be excluded, sometimes automatically, from investment portfolios due to social factors. For example, tobacco companies or manufacturers of alcoholic beverages whose products cause health problems may be screened out. Companies with poor records on health and safety, labour rights or liveable wages may also fall foul of scrutiny.

…and targeting beneficial ones

Other investors tend to accentuate the positive, for instance targeting companies that contribute meaningfully to improved health, education, equality, social mobility and safety. Investing with social aims in mind is not just about charity. There is a rational investment reason too. These issues can impact social cohesion and productivity, which contribute to competitiveness and potential for growth. Investing with social goals in mind should therefore not be at odds with investment gains.

Conversely, ignoring these issues has consequences, including, arguably, the rise of populist politics. Inequality was highlighted in the 2018 Global Risks Report by the World Economic Forum, in which ‘rising income and wealth disparity’ is ranked third among the top ‘risk trends’ that will shape global developments over the next decade.

Looking below the surface

Even where individual businesses operate well within regulation and social norms it is also necessary to consider supply chains. Even if a company has a strong record in the treatment of its own staff and immediate stakeholders, key suppliers could be flouting labour or health and safety regulations, or even human rights.

One company that has paid close attention to its supply chain is Nike, whose brand suffered in the ‘90s following reports of low wages and poor working conditions in its Indonesian factories. Initially slow to respond, Nike made considerable progress in supply-chain transparency and now regularly visits all supply chain factories and publishes an annual sustainability report, though some would argue (as with all companies) there is more it could do.

The importance of inclusion

Social challenges faced by the world’s poorest people are addressed in some of the UN’s Sustainable Development Goals (SDGs). These goals aim to end poverty, protect human rights, build peaceful and inclusive societies, as well as ensure the protection of the planet, by 2030. Many socially responsible funds aim to build portfolios aligned with relevant SDGs, often targeting companies that are addressing the unmet needs of these people.

That might include companies providing basic and goods, like food or healthcare, in an affordable or efficient manner, or it might be companies providing services that are helping these people to transition from low income to middle-income status through basic financial services such as banking. This is one of the most powerful ways of kick-starting financial inclusion, which in turn, helps to promote income growth and raise standards of living. One example is Bank Rakyat Indonesia, a microfinance company that provides access to borrowing and is a holding in Baillie Gifford Positive Change Fund.

As ever, before investing it is important that you take the time to read fund literature carefully. Although a consensus is starting to form around the use of ESG and other terminology in the area, it is still the case that different funds may use the same expressions differently. Investors should look beyond labels to check that the values of a fund are indeed aligned with their own.

 

 

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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