Focusing on social impact investing and starting with the UN benchmark
Climate change is an emergency, demanding immediate action. As such, it tends to grab the headlines. However, in the longer term, within the ESG (environmental, social and governance) mix, social factors are likely to be every bit as important, not least because climate change is likely to exacerbate social issues and ensuring a “just transition” will be an important factor behind establishing popular support for the changes that will have to be made. The move to incorporate social metrics into investment decision-making is likely to be one of the strongest trends over the next decade.
For trustees, social investment offers an opportunity to align a charity’s investment strategy with its charitable goals. Bringing about social change, from alleviating poverty to tackling discrimination to preventing abuse, is often core to a charity’s purpose. Social impact investing allows a charity to super-charge its impact in key areas.
There are also strong arguments that social investing can improve investment returns and help manage risk. Covid-19 has accelerated focus on a company’s social impact.
The pandemic exposed fissures in the social fabric of society. Women, ethnic minorities, and low paid workers suffered disproportionately in the fallout from economic lockdowns, while certain segments of society saw higher serious illness and mortality. This galvanised social movements, such as Black Lives Matter, but also saw a renewed focus on well-being and mental health from governments and the corporate sector.
Most pressing issues
A recent Harvard Law School report concerning the social aspect of ESG, written by Jonathan Neilan, Peter Reilly and Glenn Fitzpatrick, said:
“Factors relating to ‘S’ are now among the most pressing issues for companies globally…Entire sectors of the economy, and not just the weakest players, are facing a stark and uncertain future. We believe now, more than ever, that a company’s reputation - its ‘licence to operate’ - will be a function of how it engages and manages its stakeholders through this crisis; and how it communicates that responsibility - the ‘S’ - to its stakeholders in a clear and transparent way.”
The authors said social practices could be taken as a barometer for corporate culture and mention that: “Where companies have a strong and shared culture across the organisation, [social] practices tend to be strong. Where a culture is poor or considered “toxic”, [social practices] tends to follow the same pattern.”
Increasing priority for investors
Just as it has become an increasing priority for society, these considerations have become an increasing priority for investors. As poor social performance becomes a greater risk for corporate performance and a threat to companies’ reputations, investors are giving it a higher weight.
Social practice can not only be a risk for companies but also an opportunity. Companies which perform well in attracting, developing and retaining employees, while providing working conditions favouring greater employee engagement, are likely to be more resilient, remain competitive and thrive.
However, there are challenges. Reporting and measurement are at an earlier stage than they are for climate change. Also, it can be more difficult to develop meaningful comparisons. While it is relatively easy to measure carbon output, can the same be said for employee well-being? Nevertheless, policymakers and corporates are starting to work out new ways to disclose and compare social metrics.
UN Sustainable Development Goals
The UN Sustainable Development Goals have generally been used as a starting point. Even though they were originally designed for countries rather than corporates, they are being adapted to fit. More recently, the Sustainability Accounting Standards Board (SASB) has mapped accounting rules to the SDGs, so the two sides are coming together.
The EU has drafted a social taxonomy, designed to build on the environmental taxonomy already agreed by member states. This new taxonomy will take time to be approved but is reasonably well advanced. It considers both the contribution make to social goals from products and services sold by companies, along with the contribution made by the manufacturing process or supply chain. This is vitally important. There is no merit in making socially responsible products from exploitative practices.
Where charities are focusing most
While this taxonomy is being agreed, trustees need to work with the existing SDG framework. There are three main SDGs that map specifically to social factors: SDG 3, 5 and 8. It is here that many charities are focusing most of their attention.
SDG 3 – GOOD HEALTH AND WELL-BEING. SDG 3 focuses on ensuring healthy lives and “promoting well-being for all at all ages”. This includes obvious areas such as reducing maternal mortality and addressing preventable deaths in children. It strives to tackle epidemics, such as AIDS, tuberculosis and malaria. It also seeks to address mental health and well-being, including the prevention and treatment of substance abuse.
Until the pandemic, this had been an area of significant progress: the most recent World Health Organisation Report found that both life expectancy and healthy life expectancy increased globally by over 8% globally between 2000 and 2016, with progress made in reducing child mortality and fighting infectious diseases.
Still major gaps
However, there are still major gaps, with low-income and lower-middle-income countries continuing to suffer from the poorest overall health outcomes. The pandemic has exaggerated these differences.
Other aims under SDG 3 have also been made more difficult in the short term by the pandemic as health systems have come under strain. However, it has also put in place new mechanisms for the distribution of healthcare. This brings the goal of achieving universal health coverage and access to quality essential health care services, medicines and vaccines one step closer.
On the other side – and particularly important from an investment point of view – SDG 3 also seeks to strengthen the implementation of the World Health Organisation Framework Convention on Tobacco Control in all countries. It is increasingly clear that investment in tobacco is incompatible with social goals. The ambition to tackle deaths and illnesses from hazardous chemicals and air, water and soil pollution and contamination will also have implications for companies that have been careless in their emissions and waste.
SDG 5 – GENDER EQUALITY. According to the UN: “It is not just a human rights issue; it is a tremendous waste of the world’s human potential. By denying women equal rights, we deny half the population a chance to live life at its fullest. Political, economic and social equality for women will benefit all the world’s citizens. Together we can eradicate prejudice and work for equal rights and respect for all.”
This goal strives to end discrimination against women in all forms. This includes the prevention of violence and exploitation, but also ensuring workplace equality and ensuring full participation in leadership and decision-making.
Step back for gender equality
The pandemic has seen movement towards this goal take a step backwards. The World Economic Forum points out that the crisis has lengthened the amount of time it will take to close the global gender gap: “As the impact of the Covid-19 pandemic continues to be felt, closing the global gender gap has increased by a generation from 99.5 years to 135.6 years.”
Globally, between 2019 and 2020, women’s employment declined by 4.2% representing a drop of 54 million jobs, while men’s employment declined by 3%, or 60 million jobs. Female employment is not expected to return to pre-pandemic levels in the near term, while male employment has already recovered. LinkedIn data further shows a marked decline in women being hired to leadership roles, creating a reversal of one to two years of progress across multiple industries.
This is largely a result of the higher representation of women in hard-hit industries such as consumer services, non-profits and media and communication, but also because women left the workforce, finding the competing demands of childcare and work too onerous.
Regulation has also gone backwards. In the UK, which leads the world on requiring gender pay gap reporting, it was compulsory to publish gender pay gap data every year for employers in the private or voluntary sectors with 250 or more employees. However, this was suspended during the pandemic and only a quarter of companies had reported their gender pay gap by this year’s April deadline.
Binding pay transparency measures
The European Commission is now sharpening its claws on the issue. In March 2021, it published a set of binding pay transparency measures. The directive compels the 27 member states to enforce tougher pay reporting requirements on companies with more than 250 employees. Companies will also need to provide all workers with the right to see colleagues’ salaries. The new rules are in their early stages and the cogs of European regulation do not turn quickly, but it indicates a clear direction of travel for the region.
SDG 8 – DECENT WORK AND GROWTH. This Social Development Goal is a broad category, encompassing sustainable growth and equal pay, to full employment and “decent” work. It covers universal banking, youth employment, training, labour rights and safe working environments. It also looks to achieve higher levels of productivity through diversification, technological upgrading and innovation, plus a greater focus on high value-added and labour intensive sectors.
Covid shone a light on the poor working conditions across the globe. In the UK, there was the high profile expose of Boohoo. The clothing group saw its share price plummet by 23% on Monday 6 July 2020, wiping off £1bn from its market capitalisation as an undercover investigation by The Sunday Times revealed appalling working conditions and modern slavery at a Leicester garment factory with links to the company. It was a clear demonstration of how failure to address social considerations could have a material financial impact.
Major workplace structural shift
The focus on working conditions comes at a time when the workplace is undergoing a major structural shift. The pandemic set in motion a vast agile working experiment. It is not yet clear the extent to which this new-found flexibility will endure, but companies are adjusting to a new normal. Whether they manage to do this sensitively and with clear focus on their employees’ well-being may affect their ability to attract and retain talented staff.
Social impact investing is the logical end result and the direction of travel for charities and other investors alike. The capitalistic system is being redesigned and investors need to stay on the right side of that change. For the time being measurement is poor and inconsistent, but standards are being established. For charities, it is vitally important to start using social metrics and learning from the outcomes, not as a hard and fast measure but as a good starting point for further investigation.