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Social metrics and definitions lag climate but that’s no excuse to ignore them

Human capital disclosure requirements are limited and vague, for instance, but some institutional investors continue to push for more transparency from companies.
Social metrics and definitions lag climate but that’s no excuse to ignore them

Despite lagging metrics and divergent views on what ‘social’ constitutes, some institutional investors are pushing ahead with integrating social factors in their investment strategies.

Historically, environmental concerns have dominated the sustainability conversation, as social reporting continues to lag and the wide-ranging nature of the ‘S’ in ESG (environmental, social and governance) has made matters complex.  

READ ALSO: The Covid effect: How pension funds are focusing on the 's' in ESG

DIVERGENT ‘SOCIAL’ DEFINITIONS

Elena Tedesco, Vontobel

“For social, there’s less of a common vision [than environmental],” Elena Tedesco, senior portfolio manager at Vontobel Asset Management told AsianInvestor. “Some people might say it’s all about avoiding gambling, some people might say it’s all about gender equality… So there’s a bit more of a disagreement.”

“But what we do is really go to the basics and use a bit of a common sense. Typically we invest in companies that meet the needs alignment with the social development goals (SDGs) by the United Nations, which have been drafted mainly for politicians and governments,” she said.

The fund focuses on eight of the 17 SDGs, of which some of the more ‘social’ ones include equal opportunities (such as education, gender and financial inclusion) and good health and well-being (which entails making healthcare more efficient and affordable).

“We use a purity level, which basically means we try to invest in a pure place or something close to pure place... When we invest in a company, we want it to be material, to have a high relevance level, and we call it this purity level,” she said.

For example, if the impact fund she looks after were to invest in a bank, she would also consider their strategy on financial inclusion on top of profitability.

“A lot of banks will offer lending to low income, but that is not material… Their strategy on financial inclusion is actually core to the investment case as well. Are they going to grow there? Yes or no? Are they actually making money with that? Or is it just charity? Yes or no? We don't want companies that do only charity. That doesn't really count for us. We want these companies to be solutions because of the products and services that they sell. So they need to be profitable,” she said.

Vontobel uses both proprietary and third-party data to measure impact but a common complaint among social impact investors have been the difficulties in measuring the value of social investing.

“It’s a mix of the underlying methodology that we need to build, which is still a work in progress and also that sort of the data piece that we will also continue to work on,” Tomomi Shimada, sustainable investing strategist at JP Morgan Asset Manaagement said.

CONTEXTUAL MEASUREMENTS

Tomomi Shimada,
JP Morgan AM

“Having said that, D&I (diversity and inclusion) for example is an area that we're beginning to see more data available and some outperformance,” she added. “I think it's also important to note that even for things like D&I which sounds like a universal theme, the outperformance is skewed to certain markets.”

Regional context and the legalities that come with it often come into play, which means that D&I metrics used need to be adapted to companies in different markets.

READ ALSO: The 'micro-moments' that set the tone for gender diversity

“So it's a bit more complex in a way, whereas for climate change, the level of decarbonisation that we need to look into is pretty much consistent universally. For social, it's not the case – how much paternity leave that a company needs, how that impacts the whole society, and how it actually helps to retain the right talent to the company – that is quite different depending on how much the society that company is operating in actually has the ability to provide things like childcare,” she explained.

However, the companies that do manage to accomplish goals that are not necessarily aligned with the societal expectations of the market they operate in will stand out, she said.

Similarly, “it doesn't really mean that companies with better sort of D&I policy or efforts are doing more. Even within developed markets and even within Europe, there are different nuances that we need to be mindful of,” she said.

BETTER REPORTING NEEDED

Aeisha Mastagni, Calstrs

Institutional investors have called for improved social disclosures, such as human capital resources.

“I think it's crazy that we live in 2022, and the only metric companies have to disclose about their human capital is how many employees they have,” Aeisha Mastagni, portfolio manager at the California State Teachers’ Retirement System (Calstrs), said earlier this month.

“Yet, every company I talk to tells me how important their employees are to their companies surviving and thriving. That’s the other piece that people try to put this into categories, but I think we need better disclosure on human capital,” she said.

In August 2020, the US Securities and Exchange Commission (SEC) required listed companies to disclose the number of employees they employed, but there is no consistency in other types of information disclosed, such as employee benefits or even where each employee is employed.

“We need to see a breakdown on diversity issues. We need to see metrics like turnover, because we know turnover cost companies money. We need to know not just what the salaries are for your employees, but how are you investing in your human capital? Because that's even more important, what kind of programs do you have to help your employees thrive? And we need that type of information, it needs to be consistent, it needs to be comparable,” Mastagni said. 

¬ Haymarket Media Limited. All rights reserved.
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