Since the onset of the Covid crisis, social concerns have been elevated in the sustainable investment debate. Investors are increasingly vocal about human capital management issues, however there are frustrations that a lack of tangible data and limited evidence about how social considerations are linked to financial outcomes are limiting progress to more comprehensive inclusion in portfolio decision-making.
Despite these challenges, investors may be at the same tipping point in the social debate that climate change was at five years ago. Many will remember it was acknowledged as a systemic risk, yet when discussed in terms of portfolio management, it was largely viewed as an externality that had failed to manifest itself in financial returns. Are we about to see the transformation of the social dimension of ESG into a transformative economic force, too?
The Covid-crisis reminds us that all businesses are de factosocial enterprises. Institutional investor surveys, such as the Edelman Corporate Trust Barometer 2020 report, highlight the increased prominence of social issues. These finding are echoed in the recent Pension Policy Institute report where 75% of pension schemes surveyed expected members to become more concerned about social considerations in investment decisions.
The rising awareness of social matters for individual savers reflects their immediacy through their own experiences and within in their communities. The increased focus on stewardship among pension funds and wealth managers is a mechanism for elevating these concerns. It provides a voice to a wider range of stakeholders and makes all investors potential activists.
The broad scope and qualitative nature of social factors can make it hard to measure impact and understand how to implement the management of these risks effectively. The growing awareness of the topic is also increasing the range of factors being considered, adding to challenge. Yet, the complexities of a topic matter little if there is a swelling clamour for addressing systemic challenges.
Institutional investors are also increasingly using their voice on social matters. The absence of data is being filled by engagement activities that call for greater disclosure and clear goals for achieving inclusive and diverse workforces. Strong governance is needed to translate corporate rhetoric into tangible action. Here, shareholders are calling for stronger evidence of intent, starting at the board and executive level, and exercising their voting power to underscore the imperative for change.
Future of human capital
The rapid recovery from the Covid-induced recession is revealing skill shortages and changing how companies organise human capital management. In many industries, the pattern of work will never be the same again. Covid has demonstrated that flexibility can bring productivity benefits, as well as access to a more diverse talent pool.
The arrival of children in many a video conference call has humanised the work experience for many and reminded us that there is a life beyond the office. The pandemic has also raised awareness of mental illness as the downside of those productivity gains. There is now greater appreciation that mental wellbeing needs to be managed in the same way as physical wellbeing.
Beyond direct corporate activities, issues in supply chains, such as forced labour, have come increasingly to prominence. Scrutiny of supply chains is notoriously complex but the internet and social media has allowed for issues to be rapidly revealed. While traditional reported social data remains elusive, other forms of information can be even more powerful.
In addition, collaborative action is an important element of achieving greater corporate accountability. Advocacy groups, such as the Workforce Disclosure Initiative, have played a central role in driving improved transparency in all forms of human capital management and filling the data gap.
Looking five years ahead, the growing awareness of the systemic nature of social issues should ensure that they get the prominence that climate change receives today. It is an opportunity for business to show leadership and innovation, especially in a world where so much of government policy has been outsourced to the private sector.
Shareholder activism needs to be further built upon and turned into engagement that is focused on a forward-looking perspective within a multi-stakeholder world. The data will follow and should be no excuse for inaction. Behaviour is visible and shapes outcomes more than reporting will ever do, and the prescient corporation will see that effective stakeholder management is about ensuring future relevance.
Andrew Parry is head of sustainable investment at Newton Investment Management and an ESG Clarity editorial panellist.