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Social issues take centre stage for ESG investors in 2022
2021 was a record year for Environmental, Social and Governance (ESG) focused investment, which reached an estimated $120 billion, more than double the $51 billion of 2020 and following on a tenfold increase from 2018 to 2020.
But until recently, ESG investors have focused on the environmental and governance aspects of company performance. The ever more stark evidence of climate change drew attention to environmental credentials, while increasing regulation around corporate governance made it both necessary and easy for investors to assess performance on this front.
Meanwhile, the ‘S’ of ESG was the overlooked middle letter, with performance on social issues subject to little scrutiny by investors and often limited to community activities that ticked the box. But now, the consensus is that 2022 is seeing social issues come to the fore of investors’ interests.
Sustainable investor Timur Tillyaev highlights that “awareness of social issues in the corporate world has soared in recent years, especially after the pandemic.”
The shift was identified by rating agency S&P back in 2020 when the Black Lives Matter movement galvanised millions of people to protest across the US, and consumers and shareholders alike began to hold corporates accountable for their stance – or lack of stated stance – on social issues.
Since then, the powerful combination of growing social activism, the effects of climate-related disasters and the global pandemic has turbocharged the drive to hold companies accountable for how they treat employees, suppliers, customers and the community.
Climate-related disasters worldwide have highlighted the disproportionate negative impact on developing nations and vulnerable communities. At COP26 in November 2021, more support was pledged to two funds that will bolster resilience to climate change and help with the global transition to a green economy.
And as the ‘E’ and ‘S’ of ESG are increasingly intertwined, companies understand that action to mitigate climate change can no longer be planned without considering social impacts. No surprise then that research firm Sustainable Fitch says that in 2022 "we expect to see growth in (sustainability-linked bonds) with a combination of green and social targets”.
The global pandemic increased the focus on the social policies of companies: firstly because of the variance between how different companies treated employees, customers and suppliers during a time of enormous upheaval, and secondly, because of how vulnerable communities and lower-paid workers (many of them at the frontline) were seen to bear the brunt.
Another outcome of the pandemic is that corporate accountability has travelled rapidly down the supply chain. Global supply chains' complex nature and social impact were suddenly exposed to society. With 60% of global emissions generated by supply chains, the environmental aspect has been under scrutiny for some time. Now, the social impact of supply chains is of equal concern to most stakeholders: so companies have to consider the reputational risk of social policies far down the chain.
Global consultancy Accenture envisages a sustainable supply chain, instrumental in “positive change that benefits both society and the planet”. Among three supply chain priorities for 2022, it proposes building trust by ‘mitigating environmental and societal impact’. Accenture offers clients digital technology that can increase supply chain transparency and a “human rights risk assessment tool” that can, it says, identify a higher risk of child labor within a multi-tier supply network.
And if new technology can help investors monitor societal impact, increased regulation and pending legislation will do the same.
For instance, in February 2022, the European Commission released its Report on Social Taxonomy, proposing legislation that will clarify definitions around social issues such as working conditions, diversity and supply chains. There is no doubt this will make it easier both for companies to measure and report their social performance and for investors to make evaluations based on their own social parameters.
As sustainable investor Timur Tillyaev puts it: “The European Union’s Social Taxonomy… is one example of a potential global standard for reporting on social impact and risks which would enhance transparency for investors. As the push for more clarity and standardisation in measuring social issues gathers force, companies have another reason to assess the social risks and report on them to stakeholders.”
These developments underscore the reality that in 2022, a business’s social performance is equal in importance to environmental mitigation and governance in the eyes of all stakeholders. Every business must now have a clear and effective plan right across the ESG spectrum, given the high reputational risk attached to all three elements.
Forbes recently stated: “For many people, ESG investing goes beyond a three-letter acronym to address how a company serves all its stakeholders: workers, communities, customers, shareholders and the environment.” And Mike Walters, CEO of USA Financial, agreed: “Identifying the impact, positive or negative, on these five stakeholders is what should become the measuring stick for quality ESG investing…it also can be used to identify the strength and sustainability of the company itself.”
Timur Tillyaev is of a similar mind, and he intertwines mitigating social risks with profitability. “With consciousness among investors and consumers growing, and regulation on standardisation of reporting imminent, mitigating social risks won’t just impact a company’s image, it will ensure they remain competitive and profitable in today’s business climate,” he said.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes