The dawn of this millennium was a dark time for Argentina. The country, once one of the most prosperous in Latin America, was in the midst of a three-year recession which saw the economy shrink by 28%. The situation was so dire that an early attempt to print money was thwarted by the government not having enough cash to buy the paper to print it on.
That problem was solved, but it did not feed through to those who were lucky enough to have kept their jobs. One news report showed a shoe factory worker buying groceries with a pair of trainers he had received in lieu of his salary.
That period in Argentina’s history has been labelled “The Great Depression”. Yet a look at the country today shows that the recession of 1999 to 2002 should be re-classified. With inflation at 64% and bond yields reaching an eyewatering 70%, the country is on the verge of another default and another recession.
There are signs that this downturn is even harsher on its citizens than the last one. A third of the population suffers from a shortage of affordable food, the United Nations (UN) says, and some people are scavenging in landfill to feed their families.
Argentina is not an isolated case when it comes to problems accessing food as economies re-open following the pandemic. There have been protests over the rising cost of food and energy as well as access to medicine in Cuba, Iran, Indonesia, Peru, Pakistan and Tunisia. But in Sri Lanka, anger over rising poverty, and claims that corruption exacerbated the situation, led to the president fleeing the country after protestors invaded his house.
Such actions are unsurprising, with the UN claiming that 150 million people globally have regularly missed meals since the outbreak of Covid. With little sign that the price of food and energy will fall in the short term, the number of hungry mouths across the world looks set to rise.
And this is the next phase in the evolution of the social pillar of ESG. Initially, the S was about respecting indigenous people and their communities. But in recent years the focus has switched to diversity, inclusion and human rights. Now, it has been expanded to include income inequality, accessing education and healthcare, adequate housing and creating the infrastructure that connects urban and rural areas.
“The industry is evolving to another way of framing the S. It has taken many forms and is not only about diversity,” says Delphine Riou, an ESG analyst an Inclusive Growth lead at BNP Paribas Asset Management.
A broad theme
The huge rises in food and energy prices are a sign that the world’s infrastructure and supply chains need to be more efficient. Investors can play a role here by pushing companies to change their business models and invest in technologies that could produce better social outcomes. “We have a duty to deliver long-term sustainable returns to our clients,” Riou says, “so we encourage companies to shift towards better social practices.”
Yet improving their social profile has traditionally been a lower priority for corporates and sovereigns compared to environmental issues. Changes to our climate are rightly seen as one of the biggest threats to humankind, so the social element of ESG has never been at the top of the agenda. But there could be another reason for this.
“The S is a broad theme,” Riou says. “One of the major challenges is the huge range of indicators it covers.” Climate change is a global issue, so a tonne of carbon in the UK is a tonne of carbon in Australia. But measuring social issues can vary from country to country. “The S is difficult to capture,” Riou says. “The minimum wage is different in England than in France, so you have to put a contextual lens on everything.”
Issues which fall within the social pillar of ESG are getting more press coverage, which is stimulating debate, but the environmental element continuing to dominate sustainable strategies is frustrating for Maria Ortino, a global ESG manager at Legal & General Investment Management (LGIM). “That is not to say climate change is not important, but the S pillar is just as important,” she says.
Yet attitudes towards the social element of sustainable investing are changing, which is down to Covid. Riou says that BNP Paribas research discovered that investors were more aware of social issues following the first lockdown. “This was due to several things, such as people losing their jobs overnight.”
“It also made people realise that there are imbalances in society, highlighting inequalities,” she adds.
Yet this could cause conflict with investors needing to generate a certain return to pay members pensions and drive better social outcomes. Should they accept dividends from oil majors when some households are having to choose between eating and heating?
Don’t forget the G
BNP Paribas AM has been active in the social thematic area for more than 10 years with Riou putting such aspects on par with energy transition and environment issues. “We have a conviction that companies nurturing social indicators will perform better over the medium to long term,” she says.
“If you nurture the diversity in your company it will break group thinking and better reflect consumer needs. That is the link between the S and financial performance,” Riou adds.
And there can be no link between the S and financial performance without the G. LGIM has focused on diversity for more than a decade. Employee relationships and taking care of supply chains were woven into conversations with company directors. “We might have included that under the G back then, but it is now taking more prominence under the S,” Ortino says.
“But the G is important,” she adds. “You cannot have a good E or S without a good foundation of governance. That takes it back to composition of the board and its oversight of the company. If the foundation is not good, the work with the E and the S will fail. “The inter-connectedness of the E, S and G, with the G being the grounding, is essential,” she adds.
Healthy concerns
With so many social issues making the headlines, investors need to ensure that they are not following what could be a short-term fashion. “The focus has been on diversity for a long time, but we are now moving to specific health issues, as well as income inequality,” Ortino says. “We need to be focused on several pillars at once and avoid the flavour of the month issue.
“These are long-term trends for long-term investment horizons,” Ortino says. “We are still engaging on diversity after more than 10 years. “This is a multi-year issue, so I hope we are not putting an issue on the table that pushes other ones out,” she adds.
Another multi-year issue is health, the importance of which was highlighted by the pandemic. Growing anti-microbial resistance is a serious issue. People could die from grazing their knee, unless new antibiotics are discovered. Ortino warns against underestimating the severity of this problem. “Anti-microbial resistance is climate change and the Covid pandemic combined,” she says. “It is a long-term issue, a systemic risk and will impact multiple sectors.”
Managing this risk is not just about funding pharmaceuticals Anti-microbial resistance is climate change and the Covid pandemic combined. “Investors must use a two-pronged approach,” Ortino says.“We must not just engage with our companies but also with regional, national and supranational policymakers.
And it also needs to be done collaboratively with other investors. We cannot do this just on our own.” It is said that prevention is better than cure, so looking at how food and beverage companies are reformulating their products, how they market them and who they are lobbying is important.
“It goes back to that two-pronged approach of engaging with policymakers, and our investee holdings,” Ortino says. In the E, the material risk is not questioned, especially when it comes to climate change. Companies are responding to that through the information they are disclosing.
“Anti-microbial resistance is where climate change was five to 10 years ago, where it is still challenged on if it is a material risk for investors,” Ortino says. “The risk is real. If we don’t do something, we are going to be in a critical situation.”
Dirty work
Yet there is one barrier investors are working to overcome when trying to produce better social outcomes: data, or the lack of it. “Gender data has significantly improved over the years following investor engagement. Similarly for ethnicity, even if we are not there yet. But for everything else under the S pillar it is difficult to get quantifiable, comparable and verifiable data,” Ortino says. “It is easier for the E because we have, for example, scope 1, 2 and 3 emissions data.”
This is also a concern for Riou. “We look at gender diversity, but we would like to enlarge the theme to ethnicity and disability. However, iIn several parts of Europe, it is not legal for companies to report on the ethnicity of its workforce,” she says. “There is no one-stop-shop for data from a social angle,” Riou adds. “Different data providers, provide different information.
It requires tremendous work from our quant research team to make indicators comparable,” she adds. This is a symptom of social investing being in its infancy. “Compared to ‘G‘, the ‘S’ is in much more of an initial phase, Ortino says. “As investors, it is important that we do not hide behind a lack of verifiable data. We must get our hands dirty trying to identify the data we need and who can we push to provide it.”
What’s next?
So the social pillar of ESG is evolving to encompass new trends and is becoming more prominent. It has evolved since sociallyresponsible investing became a popular term in the 1990s, and it will continue to consider new issues. But what will investors be discussing in corporate boardrooms in the next 10 years? Under the S pillar, Ortino and the LGIM team will be focusing on anti-microbial resistance, nutrition, human rights, income inequality and diversity.
“I would certainly hope that we will have made progress on what we are looking at today. “I hope that anti-microbial resistance is part of company analysis for investors,” she adds.
Yet Ortino remains open minded that new challenges will arrive for socially-minded investors to consider. “We must also be open to challenges that we have not seen yet, while avoiding the flavour of the month,” she says.
Riou will also concentrate on anything related to the minimum wage. “Inequality of income is widening across Europe.” The rising cost of energy which, Riou says, will increase the cost of living. The digital transition will also be on her radar. “There will be a shift as jobs disappear because of artificial intelligence. This will be another critical issue.
“These will drive major changes in company business models, and the first to be affected will be the employee,” she adds. “When we speak to companies, we want to know if, due to energy and digital transitions, they have an acute understanding of the skills needed in 10 years’ time.”
While the E in ESG is about the planet, the S concerns the people living on it. These are difficult times and they will, it seems, get worse before they get better. Investors have a role to play here by engaging with the companies in their portfolio to eradicate hunger, generate cheaper clean energy and provide access to healthcare.
Fighting climate change is important, but we should not underestimate the positive impact that a sound social investment policy can have. Just look at Argentina.
Comments