The ‘S’ of ESG (environmental, social and governance) has been harder for investors to define and quantify than ‘E’ and ‘G’ factors. Social issues are less tangible and there is less mature available data to show how they can impact company performance. Furthermore, their scope has increasingly widened over the past two decades as a reflection of the evolving business environment.
Besides human rights, labour issues, occupational health & safety and product safety and quality, ‘S’ factors have come to incorporate issues such as bribery and corruption, diversity, automation, data privacy and security, tax payments and access to finance, medicines and nutrition.
Enter 2020. The COVID-19 pandemic has brought unprecedent challenges to the global economy and profoundly impacted society and shaken our fundamental assumptions about the way we live. The crisis, which could erase development gains across many countries, has also painfully exposed existing and persisting social and economic inequalities. 2020 also saw public uprisings against racism following the death of George Floyd in the US, and as a result many companies were prompted to take a fresh look at the adequacy of their diversity policies.
Against this backdrop, social issues are now among the most pressing issues for companies globally. Their license to operate hinges more than ever on their ability to engage and manage their stakeholders – not just through the coronavirus crisis, but in general. It has also become progressively clearer that all elements of ESG – ‘S’ included – are fundamentally linked and of equal importance. The Just Transition concept, which calls for the protection of workers’ and communities’ livelihoods as we shift to a low-carbon economy, is a case in point.
This decade, we expect investors and data providers to overcome the challenges that had prevented the analysis and integration of social factors, and step up their engagement towards social issues, whilst carefully balancing interconnections with E and G issues. The Workforce Disclosure Initiative, which we have supported, is an example of how investor action can drive more consistent, reliable ‘S’ data.
Interested in learning more about investor engagement? We are celebrating 20 years of engagement this year and have mapped out engagement’s journey from a niche approach a couple of decades ago to its mainstream position today.
The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.