BNP AM

The sustainable investor for a changing world

Why should companies place a value on social factors?

Poor diversity, lack of inclusion and inadequate safety measures in the workplace can sap social cohesion and exacerbate polarisation, both within society and in companies. Strained relationships between management and employees, child labour or corruption also feature on the list of environmental, social and governance (ESG) factors that should underpin sustainability-related investment decisions, writes Sindhu Janakiram, Equality Lead.  

Although social risks can be said to pose an increasing threat to societal stability and in turn the global economy, they often come second to environmental risks. While addressing social cohesion and societal polarisation can be seen as primarily the duty of governments, companies can and should play a role in addressing social risks.

There are both internal factors such as how an organisation acts on diversity and inclusion and external factors including how a company interacts with the community in which it operates. How does a company ensure its value chain is free from issues such as unsustainable production methods? These dynamic risks are all perceived as more difficult to measure.

Although different countries are pushing harder for companies to disclosure how they are addressing social risks, there is currently no global agreement on how this should work and the targets that should be set. Despite this, the UN Development Programme has highlighted that a just transition, where socioeconomic benefits are shared equally, is key to delivering both the Paris Agreement’s global climate goals and the UN Sustainable Development Goals (SDGs).

The lack of a standardised, reliable and quantitative method to measure social impacts is one of the main challenges that investors face when attempting to assess social risks. Companies differ in how they measure and report their social responsibility efforts, which leads to low-value data that cannot be compared or used in financial models.

Why should investors consider social indicators?

When trying to understand how a company is performing on social risks, investors rely on management reports and potentially government and non-profit databases, social media and news reports.

Many may take an ESG integration approach to analysing this data, while others may decide to exclude companies unaligned with their interests such as those linked to arms and tobacco. Impact investors take an alternative route by investing in companies with measurable social benefits such as the number of jobs created, or hours given to employee education. 

Companies doing less well than their peers face reputational risk, which could result in a financial loss for investors. Conversely, this may present an opportunity when investors are successful in actively engaging with companies to urge them to make positive changes.

Where this fails, shareholders have the power to propose and vote on resolutions that would require management to take the desired action. 

Why improving performance on social issues matters for returns

The UN Global Compact states that efforts to achieve social sustainability may give companies the potential to discover sources of innovation. These can help them develop new products and services, creating the ability to break into new markets, attract new business partners and allow them to reduce any conflict they have with the community.

Other benefits for companies that take social issues more seriously are better staff morale and motivation, which, in turn, can increase productivity and profitability.

They are also in a better position to increase customer retention and loyalty and build a positive brand recognition that sets them apart from competitors. 

Social issues and BNPP AM’s sustainability strategy

We view the energy transition, healthy ecosystems, and equality as preconditions for a more just and sustainable economy. Together, these ‘3Es’ are the focus of our Global Sustainability Strategy. Our Responsible Business Conduct policy uses frameworks including the UN Global Compact to exclude the worst actors on issues such as human rights, labour standards and anti-corruption. 

We track the exposure of companies in our universe to social themes such as health and safety, human capital management and community impact. We measure their performance on diversity efforts, employee turnover rates and employee fatality rates. We also track programmes and policies addressing issues such as freedom of association and supply chain monitoring. 

Accounting for social benefits not only has macro advantages for society, but can also help companies make better decisions that can improve their reputation, increase productivity and profitability and, for investors, enhance financial returns.

Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.