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Putting the ‘S’ in ESG

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Putting the ‘S’ in ESG

As Eimear Toomey, head of responsible investment at Quilter Investors, explains, numerous factors have propelled the rise in prominence of responsible investment and ESG (environmental, social and governance) related issues in recent years, but the areas that have received most focus within the ESG domain have varied over time.

Broadly speaking, the key driving forces behind the increased adoption of responsible investment include international sustainability-related initiatives and regulation; evolving macro trends; increased public awareness and pressure; and an increasing acceptance that meaningfully incorporating ESG factors may improve longer-term risk-adjusted financial performance.

Until last year, when looking more closely at which specific ESG issues investors were prioritising – it was clear from industry surveys that the focus was on environmental and governance issues rather than social issues, particularly where they related directly to the investment process.

1 million followers
When Attenborough joined Instagram following the release of his film ‘A Life on Our Planet’, he broke the record for the fastest profile to reach 1 million followers in just 4 hours and 44 minutes.

Within the moniker of ESG, it is therefore unsurprising that ‘governance’  is generally considered the most understood concept on the basis that well-run businesses from a corporate governance perspective tend to yield more sustainable returns over the longer term.

There are numerous national stewardship codes in operation that are well established and something many investment managers engaged in before ESG became a bigger focus. Of these, the UK’s Financial Reporting Council (FRC) Stewardship Code has been considered as industry leading.

The environment has also become a more mainstream topic in the past few years, as the growing risk of climate change has been highlighted by public figures such as the teenage activist Greta Thunberg and the natural historian David Attenborough. Both figures enjoy huge global followings.

Indeed, when Attenborough joined Instagram following the release of his film ‘A Life on Our Planet’, he broke the record for the fastest profile to reach 1 million followers (in just 4 hours and 44 minutes).

Against this backdrop, the connection between climate change and how we invest has become more scrutinised, while the focus of much of the regulatory and international initiatives in recent years has been on climate-specific investment interventions.

 

Taking centre stage

Meanwhile, the social factor had been somewhat overlooked. Although ‘social’ issues such as human rights abuses and gender equality, among others, have garnered some attention from pockets of investors – it hasn’t always had the same focus from an investment perspective as governance and the environment.

Part of this could be the nebulous term of ‘social’ that can range from human rights, workplace health and safety and product quality to data security and supply-chain issues.

However, the impact of the coronavirus in 2020 changed all that. It’s clear that ‘social’ issues are now on the minds of investment managers, clients and the public more generally. The effects of furlough schemes and lockdowns means companies are being scrutinised on how they treat their workforces more fully than ever before.

For example, fund manager CCLA plans to launch the CCLA Mental Health Benchmark in the first half of this year to help assess how companies are managing the mental health of their employees – an area not previously considered investment-related.

As we move further into 2021, it’s likely to be a broader range of ESG issues that we as investors will need to consider seriously, both in the context of long-term investment returns and the impact that these sustainability risks can have on a prosperous society.

Social factors will be more prominent, as it has become abundantly clear that investors are placing more emphasis on the impact that these have on stakeholders and broader society.

A window into ESG in the financial services industry

A recent article by Neilan, Reilly and Fitzpatrick of FTI Consulting, published by the Harvard Law School Forum on Corporate Governance delved into how the focus on ESG factors had firmly shifted from the margin to the mainstream.

They noted: “As we continued to engage with companies and investors during the course of 2019 – and we assessed the corporate reputation challenges being encountered by many companies – it became increasingly clear that factors which fall within the ‘S’ of ESG are as common as (and for some companies more so than) those within ‘E’ and ‘G’ in contributing to business risk and, in turn, causing lasting damage to a company’s reputation.

“Factors which fall within the ‘S’ – frequently customer or product quality issues, data security, industrial relations or supply-chain issues – commonly impact businesses and ‘destroy value’. This prompted us to reconsider if ‘social’ was the correct word for the ‘S’ in ESG and whether ‘stakeholder’ might be more appropriate. Indeed, the use of the term ‘social’ may have contributed to a failure to conceptualise the ‘S’ in ESG, leading to an absence of focus and measurement from the market.”

Source: Time to Rethink the S in ESG, Jonathan Neilan, Peter Reilly, and Glenn Fitzpatrick, FTI Consulting, June 2020

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Eimear Toomey

Head of Responsible Investment

Eimear is head of responsible investment at Quilter Investors. She joined Quilter Investors in April 2020 from Sustainalytics, a leading ESG research and data provider, where she oversaw client relations in EMEA. At Sustainalytics, her role included working with asset management clients to share her expertise, as well as new product development. As a member of the Sustainalytics thought leadership committee, she also worked to help identify emerging themes and trends from an ESG perspective. Additionally, Eimear led the thinking and development of their response to key regulatory and policy developments such as the EU High Level Expert group (HLEG) and on the Sustainability Finance Disclosures Regulation (SFDR.

Eimear has more than 15 years of experience in the investment industry. She started her career at Fidelity Investments before joining Merrill Lynch in 2006, where she worked as a portfolio manager specialising in equities and led the research and development of its sustainable and impact-focused investment solutions. In 2011 she joined Rothschild Wealth Management as a portfolio manager and equity research analyst, with a particular focus on charity clients and was heavily involved in leading the business unit’s involvement in Rothschild’s corporate sustainability programme. She joined Sustainalytics following her participation in the On Purpose leadership programme in sustainable enterprise and social impact investing.

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