Rising Importance of ‘S’ in ESG for Private Capital

Rising Importance of ‘S’ in ESG for Private Capital

Social issues are now among the most pressing concerns globally, be it challenges in poor and vulnerable households, unemployment, lack of support and incentives for companies to retain their staff, or hindrance in liquidity provisions to small and medium businesses that employ millions. Now, at the forefront, these issues are not just values-based but have become material business ones, and the COVID crisis has only elevated this theme.

“ESG integration becomes imperative in the capital markets as ‘S’ factors can help investors to understand how employers deal with contract workers, whether they have a strong work from home policy, or if they cut employees loose or pay them during disasters.”

The focus of non-financial factors, like ESG, has historically been on governance and environmental metrics, but COVID-19 has highlighted the importance of social risk management for a business’ social license to operate along with the fact that it needs to be integrated into its wider business strategy. There has been a huge support to focus attention on how organisations treat their employees, customers, and those in their supply chains, shifting social considerations from the margin to the mainstream.

ESG integration becomes imperative in the capital markets as ‘S’ factors can help investors to understand how employers deal with contract workers, whether they have a strong work from home policy, or if they cut employees loose or pay them during disasters. Companies are also understanding that making rash decisions that negatively affect employees, customers or communities will result in long-term damage to their reputations in the market.

The pandemic has revealed the fault lines in our vulnerable and fragile supply chains, and therefore, apart from customers, employees, and communities, even the suppliers matter. It has become especially important to find the right balance between efficiency and resilience, and address the risks at all tiers of the supply chain. For example, Global cosmetics giant L’Oreal promised to pay its small-and-medium-sized suppliers on the first available day, rather than delaying payments.

“The issue of social resilience has come to the fore, and it can be expected that private capital flows towards social issues will increase as long as returns are maintained.”

To deal with this unthinkable crisis, companies have adopted creative solutions, including using telecom technologies for all corporate meetings and interactions, just so that the health and wellbeing of their people is not compromised in this crisis. Companies whose models were already set up for workforce & business continuity in an emergency and those who embraced a changing culture and smart working practices have fared better in this environment. In the first quarter of 2020, companies of the Russell 1000 Index that ranked within the top quintile on metrics such as worker treatment, customer satisfaction, and community support, outperformed their peers by 4.6%.

In the global investment discourse, social factors are now a focal point of investment approach for 70% of investors, compared to 50% before the crisis. Impact investing, a new investment avenue that combines investing with social objectives has received increased attention and growing relevance, and models built around pay-for-success and outcome-funding can be even more instrumental, going ahead. In all, the issue of social resilience has come to the fore, and it can be expected that private capital flows towards social issues will increase as long as returns are maintained.

Evidences such as those aforementioned and increasing pressures from all directions to manage stakeholders’ expectations beyond the shareholders’ will ensure that ample emphasis is laid on the ‘S’ of ESG and that well-managed businesses are redefined to accommodate more effectively the social aspect of sustainable investing.

Bibliography

https://www.globalcapital.com/article/b1ndnc1ljygmjy/covid-19-highlights-the-s-in-esg

https://www.gsam.com/content/gsam/us/en/individual/market-insights/gsam-connect/2020/COVID-19_and_the_Rising_Importance_of_the_S_in_ESG.html

https://www.cdcgroup.com/en/news-insight/insight/articles/reinforcing-the-s-in-esg-during-covid-19-reflections-from-our-investees/

https://corpgov.law.harvard.edu/2020/08/14/the-other-s-in-esg-building-a-sustainable-and-resilient-supply-chain/#:~:text=For%20companies%20that%20have%20stumbled,tiers%20of%20the%20supply%20chain

https://www.internationalinvestment.net/opinion/4017608/comment-covid-19-brought-esg-focus

https://www.invesco.com/emea/en/invesco-insights/insights/covid-19-why-the-s-in-esg-matters.html