DOES THE ‘S’ IN ESG HAVE 'MIDDLE CHILD' SYNDROME

Long overlooked in favour of its more obvious counterparts, last year saw investors turn a corner and beckon in ‘an era of social impact investing’, says MainStreet Partners’ Managing Director, Simone Gallo

If 2020 was the year ESG went mainstream, it could also be viewed as the year businesses came under unprecedented scrutiny for their social practices.

In Europe, over half of new fund flows last year went into ESG products. Total fund flows in 2020 hit €574.3bn – the second highest amount in the industry’s history – of which ESG products accounted for 50.46% (€289.7bn). 1

Yet for an abbreviation growing more ubiquitous by the day, the ‘S’ (or social) element of ESG investing has been stubbornly difficult to understand and historically challenging to get the measure of.

In this respect, it has been much like the fabled middle child – “excluded, ignored and often outright neglected”2 – largely skimmed over in favour of its environmental or governance siblings. Until last year that is.

As with much of 2020’s contemplation of the previously underappreciated, the catalyst was the Covid-19 pandemic. Suddenly in plain sight the true chasm between the haves and have nots; the questionable treatment and remuneration of people in key worker roles; the shortcuts certain companies seemed willing to take to protect their bottom line; and in some instances, the lack of provision of basic human rights.

Finally, questions were being asked about big business’ ‘licence to operate’: Were they contributing positively to society? Was it right for profit to be prized above all else?

The ‘S’ (or social) element of ESG investing has been stubbornly difficult to understand and historically challenging to get the measure of

IT’S A PEOPLE BUSINESS

Answers have not always been forthcoming. Part of the reason for this is the intangibility of what defines ‘social’ in the context of analysing the ESG credentials of a company.

Broadly, we are talking about the impact a business has on people. Those inside its organisation and those outside it: employees, customers, suppliers, neighbours, society at large and even future generations.

This complex web of stakeholders goes some way to explaining why the assessment and measurement of a company or fund’s societal impact can be so difficult.

Another challenge lies in deciding where the accountability should end. Some of the recent abuses of human rights and/ or examples of modern slavery have occurred not within the companies listed on stock exchanges, which attract the bulk of investment, but somewhere in their supply chains – perhaps two or three businesses removed. This does not make it excusable, but it presents a challenge when it comes to assessing the wider social impact of a business.

By comparison, the ‘E’ in ESG has in many ways been boiled down to a company, or an investment strategy’s commitment to tackling climate change and biodiversity issues, while the ‘G’ agenda is neatly covered through AGMs and reporting requirements of listed companies and asset management groups.

SOCIAL BONDS ENTER THE FRAY

Interestingly, while environmental impact may be easier to assess at a company, therefore stock level, the measurement of social impact seems to be proliferating through fixed income markets first.

Last year, bonds issued by companies seeking to use proceeds to counter the devastating effects of the pandemic had a distinct tilt towards social impact.

Standout examples include Unédic, the French unemployment insurance agency, whose five social bonds worth a total of €16 billion aimed to fund financial support and job retention schemes for workers. CADES, an administrative French state agency, has issued six Social Bonds recently also worth a total of €16bn.

These bonds, as well as the €1bn and €750mn bonds issued by Italy’s CDP, which supports sustainable development in Italy, all abided by the International Capital Market Association’s (ICMA) Social Bond Principles.

From an equity perspective, there are some commonalities within sectors. For a tech company it could be focusing on their talent management programme or assessing how they store and protect user data.

For a retailer it could centre around the act of paying suppliers quickly, treating them fairly, and on honouring orders even when business slows due to unexpected ‘acts of god’.

For a manufacturer, investors may look at staff turnover, health and safety practices and workers’ wages.

It goes without saying that in all businesses, regardless of sector, commitment to improving diversity, equality and inclusion is non-negotiable.

COMING OF AGE

Reinforcing socially responsible practices is not only ethically sound but should be financially beneficial over the long term.

Not only can poor social practices create risks (not least to a company’s reputation) and destroy the investment value of a business; good social practices can also create value by enhancing productivity of workforces or making products and services more attractive to customers.

We expect asset managers to focus on getting to grips with this unruly middle child over the next few years. While 2020 may be the year the ‘S’ came of age, after being thrust into the spotlight, it also revealed the amount of growing up the industry has to go through before it can honestly stand for E, S and G in investing.

1 Refinitiv Lipper, February 2021 2 Interpretation of ‘middle child syndrome’: https://www.healthline.com/health/ mental-health/middle-child-syndrome#:~:text=Middle%20child%20syndrome%20 is%20the,of%20being%20the%20middle%20child.

About Simone Gallo, Managing Director of MainStreet Partners

Simone Gallo, was head of intermediary distribution within the Business Development Team at Unigestion since July 2016. He began his career in 2001 at Schroders Investment Management. In 2003 he joined Goldman Sachs Asset Management and became Head of Global Partners focusing on sales relationships across Global accounts in EMEA. In 2010 Simone joined Pictet Asset Management and became Senior Vice President in the Global Clients Group. At Pictet he worked on Global accounts and on the long only and Alternatives Intermediary Business in the USA, focusing on sub-advisory, banks, asset managers and insurance groups.

Simone holds a Master degree “summa cum laude” in Business and Economics from La Sapienza University of Rome, Italy.