QUANTIFYING THE ‘S’ IN ESG

The social pillar of ESG encompasses the way companies interact with their employees and the communities they operate in and, admittedly, these factors may be more difficult to assess than environmental or governance issues That is perhaps why it is often overlooked

However, we believe they are measurable To assess potential social risk factors for the companies in which we invest we have developed a systematic, data-driven ESG scoring tool We consider ESG on a holistic level and, importantly, cover all three components equally We can, however, take a deeper dive into any of the underlying metrics to better understand the driving forces behind them

Our starting point involved consulting ESG industry experts and leading industry bodies such as the UN Principles for Responsible Investing to determine local and international industry best practices for the measurement of ESG factors These engagements, supplemented with a thorough research process, produced the factors which we consider to be measurable and material in determining ESG risks and opportunities.

We subsequently developed an ESG risk-analysis tool that evaluates and scores listed companies based on their ESG risks and opportunities and we rely on these scores as a key input into our day-to-day decision-making process. We employ more than 60 metrics to gain insights into how proficiently the underlying counterparties are in incorporating ESG practices into their business

This ESG scorecard consists of the three pillars, which are weighted on a sectorspecific basis to account for industry materiality and company size biases For example, companies in the consumer goods sector are potentially more exposed to social issues, such as child labour

When determining the methodology for the overall ESG score for this sector, we would give the social pillar a higher weighting than the environmental or governance pillar, to account for its significance The derived scores for the various counters have been back-tested

The scorecard uses data from integrated financial reports, collected by a third-party service provider, and is supplemented by the experience and insights of our investment team

This data goes back to 2008, which allows us to do a cross-sectional assessment of each company ’ s ESG performance as well its historical performance against its sector peers We are thus able to track the improvement, or deterioration, in a company ’ s social factors over time, see industry-wide trends, and identify the leaders and laggards in relation to their peers at a sector level

One of the most prevalent challenges to our process is data constraints especially the disclosure of social metrics, which drastically lags developed market peers

The social component of our ESG score considers three main subfactors employee diversity and investment, safety and policies and these, in turn, comprise more than 20 underlying metrics The underlying metrics look at information such as percentage of women employees, percentage of minority employees, work accidents and fatalities, and company policies on the gender pay gap, ethics and child labour, to name a few