Shining a spotlight on the S in ESG
  • Marija Devic, Director |
  • Joe Crotty, Expert |
6 min read

It is difficult to overstate how quickly the Environmental agenda is moving. It seems like every month we have new regulation or legislation, every week there’s a huge new market development and every day another Net-Zero commitment from a large company.

These commitments are turning into real world action in the private sector (take a look at what’s happening in the Oil & Gas sector as an example with Exxon, Shell, Chevron or at BP’s targets). And that’s brilliant!

But the speed of change isn’t as quick in the Social space of ESG (Environmental, Social and Governance), even though social issues have been in the spotlight over the past year as a result of the pandemic and the Black Lives Matter protests (and going back further, the #MeToo movement).

How to accelerate the S in ESG

In our report, written with the International Regulatory Strategy Group, and working with International standard setters (including GRI, SASB) and other Institutional bodies (including UN PRI, OECD, IMP), focusing on the financial services sector, we have:

  • Identified key market trends that have brought social issues to the forefront and highlighted the growing impact of socially sustainable business
  • Discussed the challenges which are holding back progress, including the lack of consistency in the different methods for measuring, managing and reporting social impacts
  • Provided clarity on some leading measurement frameworks and principles and consider how these can be used to effect change
  • Made recommendations as to how public policy, companies and financial markets participants can all work to achieve better social standards.

Read the full report here (or just the Executive Summary, if you’re in a rush to get out and enjoy the sun!)

Below we’ve touched on a few of these key trends and challenges and the role of financial services in improving social standards.

Key market trends

Environmental as a force-multiplier of Social

There’s a clear link between environmental and social issues, as demonstrated by deforestation in the Amazon hurting local Indigenous communities , air pollution in cities causing asthma in children in poorer communities and climate change having more devastating consequences in lower-income countries with high rates of poverty and less developed infrastructure. The focus on climate change is raising the awareness of how social outcomes and environmental factors are closely coupled and we’re seeing social factors increasingly included within ESG decisions made by companies.

Increasing awareness and changing customer preferences

The impact of a firm’s environmental footprint on the way it is perceived by customers is clear, with a similar process underway in relation to social factors. Last year we saw executives resign from the Board of a large global miner following a decision to destroy a historic aboriginal site; and another miner taking large financial hits following the cancellation of projects due to community relations failures.

Asset managers are ‘walking their talk’ with some actively divesting from companies that do not meet their sustainability criteria. We also saw last year, a number of asset managers publicly announcing their decision to reduce their investments in a retailer whose response to allegations of modern slavery in their supply chain was “inadequate”, and increasingly active engagement on human rights.

The growth of the sustainable finance market

Ten months ago, total investment in ESG-oriented funds exceeded $1trillion for the first time on record, with assets of the signatories of the Principles of Responsible Investment exceeding $103 trillion as of 2020. Each signatory has committed to the six PRI principles, and are actively incorporating ESG into their investment analysis and decision-making processes. The green bond market is also thriving, with these debt issuances linked to programmes with explicit social benefits, from job support programmes to supporting vaccine rollout in less privileged communities.

Challenges

Lack of global consensus

The 2015 Paris Agreement sparked action towards a carbon neutral global economy, with over 100 countries have now pledged to get to net-zero emissions in the next 30 years. However there has been no comparable progress in the Social space. For starters, how do you achieve global progress on social issues when social issues can change the moment you step over a border?

In the Environmental space, decarbonisation can have significant social implications, as environmentally driven decisions may hit countries (and their communities) reliant on more polluting assets (e.g. Coal), which may incentivise pushing back on global efforts. This is just as likely in the social space, as economies reliant on the exploitation of social capital may oppose global approaches to addressing social issues.

Volume and inconsistency of frameworks and measurements

Often described as an alphabet soup, the volume of frameworks available to companies – often with different purposes and with varying coverage of social issues – creates a challenge for all stakeholders. Without common frameworks, it’s difficult for analysts to compare the performance of companies, to develop legally binding standards and for shareholders to hold companies to account.

Social Impact vs economic returns: Social factors are financially material now. The pro-active consideration of social risks leads to improved financial resilience. For example, health and safety procedures, whilst potentially incurring an initial cost to companies, can reduce the risk of a costly lawsuit.

Importantly, the 2020 RIAA benchmark report found that responsibly managed funds are outperforming traditional funds.

How financial services firms can drive social change

Financial services institutions should act as a catalyst for change by applying consistent standards across all jurisdictions in which they operate to elevate social standards across their own practices, their supply chains and practices they facilitate. Firms should use all levers available, including associated costs and availability of capital to differentiate between ‘good’ and ‘poor’ social performance, and divest where appropriate due to human rights violations, etc. Greater accountability and strengthened oversight are required for firms to uphold social principles and demonstrate stewardship, duty of care and positive social conduct beyond the jurisdiction in which their headquarters are located.

Achieving social goals will require collaboration, more impactful corporate investment and concerted efforts from both financial services industry and global policymakers. Powerful momentum must be built quickly. To lead this agenda, a reputable ambassador and flagbearer should be appointed in the social space to initially promote eradication of modern slavery as a lead social principle recommended in the report, and gradually expand focus on socially sustainable finance more broadly.

There is a real need to grow media presence and to elevate awareness of the social impact and consciousness for the social change. A series of upcoming high profile events this year – such as the G7 Summit in Cornwall; the G20 Summit in Rome; and COP26 in Glasgow, all provide tremendous opportunities for the international community to recognise socially sustainable finance as an urgent priority to spearhead social into its rightful place.

 

If you’d like to discuss the content of the report or how it may relate to your business, please reach out to us:

Joe Crotty

Marija Davic