What are the Current Key Social Factors that Drive ESG Investments?

 

Photo courtesy of Pexels, for illustration purposes only

 

Introduction

Investments in the spectrum of Environmental, Social and Governance (ESG) have drawn assets in an increasing projection each year. Even during the beginning of the impact of COVID-19 pandemic, we had seen sustainable fund flows were resilient. In Quarter 1 2020, the sustainable fund had amounted to over USD 45 billion versus to outflow of over USD 380 billion for the global fund universe.

ESG funds saw loss in capitals during market selloff, just like many other non-ESG funds, however in comparison, ESG funds did not suffer loss as severe in the broader market where they had shown better performance on a relative basis.  

Similar with for index funds, we had seen over the majority of sustainable index funds ranging from developed and emerging market stocks had outperformed the comparable conventional index fund.

Similar outcomes were shown during Quarter 2 2020 where most sustainable funds outperformed conventional index funds covering the same market landscape.

 

Social Matters are on the Rise

One of the major issues due to the pandemic was it has caused and will continue to cause millions of people to be left unemployed. Apart from job security, the concerns on workplace matters have begun to be scrutinised further from the public and authorities. This includes issues on health and safety, work flexibilities and employee management.

The investors are also getting more serious on social issues. According to a survey on ESG, the interest on social issues had increased 20 percentage points since the start of COVID-19. To add, almost 80% of the survey respondents in the opinion that social considerations as contributing to positive impact on long-term investment performance as well as risk management.

Many corporate leaders nowadays are aware that more and more young investors have the preference to focus on ESG investing and the trend is also seen in female investors. Most financial institutions worldwide also observe this trend and have constantly notice the urgent need to equip the institutions with social sustainability emphasis as clients have started to ask questions on the matter.

 

Lack of Social Metrices

In comparison to the Environmental and Governance aspects, the Social aspect and the inadequacy of its metrices have not been given the same amount of attention. This resulted in the ineffectiveness for financial advisors to advise and guide clients to create portfolios to include a wide range of material social considerations.

Many reporting companies disclose a lot of its Environmental and Governance data, but Social data is still in the area where it requires more regulations in driving its more robust publications particularly for data that may affect the company’s reputation such as turnover rate.

Internally, there should be greater awareness of social issues that could potentially drive the initiatives to identify the relevant metrics to measure and report on, starting from the basic to a more complex sets of social data.

However, the unavailability of certain social data should not be the considered as the failure of a company to manage its social issues well. Some may already have sustainability-related mandates to support employees as well as having robust policies on labour rights, diversity and health and safety.

 

Conclusion

There is the current and ongoing trend of investors seeking long-term ESG investments, including from the Social aspect as these investors are driven by their own values while gaining long-term profit. However, more and more investors are demanding better avenue and data to attest the value creation from investments that consider Social material issues.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation