ESG continues to evolve. While investor interest in ESG has grown, so too have expectations of what and how ESG investments should be delivered, but typically the social or ‘S’ of ESG has lagged the environmental or ‘E’ in the context of investment decisions.
However, the pandemic prompted many to revaluate the way in which they consider ESG, with more attention being put on social issues, such as working conditions, fair pay and equality. Although the environment, especially tackling climate change, remains a focal point, Covid-19 appears to have sharpened the focus on social aspects.
One of the key challenges for fund managers in the aftermath of Covid-19 will be to step up their ESG offering and ensure they’re credibly addressing ESG matters, including social issues. Measuring the contribution to social themes is not always as straightforward as measuring companies’ environmental impact, yet its consideration should not subside as a result.
According to our latest research on attitudes to ESG among investors, the ‘S’ was recognised as more significant following the outbreak of the pandemic. In 2021, Berenberg conducted a survey among the investment community which had explored a number of topics relating to ESG – part of which was to better understand whether the pandemic had affected the relative importance of the ‘E’ ‘S’ and ‘G’ of ESG. In addition, the survey also gathered insights on investors’ views of the UN Sustainable Development Goals (SDGs) and the ESG products they see as being the most relevant to them in five years’ time.
Key findings
The 112 respondents, who were primarily from the UK and Germany, and included a mix of asset managers, family offices, charities and private investors, were asked which out of environmental, social or governmental issues had increased in importance due to the pandemic. Responses showed that 47% considered the social element of ESG to be the more significant after the outbreak of the pandemic, followed by 35% selecting environmental factors and only 18% choosing governance.
Covid-19 had prompted participants to think about these social factors more, due to heightened changes in inequality, consumption habits and employee wellbeing. Firstly on inequality, some countries’ lockdown restrictions increased awareness of existing disparities between individuals, as the better off or better connected, were more able to deal with the pressures of lockdown and of the pandemic.
Second, as Covid-19 has necessitated a number of protocols, it has brought a focus on consumption habits and accelerated underlying trends, which ultimately feed into investments such as digital payments and telehealth. In addition, services within the gig economy such as e-commerce and food delivery are now being used more often. These industries partly comprise of jobs with often challenging working conditions and workers are more at risk of contracting Covid-19.
Third, the pandemic boosted concerns for employee wellbeing, with greater attention being paid to companies’ attitudes towards and support for their employees during this critical time, in addition to existing issues such as the treatment of factory workers.
Respondents further highlighted that social factors need to be addressed in conjunction with environmental and governance factors in order to drive change.
The survey subsequently aimed to discern how this shift in attitudes to ESG might translate into investments. When participants were asked what would be the most relevant ESG product five years from now, actively managed ESG strategies emerged as a slight favourite, with 19% of respondents opting for them in preference to other products. This was followed by 17% choosing impact investments and 15% sustainability/SDG-linked bonds.
While the investment community as a whole is interested in a diverse range of products, this data may be as a result of actively managed strategies currently retaining greater flexibility to divest or engage with companies that may not meet their expectations regarding ESG factors.
However, it is not simply about avoiding or trying to remedy bad practices; social risks often demand relatively more attention. It is important to evaluate opportunities relating to social factors, given the impact on stakeholders and benefits a company can bring to society with their product and services. Engagement activities with companies are important in this to measure and drive change.
So what’s next?
The rising importance of social factors is a long overdue development in the pursuit of sustainability. Yet, incorporating and reporting on social factors comes with challenges, given that their measurement can lack clarity and consistency on both a company and investment process level, when compared to environmental factors.
Historically, social metrics have centred around employee-related indicators (eg the number of health and safety incidences), however, we need to look further afield for metrics that encompass broader, externality-based effects, such as social change. In the healthcare sector, for example, social change could include increasing the provision and accessibility of healthcare services to those in need.
These aspects should be defined on an industry-level to assess a company’s impact or evaluate its level of ambition. Further, once a framework is in place, benchmarks and historical comparisons can be used to monitor progress and performance alongside actively engaging with companies. As such, more consistent investment appraisal would enable investors and investees to collaborate further on how to address and enhance the ‘S’.
Bernd Deeken is portfolio manager of the Berenberg Sustainable World Equities fund
