More investors are using environmental, social, and governance (ESG) factors to assess companies’ operations. But what are the social considerations investors include in their evaluations—and how much consensus is there?
Social Impact Issues
In general, investors’ social considerations relate to how a company manages relationships with employees, suppliers, customers, and the communities where it operates. But with no standard definition, the list of potential social impact criteria is long. One recent Vanguard analysis listed 18 possibilities, from adequate housing and animal testing to obesity and opioid use.
Still, there are preferences. Among money managers, Vanguard found that the top areas include tobacco, conflict risk, human rights transparency, and anti-corruption. Overall, the incorporation of social factors into ESG investing increased by 39% from 2016 to 2018.
To make a social impact, investors are turning to a range of strategies. Until recently, the emphasis has been on equity markets, where information on public companies is most easily accessed. For example, at least 30 publicly traded products focused on gender equity were introduced between 2013 and 2018, with a total value of $2.4 billion in 2018, according to Veris Wealth Partners.
At the same time, more alternatives are opening up. In recent years, private equity funds such as the $1.2 billion KKR Global Impact, the $390 million Bain Capital Double Impact, and the $2 billion Rise fund have launched. They focus on health, wellness, and expanding opportunities in distressed communities, among other areas.
Investors willing to participate in a more experimental investment vehicle can look into social impact bonds. These are contracts in which a government agency arranges with a social service provider to deliver a specific social outcome such as reducing recidivism. Investors are paid a return only if this social outcome target is reached.
Beyond specific investments, investors can also influence social outcomes by engaging directly with a company’s board and management or casting votes on relevant shareholder resolutions. Proxy voting often taps the zeitgeist. For example, there has been a rise in resolutions on human rights issues like the treatment of immigrants and the criminal justice system as well as the impact of electronic media on public discourse.
For investors, the biggest challenge may be measuring social impact. An analysis of 12 ESG frameworks by the NYU Stern Center for Business and Human Rights recently found many gaps, including confusion caused by a lack of consistent standards. According to the report, “Social measurement evaluates what is most convenient, not what is most meaningful.”
Still, as interest in ESG investing continues to grow, greater standardization is likely to follow.