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The importance of measuring social factors – the ‘S’ in ESG – is rising up the sustainability agenda, Robeco’s recent experience shows.
Robeco routinely integrates environmental, social and governance factors in its investment processes, and votes on ESG issues that we feel are important at company shareholder meetings. In the past, the environmental and governance factors have been high profile, due to concerns over climate change and boardroom behavior respectively.
Now, the social factor is increasing in prominence. Looking at what kind of financially material ESG issues are addressed in investment cases of our financial analysts, we find that eight out of the 15 most mentioned issues are actually social factors, as shown in the graph below. These range from human capital management to occupational health and safety and privacy protection.
This forms part of a wider acceptance by companies and investors that ESG factors are financially material to performance. Virtually all companies already give a high priority to occupational health and safety, for example, as this topic routinely comes before profit; the safety of employees remains paramount. Aside from the human consequences of an unsafe working environment, the premise that good management of your staff leads to lower staff turnover and enables a company to attract better-qualified people is widely understood as also leading to lower costs, and thus higher margins.
Many of the other socially relevant topics like privacy and data security, product quality and food safety management often influence a company’s value through reputation. Having good policies and track records on these issues gives financial analysts the comfort that risks are lower when investing in these names, and is integrated into our investment processes.
Investors who take the time to do this may find they also then have more confidence in management quality. Quantifying it can be more difficult, however. To help investors with this topic, the UNPRI published a report in May 2017 entitled ‘ESG integration: How are social issues influencing investment decisions?’ using several case studies to strengthen their arguments.
The fact that social issues are very relevant for companies was also confirmed by the voting season this year. We voted on 195 socially related shareholder proposals, compared to 85 on the environment.
In fact, of the many ways in which shareholders can influence the strategic direction of the companies in which they invest, filing and co-filing shareholder proposals is perhaps the most impactful. We will therefore file and co-file shareholder proposals in a limited number of cases where we believe they will have strong material impact on long-term shareholder value creation. At the 2017 shareholder meeting of McDonald's Corporation, for example, we co-filed a proposal requesting the company to adopt a policy regarding use of antibiotics by its meat suppliers.
We also analyze all shareholder proposals on case-by-case basis, and assess the impact on the company’s business from a responsible shareholder perspective. As shareholder proposals on environmental issues tend to relate in some way or other to climate change, their materiality is immediately obvious.
However, the more fragmented nature of proposals on social issues makes their materiality less instantly clear. We tend to find that these proposals are often less well constructed, more difficult to quantify and assess the impact on value for the company, and more difficult to execute for the company than are proposals on the environment. That is why we vote in favor of them in about 55% of the cases (as opposed to 83% of cases on the environment).
So, to me, it is clear that social issues can be extremely relevant to investors, though we need to do more research into making the financial relevance and context clearer. So let’s not forget the S in ESG.
This is our monthly column on sustainability investing by Head of ESG integration Masja Zandbergen.