Investing is increasingly defined by more than just financial returns. The changing political and cultural landscape is forcing fund groups to engage more closely than ever with the companies they invest in, to ensure their money creates a positive impact on society and the world at large.
According to a 2020 survey by the US Forum for Sustainable and Responsible Investment, socially responsible investing and impact investing accounted for more than $1 out of every $3 under professional management in the US. This equates to more than $17tn in assets,an increase of 42% from 2018.
This increase has been driven by several factors, with the Black Lives Matter protests and the Covid-19 pandemic highlighting a range of social issues from poverty to racial justice.Investors say that while these are not necessarily new themes, the events oft he last couple of years have put them at the forefront of clients’ minds,particularly institutional clients.
‘The issue of diversity has really resonated with clients in the US,’ said Maria Drew, director of research for responsible investing at T Rowe Price.
‘We’ve seen our clients asking us a lot more about the diversity statistics of our portfolios, how we’re positioned, and how we’re taking that into account in our investment process.’
Similar trends have been evident in Latin America, where interest in responsible investing has intensified because the pandemic spotlighted inequality.
Many fund groups in the region have re-evaluated their organizational strategies and operations to mitigate the effects of the current crisis, as well enabling countries to recover from the pandemic in a way that protects human resources. By the end of 2020, the UN Principles for Responsible Investment had gained more than 70 signatories from Latin America.
‘Investors and clients in the region are more interested in responsible and sustainable investment due to rising awareness of the local and global challenges,’ said Rosmary Lozano, ESG senior associate at Credicorp Capital Asset Management.
‘Unemployment, informality, social inequality, high levels of indebtedness, and poor healthcare and education infrastructure were already vulnerable topics for large groups in the region,and that has been exacerbated by Covid-19,’ she said.
Lozano said this has led to increased issuance of social and sustainability bonds, as well as investors turning their attention to companies that operate in areas with little or no government presence.
‘Investors and clients in the region are more interested in responsible and sustainable investment due to rising awareness of the local and global challenges’
– Rosmary Lozano, Credicorp Capital Asset Management
‘These companies are a source for investment in social infrastructure, such as roads, bridges, hospitals and schools,’ she said. ‘In Peru, we have many examples in the mining industry.’
A closer look
Such social initiatives have received increasing amounts of funding over the past decade, but growing social unrest across the region in recent years has prompted asset managers to take a closer look at the impact companies have on their communities.
‘Investors have the power to influence companies to adapt and respond to social challenges,’ said Dario Valdizan, a buy side research director at Credicorp.
‘Increasing attention to ESG and sustainability has provided a platform for companies to formalize their engagement in social themes and become more conscious of the impact of their business and their supply chain.’
For investors in the US, many of the issues highlighted by the pandemic have increased the attention on social engagement, not purely from an ethical perspective, but in identifying well-run companies that represent good long-term investments. As an example, Drew pointed to the labor force issues highlighted in food processing companies or other industries during 2020.
‘I believe that companies are in a better position to deliver a more financially sustainable performance if they’re more attuned to all of their stakeholders,’she said.
‘So,analyzing that makes sense from both a risk and opportunity perspective. I think social is always a great indicator of how the company is running. If we’re seeing that a company is having issues with their workers, say, they’re not paying their workers fairly, those things tend to manifest themselves as problems with financial performance down the road.
‘A good example that’s been in the media recently is wage inflation. Some companies are recognizing that they need to pay a higher wage, because that way, at least we get employees that stay with us and are more productive.’
Drew said that when T Rowe Price conducts analyses of companies from a social perspective, it focuses on three different categories: the first relates to their management of human capital, both within their own operations and their supply chain; second, how they interact with society at large, as well as local communities; and finally, how their product affects metrics relating to sustainability and human health.
‘Within the supply chain analysis, we’re going to look at what types of supply chain standards and management practices the company has in place, we also might look at if they are members of certain, more sustainable groups,’ she said.
‘We’ll also look at whether or not their supply chain is externally certified, and then a big part of our analysis is looking at any controversies that the company’s been involved in.’
Lack of data
But some social factors are easier for investors to quantify than others. Glen Yelton,head of ESG client strategy for North America at Invesco, said data on the environmental aspects of ESG tends to be easier to obtain than certain social elements, particularly diversity.
‘Sometimes we find the data challenge to be insurmountable,’ he said. ‘For binary gender,we have data that does go back several decades; that information has been readily disclosed for about two decades.
‘When we’re talking about issues related to race, ethnicity, and non-binary gender,that data is not always there. And that poses a challenge for an investment manager.’
Asset managers can often obtain information on a firm’s diversity, and health and safety statistics over one or two years, but Yelton said it is harder for them to find that information across multiple years, which is required to identify trends. Certain asset classes are also easier than others when it comes to conducting due diligence on social factors.
‘There’s an asymmetric ability to do socially responsible investing across asset classes,’ he said.
‘Impact investing can be executed very effectively in venture capital and private equity where you have direct ownership. It can be executed very directly, and very effectively, in real estate where you have direct ownership of a property.
‘It can be executed less effectively in municipal bonds, because you may have project-based financing in some cases but not all, and when you move over into public equity, it’s almost impossible.’
‘When we’re talking about issues related to race, ethnicity, and non-binary gender, that data is not always there. And that poses a challenge for an investment manager’
– Glen Yelton, Invesco
But despite some of the challenges, the focus on social engagement from the perspectives of both investors and clients is very much here to stay.
‘That continued focus on diversity, equity and inclusion – it’s not going away,’ Yelton said.
‘Our clients are asking us as the asset manager to report on our diversity, equity and inclusion activities, as frequently as they’re asking us to report on what we’re doing in their portfolio. And the level of attention on that as an asset manager has continued to increase.’