Why investors can't overlook the 'S' in ESG

The ‘S’ in ESG has never been more important.

We explore some of the risks, as well as opportunities that exist in the UK stock market, and ask how companies can be more socially responsible.

Investors are increasingly being asked to deploy capital more responsibly; the increase in assets under management in the ESG (environment, social, governance) space over several years reflects this.

The focus on achieving net zero greenhouse gas emissions and the increased need for renewable energy sources are just two drivers fuelling the growth of capital deployed in the ‘E’ bucket within ‘ESG’. But what about the ‘S’?

In recent years, the rise of social movements such as MeToo, Black Lives Matter and Time’s Up has brought greater awareness of inequality within society across gender, socioeconomic and racial lines; despite heightened attention, the ‘S’ in ESG has received less funding relative to the ‘E’.

There are reasons for this disparity in funding, such as the inconsistency in the different methods of reporting social based impact data, and lack of consensus on which social issues to include for assessment.

WHICH UK COMPANIES ARE DOING ‘S’ WELL?
Investors looking to deploy their capital in a socially responsible way will focus on companies whose products and services provide clear benefits to society.

The United Nations’ Sustainable Development Goals (“SDGs”) is a universal call to action to end poverty, protect the planet and ensure that all people enjoy inclusion, peace and prosperity. Of the 17 SDGs, at least 75% are focused on improving society, and is a useful tool to assess a company’s qualitative impact on society.

Two smaller UK companies whose products and services we believe are aligned to the SDGs include:

MAXCYTE (SDG 3: GOOD HEALTH & WELL-BEING)
MaxCyte is a medical device company that sells and licenses gene editing equipment to global pharmaceutical firms, who use it in the development of therapies to cure diseases such as sickle cell anaemia.

Barriers to entry are high, making the company potentially attractive to investors.

OSB GROUP (SDG 11: SUSTAINABLE CITIES AND COMMUNITIES)
OSB Group is a specialist lender that offers residential mortgage products; it supports clients with imperfect credit history or non-standard income, through to first-time buyers using Help to Buy or shared ownership schemes.


SUPPLY CHAIN BOTTLENECKS POSE A RISK
But social responsibility goes beyond a company’s products and services; current global supply chain disruptions are likely to draw attention to the social issues within companies’ supply chains, particularly as efforts grow to improve working conditions amid labour shortages.

Previously, companies adopted voluntary international reporting and due diligence standards, but there is an increasing global regulatory emphasis on corporate
responsibility.

New and prospective laws within the EU, and other non-EU countries, are now focusing on introducing mandatory ESG due diligence requirements for companies.

The aim is to ensure measures are taken to prevent adverse impacts on human rights, while ensuring there is good governance in supply chains and business relationships.

This poses a risk for UK companies, especially those with an international footprint; addressing potential weaknesses at the earliest opportunity could avert future scandals, reputational damage and reduced investor confidence.


HOW TO IMPROVE ‘S’ EFFORTS
For companies whose products and services may not be directly aligned to an SDG, we believe management teams could consider the following measures to improve their ‘S’ efforts:

• Consider what the firm stands for and adopt a business code of ethics;
• Create Employee Resource Groups aimed at promoting inclusivity across the organisation;
• Provide employees with volunteering days to give back to the community;
• Find organisations to work with to tackle issues that matter to customers. Set aside a proportion of the annual budget to fund charitable efforts.

This list may help guide companies, particularly SMEs, in the right direction; investors can actively engage with companies to drive positive societal outcomes, and use their proxy voting power to veto management teams and boards that fail to meet their commitments or goals. Securities mentioned are for illustrative purposes only and not a recommendation to buy or sell.

Keep up to date with the latest Schroders news here

Important information
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is
believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.
Authorised and regulated by the Financial Conduct Authority.

Read the latest edition of DIY Investor Magazine

DIY Investor Magazine

The views and opinions expressed by the author, DIY Investor Magazine or associated third parties may not necessarily represent views expressed or reflected by EQi.

The content in DIY Investor Magazine is non-partisan and we receive no commissions or incentives from anything featured in the magazine.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.

DIY Investor Magazine delivers education and information, it does not offer advice. Copyright© DIY Investor (2016) Ltd, Registered in England and Wales. No. 9978366 Registered office: Mill Barn, Mill Lane, Chiddingstone, Kent TN8 7AA.