Bringing social issues to light

While all three ESG issues (environmental, social and governance) are vitally important for responsible investment, most people find the environment aspect the easiest to think about and understand. Topics like climate change are here to stay, commanding ongoing attention from the media and directly influencing people’s behaviour and lifestyles.

The social element of ESG is harder to define. The Corporate Finance Institute describes it as “an organisation’s relationships with its stakeholders”. This can be measured by:

  • How it treats its people (for example, fair wages, employee engagement); and
  • Its local impact – especially in areas where its influence can improve standards.
  • Those businesses which make successes of these relationships are likely to achieve greater results. This, in turn, leads to better outcomes for investors in those businesses, such as the UKRF.

    In this article, we look at these social considerations, and the benefits of managing them successfully.

    What we mean by social issues

    The World Bank uses the term Social Sustainability and Inclusion to describe goals and activities which support “inclusive and resilient societies” and create “opportunities for all people today and tomorrow”.

    From the perspective of those companies we invest in, awareness of these social issues revolves around their overall impact on people. This means each business must examine its activities in two directions:

    Inward: the effect of its actions on its workforce and their ability to carry out their role.

    Outward: the impact of its operations on people outside the company – for example, their suppliers, the communities where they operate and, ultimately, their customers.

    The ongoing success of the business depends on the wellbeing of all the people it affects, whether they are part of the organisation or not.

    To investors and shareholders (such as the UKRF), socially responsible investment is a method of seeking good returns and aligning with our investment principles.

    Following the UN’s lead

    The UN Global Compact – the “world’s largest corporate sustainability initiative” – has established principles for responsible businesses to follow. Several of these principles focus specifically on social themes.

    Businesses should…

    Human rights

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    “…support and respect the protection of internationally proclaimed human rights”

    “…make sure that they are not complicit in human rights abuses”

    Stay aware of working practices both within the business, and also at any providers, suppliers and customers.

    Be mindful of the company’s impact on local communities.

    Avoid investing in organisations that produce controversial weapons.

    Worker’s rights

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    “…uphold the freedom of association and the effective recognition of the right to collective bargaining”

    “…uphold the elimination of all forms of forced and compulsory labour”

    “…uphold the effective abolition of child labour”

    Involve employees in discussions on any upcoming change.

    Make sure policies exclude any abuse of workers’ time, health, situation.

    Zero tolerance for working with or appointing any business linked with this kind of abuse.

    Diversity, equity and inclusion

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    “…uphold the elimination of discrimination in respect of employment and occupation”

    Ensure fair treatment for all, whatever their background.

    Address gender pay gap.

    Best practice

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    “…work against corruption in all its forms, including extortion and bribery”

    Establish codes of conduct to promote ethical standards and follow up when breaches arise.

    Keep all online information (customer, client, employee details) secure.

    Why social issues matter

    Research suggests that companies with good track records on social issues tend to provide positive investment outcomes over the long term. There are a number of reasons for this:

    Enhanced brand/image: Businesses that lack social focus expose themselves to greater ‘reputational risk’. For example, if it suddenly comes to light that a company has links with a manufacturer a long way down the supply chain that abuses worker rights, the company’s own image will still suffer. Avoiding ‘negative shocks’ like this can protect – and enhance – its reputation.

    Better performance: As you might expect, organisations that treat their employees with respect keep them for longer. Accordingly, this means more of their staff gain promotions and improve over time, instead of leaving. Greater diversity also leads to the business benefiting from wider employee experience and knowledge-sharing.

    Greater co-operation: Companies with social priorities are more likely to treat their suppliers fairly, and in turn, benefit from those suppliers’ best service and ideas.

    As well as the financial benefits, investing in these businesses allows the UKRF to promote its own ESG principles and put them into action.

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    Read more about our Responsible Investment Statement in the Library.

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