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Social: the hardest to define and integrate
Social: the hardest to define and integrate
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Social: the hardest to define and integrate

03/12/2019


Florence Fontan

Florence Fontan

Head of Company Engagement and General Secretary

BNP Paribas Securities Services

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Information on social performance is far from perfect, but pressure from regulators and investors, and an imaginative use of technology, is pushing things in the right direction.

Institutional investors are increasingly embedding environmental, social and governance (ESG) factors into their investment frameworks, but the social factor is proving the hardest to define and integrate. In BNP Paribas’ 2019 Global ESG Survey, 46% of investors found it the most difficult to analyse and embed in their strategies.

Social metrics include a company’s treatment of its employees, as well as its impact on wider society through its relationships with customers, suppliers and local communities. In this sense, it is not just about limiting potential damage, but also about creating social benefit. This can make it more challenging to assess than environmental factors, which tend to focus on reducing harm, or governance, which tends to operate within existing legal or stewardship frameworks.   

Major challenges

One major challenge is the huge range of metrics that can constitute a social issue, including labour relations, workforce diversity, procurement and supply chain practices. Even when a relevant social factor has been identified, it can be hard to measure its impact. For example, does education provide a social benefit if it is a private education for wealthier kids?

And unlike environmental measurements, such as reducing carbon emissions, social indicators often lack a clear start and finish point. A company may be employing people in rural areas where work is scarce, but the question then becomes: is it employing men and women? And is it paying them a low wage or a living wage? Is it providing fringe benefits? The questions are endless.

The qualitative nature of many social programmes makes it difficult to translate them into meaningful key performance indicators that can be used effectively by investors. Compounding this problem is the lack of available data. Globally, approximately 40% of large and mid-cap companies report carbon emissions. However, under a third of large and mid-cap companies in the relevant sectors report the number of workplace fatalities.

A lack of standardised reporting also means that data providers must use a combination of factors to make their own assumptions and assign weightings. As a result, there is very little correlation between data provided by different vendors.

The social imperative

Regulators, exchanges and investors are successfully demanding that companies provide more and better data on social factors. Many initiatives are slowly making progress.

For example the UK’s Modern Slavery Act 2015, requires large and mid-sized companies to set out the steps taken to ensure modern slavery is not taking place in their business or supply chains.

Another step forward is the Sustainable Stock Exchanges Initiative, a UN working group and forum for exchanges to improve ESG reporting by their member companies. Since 2015, when the Initiative called on all exchanges to provide guidance on ESG reporting, the number of exchanges doing so has more than tripled to 43.

Technology also has a role to play. For example, some companies are partnering with local NGOs to use satellite imagery to check that suppliers are not supplying false data on the use of child labour.

Furthermore, custodians are well placed to gather, analyse and aggregate publicly available big data on the securities they hold on behalf of investors. And this is what investors are demanding. In BNP Paribas’ ESG survey, 36% of respondents saw ESG data aggregation as the most important ESG service provided by a custodian, and 43% regarded analytics and risk monitoring as a key custodian service to support ESG investing.

Progress on supporting the S in ESG is welcome and although information on social performance is far from perfect, institutional investors can challenge data vendors and companies to speed up progress.

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