Many of us have been happy to leave 2020 behind, with renewed hope of a better 2021. While the coronavirus pandemic and social unrest across the globe uprooted many lives, the social issues that got magnified last year are finally catching the right momentum for changes to take place.
And this is where the “S” in environmental, social, and corporate governance (ESG) comes in.
Assessing environmental, social and governance factors in how companies run their businesses have become one of the key considerations for everyone from lenders to investors to financial firms.
Recently, the “S”, or social, component has received increased attention. This year, people are taking a closer look at the social aspect of companies and the effect of firms’ operations on society as a whole, their workers and contractors, political involvement, labor issues, product liability, and safety, as well as diversity and inclusion practices within these firms.
More investors are looking to put their money to work in firms and funds that stand behind inclusivity and equality. Given this recent and popular demand perhaps, it’s no surprise that several new funds have been launched to specifically address those issues.
For example, SPDR SSGA Gender Diversity Index ETF (SHE) focuses on U.S. companies that have shown a greater gender diversity in their senior ranks versus other firms in their sector. Impact Shares NAACP Minority Empowerment ETF (NACP) invests in U.S. firms with strong racial and ethnic diversity policies. The fund donates its net management fee to the NAACP to sponsor projects for greater inclusion in the private sector.
Many funds don’t just focus on the “S” in ESG, but combine several or all of the factors in their security selection. There are two ways of doing this: by excluding certain companies from the portfolio, or including those that fit particular criteria or show high ESG scores.
ESG is quickly becoming a mainstream discussion and requirement resulting from shifting government regulations, as well as newfound prioritization from people, investors, and non-profit organizations.
MSCI, a leading ESG research and rating provider, defines the social pillar by four main factors: human capital, product liability, stakeholder opposition, and social opportunities. Thus, the “S” in ESG is much broader than what the word “social” would imply.
The first element includes labor management, health and safety, human capital development, and supply chain labor standards. When it comes to product safety, MSCI also considers chemical and financial safety, as well as privacy and data security, and ensuring health and demographic risk. Other contributing factors that MSCI rates include controversial sourcing, access to communication, finance, health care, and nutrition.
Examples of social impact and how it’s monitored by ESG-focused funds are wide-ranging. An executive harassment scandal, unsafe workplace practices in clothing or tech manufacturing, and supply chain issues can all cost companies millions of dollars, affecting their share prices and eventually returns for investors. This is where it becomes important to consider the social impact of such actions not just on society, but also with return on investment.
ETF Database evaluates ETFs on a total of 77 ESG metrics for which it receives raw data from MSCI ESG Research. Within its social bucket, it looks across 22 ESG themes and 32 metrics. Those include revenue exposure to social impact, affordable real estate, education, major disease treatment, and global sanitation.
“A methodical and well-executed ESG integration strategy can reveal both corporate risks and competitive advantages that may otherwise remain invisible to investors who rely solely on traditional financial analysis,” stated ETF Database on ESG Investing.
