Three European pension funds discuss their increasing focus on social factors within their ESG-driven investment strategies
More, better data is needed
We see the social dimension of our investments as crucial to our objectives. In our view, many social factors are financially material to the performance of investee companies.
These factors can range from the level of diversity of a company’s workforce to the level of wages that a company pays its employees.
We already engage with our investee companies and our asset managers on social issues, but a large part of our work so far has consisted of building and collating data. Good quality, meaningful data on social issues is still lacking at market level.
The issue with data on social factors is that much of it can be qualitative in nature and as a result it can be reported in very different ways by different companies. That is why initiatives such as the Workforce Disclosure Initiative (WDI) are critical for investors to build a consistent range of metrics on workforce disclosure. We are signatories of the WDI and hope that it will be rolled out across jurisdictions.
The lack of data does not stop us from engaging directly with our investee companies and asking them to disclose their practices. If engagement on certain issues fails, we may consider voting against management. But we also engage with our managers, asking them how they incorporate social issues within their investment process and making sure their stewardship and voting record on these issues is in line with our expectations.
‘Social-washing’ is a danger we are cognisant of. In the absence of regulation, managers are free to come up with their own assessments of companies’ social impacts, and might overemphasise good behaviour while failing to consider offsetting bad practices. For this reason we must make sure our managers’ monitoring and assessment process is rigorous and transparent.
At the moment, our strategy around social factors is driven primarily by our risk-return concerns. However, in the future we may start intentionally seeking investments in businesses that have a positive social impact, which we believe could be more sustainable. The link between achieving positive social impact and delivering strong and sustainable returns is becoming stronger.
For the past two decades, our organisation has been extending the scope of its responsible investment approach to all asset classes and investment strategies including private assets. Our voluntary, gradual and methodical deployment of ESG/SRI now encompasses 100% of AUM. As a leading player in social protection and as chair of the Global Compact France, our organisation strives to align its actions with the UN Sustainable Development Goals. In our framework, the S pillar is structured around key performance indicators that pertain to the SDG.
In line with the commitments we made to the UN Global Compact in 2006 and with our responsible investment charter, launched in 2016, social and societal issues are well established within our investment policy. For example, we apply criteria based on human capital to select the companies within our investment universe. We also evaluate societal issues when evaluating the ESG credentials of sovereign and similar issuers. We pay close attention to controversies relating to societal issues and affecting companies and issuers in our investment universe. In addition, we have made several investments in social housing.
Bringing solutions to societal and environmental challenges while earning returns is how we define our impact-investing approach, which seeks to combine intentionality, measurability, additionality and replicability.
Building trust, helping investors to better understand the green social and responsible investment market and creating a common base of knowledge are essential aspects, which is why the current regulatory initiatives at national and EU level are welcome.
In-depth work with investee companies
In our view, the S of ESG is perhaps the broadest of the three categories, as it includes everything from human rights, child labour and indigenous peoples’ rights to labour issues and human-capital considerations. We do not work with a clear definition of the S, but we generally think of it as all the issues relating to our investments that are primarily concerned with people, as opposed to the environment.
There is no real consensus on what kind of data should be reported when it comes to social issues, which means that companies typically report what they find relevant. At the same time, estimation with regard to S data is often not an option, and benchmarking is often difficult, since comparable numbers can be hard to find. As a result, it is necessary to work in-depth with each company.
We consider the social aspect in all our investments from both risk and opportunity perspectives. For example, in our unlisted portfolio we base much of our ESG asset management on our ESG questionnaire that we developed and started to send out to portfolio companies last year. Roughly a third of all the questions in our ESG questionnaire deal with social indicators.
For us, ESG is an investment belief. We believe that companies that perform well on social issues, by managing their human capital and broader social risks and seizing social opportunities, will perform better financially in the long run.
Interviews by Carlo Svaluto Moreolo and Susanna Rust