PRI: Assessing the ‘S’ in ESG

Social issues have traditionally been viewed as the weakest link in investment analysis. In many cases, the absence of company data and robust regulation has hampered investors’ ability to assess the risks and opportunities such issues present to their portfolios. While some companies have made efforts to provide good quality disclosures, on the whole, investors have had limited information on which to base decisions.

This is changing. A plethora of new initiatives and engagement activity is driving more meaningful disclosure of data on human rights and labour standards by companies and across supply chains. Policymakers worldwide have a renewed enthusiasm for enacting hard laws and soft guidelines to expand the role and responsibilities of companies when it comes to social issues.

The Principles for Responsible Investment (PRI) recently responded to a government inquiry underway in Australia to determine whether the country should introduce its own Modern Slavery Act, which would complement recent legislation on human rights due diligence introduced elsewhere, such as the California Transparency in Supply Chains Act of 2010, the UK’s Modern Slavery Act 2015 and the European Union’s Non-Financial Reporting Directive. Earlier this year, France adopted its own Corporate Duty of Vigilance law, which requires its largest companies to assess and address adverse impacts on people and the planet, both in direct operations and throughout the supply chain.

Beyond national and state-based legislation are a series of soft laws – norms, standards and frameworks – launched in recent years to promote best practice and stamp out the most egregious violations. These guidelines have included the United Nations Guiding Principles for Business and Human Rights, the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises and the International Labor Organization Fundamental Conventions.

More for investors

Such changes are giving investors better data. For example, the Committee on Workers’ Capital recently launched its own Guidelines for the Evaluation of Workers’ Human Rights and Labour Standards, which trade unions have developed to help investors scrutinise social issues such as labour relations in the investment chain. Better metrics on the treatment of workers, employee engagement, training and staff turnover can be strong indicators of the health of a business.

Early evidence suggests both the UK and California laws – which require companies to disclose on their websites the efforts they’re making to address risks of human trafficking and slavery by their suppliers – are providing a wealth of new data and insights to help investors better assess the ‘S’ in their portfolios and inform their engagement and integration strategies, while increasing senior-level corporate engagement, transparency and action on social issues.

More action from investors

Earlier in June, the PRI published a collection of case studies showing how investors are making use of this additional information, putting to rest the notion that investors can’t scrutinise social issues. ESG Integration: How are social issues influencing investment decisions? contains examples from a wide range of sectors – from retail to mining – highlighting methods being used to integrate social issues into listed equity investments.

At the same time, the PRI has facilitated a number of collaborative engagements to improve investors’ understanding of human rights risks and supply-chain labour practices. The findings and outcomes from these projects are captured in the PRI’s From Poor Working conditions to Forced Labour: What’s hidden in your portfolio? and Investor Expectations on Labour Practices in Agricultural Supply Chains.

Matt McAdam is head of Australasia for the PRI.