The Forgotten Letters — S & G
Looking back at our ESG research and insights from October, we’re showcasing our most essential insights on social and governance factors — from the purpose of a corporation to fair labor practices. These “S” and “G” risks and opportunities can often be overshadowed by environmental factors, even though they also are crucial elements of sustainable investing.
Published: October 1, 2019
Social Review
When it comes to sustainable investing, three factors are typically used as measurements: social, environmental, and governance. For most of us, the benefit to reducing our environmental impact is obvious. The importance of governance has also been well researched by S&P Dow Jones Indices—just look at the S&P LTVC Global Index.
The social factor, however, has been less examined. Social refers to mentalities in the workplace (e.g., diversity management, human rights, etc.), as well as any relationships surrounding the community (e.g., corporate citizenship and philanthropy). It includes criteria such as human capital development, corporate citizenship, and occupational health and safety.
This “S” factor has become increasingly relevant to market participants. In January 2016, the U.N. set the Sustainable Development Goals (SDGs)—17 goals with the ultimate purpose to “end poverty, protect the planet, and ensure prosperity for all.”
How can a company manage its relationships with its workforce, the societies in which it operates, and the political environment? This is the central question behind the “S” in ESG investing — the social aspect of sustainable investing. Social factors include a company’s strengths and weaknesses in dealing with social trends, labor, and politics. A focus on these topics can increase profits and corporate responsibility.
Read more about social factors
Governance
The We Co.'s planned initial public offering, once expected to be among the largest this year, is on hold until further notice, and some are questioning whether it will come to market at all.
Much of the hype surrounding the WeWork Cos. Inc. parent's public debut has fizzled. In an effort to stem the tide of negative sentiment around the company's unusual corporate governance structure, WeWork's board this week pushed co-founder and Chairman Adam Neumann out of the CEO seat. The flare-up has reportedly even singed JPMorgan Chase & Co., Goldman Sachs Group Inc. and other advisers to the company, who face potential reputational fallout for having pushed an estimated valuation of $47 billion or more with the offering. Critics say the company is worth only a third of that, at the high end.
The “G” in ESG pertains to the governance factors of decision-making, from sovereigns’ policymaking to the distribution of rights and responsibilities among different participants in corporations, including the board of directors, managers, shareholders, and stakeholders. The purpose of the corporation, the role and makeup of boards of directors, and the compensation and oversight of top executives have emerged as core issues in companies’ corporate governance structures.
Read more about governance factors
Corporate Purpose
Sustainability-focused groups are calling on the CEOs of major U.S. corporations who make up the Business Roundtable to act on their recent declaration that the companies should concentrate on providing benefits to all stakeholders rather than primarily on deriving profits for shareholders.
About 180 of the roundtable's member CEOs signed a letter in August expressing the view that the focus should be on overall benefits to customers, employees, suppliers and communities along with shareholders. The letter marked a major shift in the group's official position.
Key Takeaways
- The most important aspect of the roundtable statement will be whether those companies follow up with deeds and hold themselves accountable.
- Shareholder advocates view the proxy process as a key tool for pushing companies to pay attention to emerging issues, and some are concerned that the process would be hindered if the SEC revamps the rules.
Impact of Social
Walmart Inc.'s move to stop selling certain guns and ammunition could benefit the retailer as consumers and investors continue to seek out socially conscious companies, industry experts said.
The company announced on Sept. 3 that it will stop selling handgun and short-barrel rifle ammunition nationwide following deadly shootings at two of its stores, in addition to halting handgun sales in Alaska, the only state where Walmart sells the guns.
The retail giant's moves, which came after it received mounting pressure from its employees and the public to stop the sales of firearms, comes during the renewed debate on the issue of gun violence and could encourage other companies to engage in a public conversation about gun policy in the U.S., experts said.
Key Takeaways
- While the move riled gun advocates who say other retailers will replace Walmart, others believe the company could sidestep any backlash as the new policies more closely align with American consumer sentiment and the continued call for corporate social responsibility.
- Walmart expects its recent moves to reduce its ammunition market share to a range of approximately 6% to 9% from about 20%, according to a company statement.
Labor Practices
The world's biggest food companies have long been criticized for failing to tackle the insidious problem of child labor in the $140 billion global chocolate market. Now the Netherlands, with a population of 17 million and a large cocoa footprint, is using a carrot-and-stick approach to spur faster change.
The Dutch effort partly relies on a tough new law that requires companies to identify and fix child labor problems in their global supply chains. It also harnesses the market power of local banks, asset managers and pension funds to increase the financial pressure on the cocoa industry. The effort is starting to pay off, as suppliers, manufacturers and supermarkets increasingly change the way they source, track and sell chocolate.
Key Takeaways
- More than 2 million children work in the impoverished and sometimes hazardous conditions of family farms in Ghana and Ivory Coast, which produce about 65% of the world's cocoa.
- What's more certain is that strong western demand for chocolate over the past decade has given rise to more cocoa farms and, therefore, to more child laborers. International pressure to fix the problem is intensifying, bringing with it a new set of regulatory, legal and financial risk.
