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Enhanced_focus_on_the_S_SOCIAL

Enhanced Focus on the "S" in ESG Investing

Recent events have enhanced investors' focus on social issues and what positions and steps companies are taking to address these issues now and going forward.

Since the introduction of environmental, social, and governance ("ESG") investing, the environmental and governance aspects have garnered significantly more focus. Issues such as climate change (under the "E") and board composition (under the "G") have been at the forefront of investors' decision-making, resulting in a major focus on these items by public companies when making ESG disclosures. While some companies and investors also have focused on social issues such as treatment of employees (often referenced as human capital management), worker safety, and/or a company's contribution to community, these issues have featured less prominently in investing decisions. However, recent events―notably, the reaction of the public to the death of George Floyd―are changing this landscape, elevating the "S" in ESG investment considerations. 

As society considers how to respond to the events of late, many companies have expressed their views on social media or taken other steps to emphasize the importance of such events and communicate their policies and views in a more formal manner. Additionally, companies may be asked to provide information about their social initiatives and achievements to be used in assessing their overall ESG efforts. And while many business leaders made swift statements of their commitments, S&P and others have announced that they will be holding businesses accountable for such statements. For example, S&P indicated it will note a company's response to its community as a result of George Floyd's death in the scoring system for the S&P 500 ESG Index, and Calvert Research & Management, a sustainable investment firm, plans to ask companies to publicly state, among other things, their steps taken to address racism and police violence. Major institutional investors also have stated that it is important for companies to explain how they establish themselves as the employer of choice for workers in terms of employee development, culture, inclusion, and diversity, among other human capital management issues.

Socially-minded investors want to know that their values are reflected in their investments and increasingly are watching, listening, and seeking more information about how companies are addressing social issues. To this end, there is also a growing expectation for companies to incorporate social and human capital management goals into their executive compensation programs, to better give corporate leaders line of sight to, and to hold them accountable for real progress on social issues. 

As a starting point, companies should review what they have publicly disclosed to date regarding their "S" policies and initiatives and consider developing public statements that enhance these disclosures in the following areas:

  • The company's policy on diversity and inclusion, particularly with respect to hiring and promotions.
  • Any community outreach the company engages in within the areas where it maintains offices and operations.
  • Steps the company has taken, if any, to address racial and economic disparities in the workforce, C-suite, and board levels.

Companies should carefully inventory their social views and corporate values in light of current events and consider how best to craft an appropriate message, demonstrating their social awareness, and possibly linking management compensation to the social achievement interests of ESG investors. Even with renewed attention to ESG, the law has not changed the duty of a company's board to maximize long-term shareholder value. Of course, attending to ESG can support shareholder value―they do not necessarily conflict. By choosing not to address these sensitive issues, companies risk sending the unintentional message that there is no "S" in their ESG considerations and garnering unwanted criticism and focus in the form of shareholder activism.

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