The S in ESG: Why investors should care about a company's social impact

A growing number of investors are assessing companies based on environmental, social and governance (ESG) factors. ESG considerations can have both a positive and negative impact on a company's performance and on shareholder value. Studies show companies with a strong ESG performance are more likely to provide strong financial returns and reduce risk, especially when markets are volatile1.

This article is part of a three-part series looking at each of the ESG components. Here, we're looking at the social factors that are helping to create returns for investors, while at the same time strengthening organizations, families, communities and helping society meet some of its toughest challenges.

Socially responsible investing

When investors look at social criteria, they're interested in how a company manages its relationships with employees, suppliers, customers and in communities where it operates.

For example, investors may look at whether a company provides a safe and healthy working environment for its employees, or if it donates time, money or resources to give back to the communities where it operates.

Unsafe working conditions or a disregard for community or customer concerns are tangible risks for many companies. On the flip side, companies that treat employees well and give back to society are seen as less risky and can also benefit from higher productivity and an ability to attract top talent.

Research shows companies that are considered good corporate citizens perform better financially than those that don't. Consider a 2015 research review, conducted by the Investor Responsibility Research Center Institute (IRRCi) and two Harvard Law School professors, which found positive correlations between how companies manage workplace relationships and their financial performance2. A 2006 study from Oxford University and New York University showed a "link between financial and social performance." 3

Screening for social performance

Investors can screen for positive or negative social performance, as they would for environmental and governance factors. Negative screens can be used to rule out companies whose social policies and practices expose them to unacceptable levels of risk. An example is a company that faces labour unrest if its wages or hiring practices are considered to be unfair. Another example is a company that sources raw materials, such as cotton or cocoa, from suppliers or jurisdictions that violate human rights or child labour standards. Positive screens are used to find companies that perform well when it comes meeting international labour standards, as well as expectations for employee, customer and community relations. Examples include hiring local workers, offering competitive employee benefits, or helping communities tackle challenging social issues such as sustainable farming or affordable housing.

Impact Investing

Impact Investing is a fast-growing component of Responsible Investing. Impact investments are made into companies, organizations or funds with the intention to generate financial returns, as well as measurable and beneficial social or environmental impacts. Until now, most of the Impact Investing opportunities have been geared towards institutional investors, foundations and high net worth investors. However, there's a growing collaborative, international effort to speed up development of a market for Impact Investing that will be accessible to all investors.

Resources for investors

If you are interested in discovering companies that are deemed to be leaders when it comes to social performance, or in learning more about Impact Investing, here are a few resources to check out:

 

  1. "Canadian Responsible Investment Mutual Funds: Risk /Return Characteristics," Carleton Centre for Community Innovation, May 1, 2015. https://www.qtrade.ca/_pdfs/oceanrock/3CI_ORII_RI_Fund_Risk_Return_Analysis.pdf
  2. "The Materiality of Human Capital to Corporate Financial Performance," Investor Responsibility Research Center Institute (IRRCi) and Harvard Law School, April 2015. http://www.law.harvard.edu/programs/lwp/pensions/publications/FINAL%20Human%20Capital%20Materiality%20April%2023%202015.pdf
  3. "Beyond Dichotomy: The Curvilinear Relationship between Social Responsibility and Financial Performance," Oxford University and New York University, Strategic Management Joournal, 2006 http://onlinelibrary.wiley.com/doi/10.1002/smj.557/abstract