Amplifying the “S” in ESG: Investor Myth Buster Table of Contents ESG Working Group: who are we? 3 Amplifying the “S” in ESG: Executive Summary 4 Investor myths about “S” indicators 7 Introduction: Investor myths about “S” indicators 8 Myth 1 - Financial materiality: Social performance is less financially material than environmental performance 10 Myth 2 - Starting point: It is too difficult to know how and where to start assessing social performance 14 Myth 3 - Data: The “S” indicators are too hard to measure; there is no reliable and comparable data 17 Myth 4 - Integration process: Qualitative surveys or questionnaires are the best method for tackling social issues and analysing the social aspects of performance 22 Myth 5 - Relevance to investors: Integrating “S” indicators is only relevant for impact investors 26 Conclusion 32 Amplifying the “S” in ESG: Investor Myth Buster 2 REUTERS/Krishnendu Halder ESG Working Group: who are we? We are a new partnership that has been formed The Group hopes that this ongoing work will with the aim of emphasising the importance of help further the momentum for both the ‘social’ criteria within Environmental, Social improving the “S” indicators and expanding and Governance (ESG) investing. their use among the investor community. The Thomson Reuters Foundation, Refinitiv, The partners view this white paper as the start International Sustainable Finance Centre (ISFC), of a broad dialogue to promote a better White & Case, Eco-Age, The Mekong Club, and understanding, and wider adoption, of social the Principles for Responsible Investment (PRI) criteria in investment strategies. We plan to – an observer participant – have created the carry on with this work by engaging with more ESG Working Group (‘the Group’), as a pro bono stakeholders, as well as organising events and partnership that brings together civil society, training sessions to build greater capacity. experts and private sector. The white paper reflects the vision of the All Group partners believe in amplifying the Group, and not that of the individual work around social performance and organisations involved in its work. indicators as an important consideration when making investment decisions, and agree that If you would like to find out more, stay updated there is a need for a broader and speedier or get actively involved in this work, please action globally. contact: [email protected]. Amplifying the “S” in ESG: Investor Myth Buster 3 REUTERS/Ognen Teofilovski Amplifying the “S” in ESG: Investor Myth Buster Executive Summary Impact of COVID-19: this needs to Social performance assessments: change everything how and why? In 2021, investors are under renewed pressure The objective of this group is to demonstrate to to consider the “S” (social) performance investors how it is possible, and why it is component in their investments. Yet in the necessary, to have and drive forward more world of Environmental, Social and Governance sophisticated social performance assessments. (ESG) investing, the integration of social We do not aim to provide definitive answers, performance assessment has seen insufficient nor to be prescriptive about solutions. progress. It is plagued by many challenges, and by what this white paper calls ‘myths’: Instead, we address the most common misperceptions about why social indicators misperceptions, or myths, that have emerged – such as a company’s labour practices or because of the real challenges that investors community relations – matter, and how or face now, and have faced in the past, when whether they can be integrated into investment trying to integrate social performance analysis. For all investors, it is important to indicators into their analytical metrics. The proactively address these questions because, Group highlights the existing gaps and as the Working Group found, social issues can challenges, while also looking at the positive create key risks; they are salient and will be steps investors can take. It is hoped that this increasingly relevant in the future. white paper will be a springboard for a wider discussion about both improving the “S” indicators and strengthening them as a tool for the investor community. Amplifying the “S” in ESG: Investor Myth Buster 4 The tools already exist to start taking action Our analysis used the rights outlined in the Universal More indicators are available to investors, for Declaration of Human Rights and measuring both the efforts (policies and the International Bill of Human processes) and effects of companies’ Rights (including its component performance than are routinely being integrated treaties and conventions) to inform into investment analysis today. the way we thought about social indicators, and how we organised This is illustrated by a mapping and consultation our four overarching themes: exercise undertaken by the Group (See Annex I). Our analysis uses the rights outlined in the Universal Declaration of Human Rights and the International Bill of Human Rights (including its component treaties and conventions) to inform High-risk labour and land the way we thought about social indicators, and issues how we organised our four overarching themes. As a starting point, we leveraged Refinitiv’s social indicators that capture data from over ten thousand and three hundred companies globally and examined a wide range of industry Socio-economic inequality approaches to identify thematic indicators that were linked to effects. We then cross-mapped these thematic indicators across the frameworks of two leading standard-setting organisations, the Sustainability Accounting Standards Board (SASB) Diversity and inclusion and Global Reporting Initiative (GRI), along with data collected by Refinitiv and RepRisk. We assessed how these indicators corresponded to the targets of the UN Sustainable Development Goals (SDGs) and consulted with approximately Digital rights 100 industry stakeholders, including investors, subject matter experts, lawyers, data providers and civil society, for input and feedback. This mapping exercise is by no means exhaustive; it was not designed to be. The purpose was to offer an initial overview of indicators linked to effects, compare key themes and identify existing data sets as a starting point. While our analysis shows that there are still significant data gaps due to the lack of standardised reporting requirements - in particular, for global supply chains - many quantifiable social indicators are available for investors to include as part of their investment analysis. Many quantifiable social indicators on the effects of companies’ actions are already available for investors to take action and use as part of their REUTERS/Stringer investment analysis. Amplifying the “S” in ESG: Investor Myth Buster | Executive Summary 5 Demanding more data improves A proactive, mixed approach investment resilience pays off The link between business and human A more proactive effort is needed to better rights is well established. Regulation is fast understand and address social issues increasing. The current state of disclosure appearing within supply chains, which form a requirements by governments and stock substantial part of companies’ social exchanges is illustrated in Annex II. A decade performance. after the adoption of the UN Guiding Principles on Business and Human Rights (UNGPs), In the quest for better approaches to ESG there’s a growing consensus that voluntary criteria integration, qualitative approaches can commitments and compliance are not enough. be enriched by data-driven elements, and vice There are also many resources for improving versa. A combination of the two for the the understanding of social risks and purposes of due diligence and engagement can performance, some of which are available in this improve outcomes and help generate alpha. white paper and in Annex III. It is important to note that technology is, and Firstly, investors can, and should, demand will keep on, changing the availability and more data from both companies and data type of data investors can use, a development providers that is focused on the effects of that will increase the volume and granularity companies’ policies and impacts, while paying of available data. It will also allow for more closer attention to supply chains. This is key, information that is not based on self- because emerging evidence shows that the disclosure. integration of ESG criteria in investment analysis leads to improved returns, less The direction of travel is clear. Now is the volatility and lower downside risk. Better time for the investment community to be integration of social indicators in particular proactive and engage fully in the development can help to identify more resilient and of increasingly robust approaches to assessing profitable investment opportunities that are social performance and integrating social already aligned with established and criteria, in order to play its part in creating anticipated regulation. more resilient and equitable economies. More effective and consistent integration of social criteria in investment processes can also help de-risk investments and fulfil fiduciary Lessons learnt from the work of duty, the understanding of which itself is compliance professionals show that changing. It is key for investors to develop a voluntary policies and procedural strategy for their total portfolio – public and ‘tick-box’ exercises are not a remedy private markets, equity and debt – covering for avoiding enforcement actions or engagement,