Practitioners of ESG investing (common shorthand for strategies that take into account environmental, social and governance issues) often single out the “S” in that acronym as a particular challenge. They present common questions – such as the best way for analysts and portfolio managers to uniformly quantify the anecdotes they hear about social issues connected to companies, or the social problems or strengths that matter most – but they offer very different answers to those questions, if any at all.
“We are, with social issues, where we were with environmental issues probably 15 years ago,” says Paul Hilton, a portfolio manager at Trillium Asset Management, a $1 billion firm devoted solely to sustainable and responsible investing. “That’s a frustration for many of us.”
A recently released report by the Interfaith Center on Corporate Responsibility (ICCR), a long-time presence in the push for better corporate sustainability, seeks to address, and perhaps begin to alleviate, the common frustration around the S in ESG.
The main takeaway from the ICCR’s “Social Sustainability Resource Guide” is that companies need to do a better job of both considering and reporting on their social impacts. And for those companies that do implement positive social programs and report on them, ICCR stresses that less emphasis should be put on social outputs (for example, the number of bed nets provided to prevent malaria), and more on social impacts (the result or change that is a consequence of the outcome).
“ICCR calls for greater emphasis on a rigorous, collaborative, multi-party, multi-sector approach to social sustainability that is rooted in on-the-ground realities that impact people’s lives,” says the report.
In the spirit of this “collaborative, multi-party, multi-sector” approach, the report’s authors represent a wide variety of corporations, NGOs, and investment firms. It includes case studies from PepsiCo, Timberland, Merck, Domini Social Investments and others to drill into the details of how various players have tackled the quantification of social issues. And it concludes with a framework to help companies begin to gather around a common model of how to report on the actual impacts of their social programs.
But will the report and its framework really help ESG investors get a handle on the social issues most closely tied to companies’ core businesses? Take the PepsiCo case study: it’s a description of WaterHope, a program established with the help of PepsiCo that provides for the creation of community-owned and operated water stations in poor areas of the Philippines. Even if the ICCR report helps companies to better report on the impacts of programs like this, will it really be helping to pull the S out of the greenwashed cloud of cherry-picked anecdotes? Or will it be giving companies a license to focus primarily on their philanthropic side projects in reporting on their social sustainability?
David Schilling, program director at ICCR and one of the lead authors of the report, stresses that he and the other authors of the resource guide don’t consider programs like WaterHope to be philanthropic side projects – he says that for a company like PepsiCo, which relies heavily on water to operate, any program that encourages the sustainable use of water is tied to its core business.
“We’re not seeing this as just a nice thing to do in the community, or as philanthropy,” he says, “but as a way of asking, ‘What can sustain communities?’ and ‘How can corporations participate in that, while also looking at it from a business risk perspective?’”
He adds that ICCR’s resource guide is admittedly an early step in the conversation around improving how the social part of ESG is quantified, and that for the discussion to move in the right direction, it’s incumbent on institutional investors to be asking companies the right questions about their social impacts.
“It’s going to be an iterative process, and eventually, on those quarterly calls where CEOs talk to investors, you’ll be getting a range of questions that aren’t just on the financials, but are about human rights issues, other social issues, and other environmental risks,” Schilling says.
Hilton, of Trillium, agrees that the conversation around the S is in its early days, and that the ESG investing community has a long way to go in offering up wholly satisfying answers. He believes that the focus on side projects in the report is simply indicative of where that conversation is right now.
“I don’t think it’s a weakness of the report; I think it’s a weakness of the current state of how companies are addressing this issue,” he says. “But it’s true that from an analyst and portfolio manager perspective, we’re going to need more robust tools to evaluate where companies are going, and to do proper benchmarking in this area.”
He says that the ICCR report is most helpful in its focus on quantifying issues that have long been solely qualitative, and that that’s perhaps the biggest step it could have taken at this point.
Both Schilling and Hilton point out that toward the end of the ICCR guide is a “recommendations” section, which says that going forward, it’s important for companies to move the social impacts discussion up several notches to the board level, so that it can permeate all aspects of operations.
“Over time, I think we’ll see more investors asking, “How do companies look into this at the board level? How does it work into their strategic decision-making?” says Hilton. “It’s clear that these one-off examples don’t necessarily get to those broader questions, but I think that eventually, that’s what we’re going to get.”
