In the world of ESG investing, the environmental (“E”) and governance (“G”) issues facing companies have often taken centre stage, with social concerns (“S) receiving much less attention.
However, discussions around these social factors – which can be loosely defined as how a company manages its relationships with its internal and external stakeholders, namely employees, customers, suppliers and the community and society in which it operates — have become more widespread in recent years. The impact of Covid-19, which has seen companies optimising new ways of working and responding to employees’ needs, as well an increased focus on diversity and inclusion initiatives, means that the ‘S’ of ESG continues to gather momentum.
In emerging markets (“EM”), social factors that are recognised in more developed nations are not yet fully considered, however the creation of a draft EU Social Taxonomy framework, driven by underlying UN SDGs, means that investors globally can start to map their products, services and activities.
Although this framework has yet to be finalised, we feel optimistic that EM countries will adopt standardised social metrics, as certain sectors will have financial incentives to do so. And crucially, this framework helps us ask the right questions to our investee companies, as part of our ongoing, in-depth analysis into emerging markets countries and businesses. Questions around issues such as supply chain integrity, child labour and working conditions ensure our companies continue to be mindful of their social efforts, and we continue to emphasise the importance of this work as it becomes apparent that best-in-class practices are rewarded not only by better productivity and happier stakeholders, but also by increased profitability.
In our report below, Veronique Erb, EM Equity Portfolio Manager, looks at the following key points:
- Why social factors have been harder to define and measure.
- The importance of rigorous, independent research.
- Standardisation through social taxonomies.
- EM sectors that would benefit from a standard framework.
Want to read more about the "S" in ESG? Download our PDF here.