Measuring the S in ESG

Hope you are doing well and staying safe. Welcome back to our brief thoughts on ESG. This week, as social factors have gained importance within the ESG realm amid the pandemic, I would like to discuss how can you measure when a company has the right “S” strategy.

As usual, the ideal world for investors is to have quantifiable factors to measure. This has always been perceived as the most difficult part of ESG integration. With the S, it is perceived to be particularly difficult as some S factors (like social impact) are relatively challenging to measure. But, is the S truly difficult to measure? Or in other words, what are the most measurable parts of the S?

If we look at SASB’s standards, there are a lot of quantitative S topics which are included. Depending on the industry, these topics focus on health (product safety, safety at work, labor conditions, etc), equal opportunity (gender bias, minority representation across the corporate structure, etc), information security/data privacy, business ethics, or even things like financial inclusion (checking accounts provided to unbanked or underbanked groups). There therefore seem to be many ways to measure when companies are doing the right S thing. As with all ESG issues, the sky is the limit with S factors. And the good news is that if a company wants to start measuring its S impact, we think SASB standards focused on social items are a good place to start.

Assuming a company decides to improve its S practices and be more explicit with its disclosure, how will an investor know when a company is doing enough? We think that as with many things, it will be a relative game. The bar will be higher in more developed markets (even more so in Europe) than in emerging markets. Within a market, the bar will depend on what competitors are doing. Ideally all companies would go far to improve their social impact, but as resources are limited, companies should at least try to target a best in class standing.

In Mexico it is very uncommon to see companies disclosing in detail their S practices. You can find relatively enough data on gender diversity now (it became mandatory to disclose it at the board level, and many companies are now doing it across the structure). You can sometimes also find data on labor conditions (employee benefits, employee training, employee turnover rates, etc.). But then it becomes harder and harder to find robust data on data privacy, safety at work, business ethics, financial inclusion, etc.  

Over time, we believe that companies will be pushed (by investors) to become more transparent. By then, we would expect to see more quantifiable data available to feed models that measure the S-risk as part of the ESG-risk. It would be wise for companies to start looking ahead and start gathering the right data to be able to answer these questions soon. First movers, as usual, are likely to be praised.

Hope this was of use. As usual, if there is anything we can help you with, please reach out. Also, don’t forget to recommend any ESG subject matter that you would like us to research and put in a forthcoming weekly.

Regards,

Marimar

Partner, Miranda ESG

This week’s recommended reading

• BlackRock’s Green Bet Pays Off as ESG Investing Holds Firm Under COVID-19
• Why tech funds score highly on sustainability
• ESG investing continues to grow despite lack of investor understanding
• ETF Insight: ESG ETFs score major victory during coronavirus turmoil
• Can companies still afford to care about sustainability?