Recognising that being a good corporate citizen is the right thing to do and pays off is something investors and the financial community need to think harder about, argue Vaidehee Sachdev and Matt Kirby.

Read this article to understand:

  • The importance of business in addressing social inequality
  • The evidence supporting the case for better employee treatment
  • Whether investors can contribute to a fairer world and generate returns that meet their expectations

Do companies that behave as good corporate citizens outperform? Might their actions benefit everyone, creating profit and enhancing societies as well? These knotty questions have occupied academics and authors of investment literature for years but have come into sharper focus in the aftermath of the coronavirus pandemic.

In this Q&A, Aviva Investors’ social pillar lead and impact analyst Vaidehee Sachdev (VS) and social transition fund manager Matt Kirby (MK) contemplate the challenges of investing to make the world a better place – to achieve positive social impact.

Has the financial sector turned a blind eye to exploitative corporate behaviour?

VS: The social impact of corporate behaviour has been one of the great blind spots of the financial industry. We know society is characterised by unsustainable inequality in both the developed and developing world; millions of people do not have access to basic rights and resources. Of course, this is partly down to the failure of states to provide a decent standard of living for their citizens, but also because business and markets have failed.

It's simply not efficient or healthy to have large sections of the population in working poverty, lacking access to basic resources or routinely denied their rights at work.

MK: The US economist James Galbraith suggests income inequality is the financial equivalent of high-blood pressure. It affects the whole body, can prefigure a crisis but is not unstoppable – it can be addressed. Conversely, measures to address inequality can bring positive benefits, improving social mobility and wellbeing, promoting employment productivity and growth.

What kind of social transition is needed?

VS: When we refer to the need for a social transition, what we are talking about is a shift away from business-as-usual to a situation where businesses and the financial sector are accountable for their negative impacts on people and society. Investors and companies have a part to play in this.

The call for a social transition is about straightforward things – paying workers fairly, respecting human rights and providing people with access to basic services to enable them to live in dignity. But the consequences of ignoring these factors are potentially devastating. 

Why has it taken so long for investors to focus on social impact?

VS:  One of the common reasons people cite as a barrier is the fact social is hard to define. But we should not be debating this anymore, because we are essentially talking about human rights.

Reasons usually centre on how much harder social is to measure

Other reasons usually centre on how much harder social is to measure. But you just have to change your research methods; you need to focus more on obtaining qualitative information, for instance. This can be time-consuming, painstaking work, but helps build a clearer picture of a company.

MK: Social impact is difficult to quantify, but the mental obstacle can be overcome if you change your mindset to viewing profit as an outcome rather than a goal. There is a growing weight of evidence from academic studies highlighting the strong relationship between social performance and long-term financial performance.

How much detail on companies’ social exposures can you see now in financial accounts?

VS: Generally, company disclosures on social issues are poor. Often, companies excuse themselves by pointing to a lack of standardised reporting templates and frameworks, but soon that will change. For instance, the European Union’s Corporate Sustainability Reporting Directive (CSRD) will provide standardised metrics all companies will have to report against. In the States, the US Securities and Exchange Commission has also been considering mandatory disclosure on human capital topics.

We hope the EU regulation will encourage companies to report more comprehensively on their people impacts

We hope the EU regulation will encourage companies to report more comprehensively on their people impacts.

MK: We assess whether companies are truly aligned with their customers. Then there are questions about managing human capital and productivity right across the board. At a time when intangible assets are thought to account for over three quarters of the value of the S&P 500, we simply cannot afford to overlook human capital.

What this means is that every company represents a unique basket of opportunities and risks, which is why it is so hard to call for any kind of blanket measurement.

How will you measure social value and assess who is creating it?

VS: For publicly listed companies, we look at whether companies have met what we believe are their core social responsibilities. We use a framework developed by the World Benchmarking Alliance to assess whether companies have a robust human rights approach, provide decent work and act as good corporate citizens, including paying their fair share of tax. What is important – but often hard to obtain – is data on outcomes.

We expect to see more companies provide greater disclosure on their supply chains

MK: We draw on the work of hundreds of NGOs and independent data providers that analyse which industries or companies are carrying out sustainable or unsustainable activities. This information is being provided to the financial community at no charge but is either being overlooked or not used systematically to enhance decision making. It’s wasteful and arguably financially irresponsible. The information is varied and sometimes unstructured, so it is not possible to take a pure quantitative approach but looking at the data in detail can be instructive, certainly compared to an approach that solely focuses on financials.

How will the research be translated into an investment strategy?

MK: There is very detailed research that informs what we do, based on which stakeholders are most affected by the way the company is doing business and what the company is doing to prevent or remedy negative impacts.

Firstly, we exclude companies from the investment universe that have clearly breached important international standards and norms. Investing in these companies would put our clients’ capital at risk.

We compile data from a wide range of data to strengthen our view on a company

Then we have a social transition sleeve, which focuses on identifying companies that manage their social impacts well and where we think we can engage to encourage them to go further. We look for companies that are demonstrating good practices in our three thematic areas – respecting human rights, offering decent work, and behaving responsibly. To do this, we compile data from a wide range of data sources to strengthen our view on a company.

Thirdly, we have a solutions sleeve, made up of companies enabling people to access basic resources and services. Provision or access to education, healthcare and financial resources are the main areas of focus. These are very exciting areas from an investment perspective.

What will drive the performance of the strategy?

MK: Calculating a company's intrinsic value involves estimating its future cashflows, discounted back to today. In our view, companies with well-established governance and social frameworks are more likely to deliver cashflows in sustainable, predictable ways. Our process has been set up to ensure these variables are rigorously assessed. Only long-term investors can truly benefit from investing in companies that focus on social performance rather than profit alone, as it typically takes years for investments in material stakeholder factors to flow through to financial performance.

How will you engage with companies that you identify are not addressing their social responsibilities? Are you prepared to divest?

VS: A big part of the success of this kind of strategy will depend on how we engage because we cannot expect to have direct impact through how capital is allocated alone. That is going to be a real power of this strategy, because no company is perfect.

How we engage will be a big part of the success of this kind of strategy

We are asking companies to have a robust and meaningful process in place on human rights due diligence. Ultimately, if we do not see progress on these and other areas, we will use that final lever and divest.

Key risks

Investment risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates. Investors may not get back the original amount invested.

Emerging markets risk

The strategies invest in emerging markets; these markets may be volatile and carry higher risk than developed markets.

Related views

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

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