Why investors cannot ignore the ‘S’ in ESG

Apr 25, 2022

For businesses and investors, ESG (environmental, social and governance) integration is not just a nice to have: it has become core to strategic and sustainable growth.

The ‘S’ in ESG in particular is moving rapidly up the agenda due to the effects of the pandemic, which highlighted inequalities in health and wider society; recent social and labour movements; and awareness of the wide and commercially tangible benefits of diversity, inclusion and employee wellbeing.

“Society is looking for fairer economies and fairer companies,” says Willem Sels, Global Chief Investment Officer, HSBC Global Private Banking and Wealth. “We believe those companies that behave in a fair way are going to be the ones that win in the longer term, and investors positioned to anticipate the change will benefit.”

Powering a new social conscience

The COVID-19 pandemic has put social inequalities into sharp focus. One example is stark differences in The COVID-19 pandemic has put social inequalities into sharp focus. One example is stark differences in access to vaccines across the world based on socioeconomic status. Just 14 per cent of the population of low-income countries has received at least one vaccine dose for COVID-19, compared with 79 per cent of the population in high- and upper-middle-income countries.(1)

Unequal access to healthcare, coupled with longer life expectancies and ageing populations worldwide, has triggered intense demand for sustainable healthcare – that which is affordable and accessible.

“Innovative new technologies are enabling healthcare services to be delivered in novel ways, often at lower overall cost and with better patient outcomes,” Sels notes. “This presents a fascinating investment opportunity with the potential for both social and financial rewards.”

Ethnic minorities, lower-income households and women have also been disproportionately economically affected by the pandemic. In the US, female participation in the labour force is at a 33-year low. Black women, senior managers and women with young children have experienced the greatest challenges: some 23 per cent of women with children younger than 10 considered leaving the workforce in 2020.(2)

Yet we know greater diversity means greater productivity, greater creativity and therefore greater profits – Yet we know greater diversity means greater productivity, greater creativity and therefore greater profits – and increasingly so. One analysis found that companies in the top quartile for gender diversity on executive teams were 25 per cent more likely to have above-average profitability than companies in the fourth quartile – up from 21 per cent in 2017 and 15 per cent in 2014.(3)

Another key talking point around ESG in recent months has been labour standards, as company supply chains come under scrutiny and consumers push companies to treat employees, customers and society more fairly. 

Everyone is a stakeholder in social issues

Judy Kuszewski is Chief Executive at Sancroft, a sustainability consultancy that works with companies to improve their environmental, ethical and social impact. She explains that regulation has been an important contributor to companies’ new focus on social factors.

“Governments and regulators worldwide are starting to tackle major issues of social concern in a big way,” she says, pointing to the UK Modern Slavery Act, and new rules on human rights due diligence in the EU and Japan. Meanwhile, in China, authorities are pursuing a ‘common prosperity’ drive – an effort to correct social inequalities and bridge the wealth gap.

“China has seen a significant shift from the decades-long focus on quantity of growth to high-quality, low-carbon and inclusive growth,” says Cheuk Wan Fan, Chief Investment Officer, Asia, HSBC Global Private Banking and Wealth. “China’s vision to promote common prosperity and other initiatives under the 14th Five-Year Plan will create new opportunities for growth.”

But there is not just top-down direction from governments on social issues. Shareholders feel empowered to hold companies to account, because the ‘S’ is all about society and people, making everyone a legitimate expert, says Kuszewski. Investors and executives are leading a shift around the role of businesses in society, she suggests, realising that companies need to build and maintain their reputation and “social license” to operate. 

Plus, there is evidence that shareholders and consumers are increasingly willing to pressure companies on sPlus, there is evidence that shareholders and consumers are increasingly willing to pressure companies on social values through their buying habits. A survey from Euromonitor found that more than a third of consumers are willing to boycott brands that don’t align with their values, and switch to those that engage in social issues.(4)

Corporate social responsibility: cost versus benefit

Being socially responsible does not come at a cost to business. “On the contrary,” notes Sels. “Research shows it is likely to boost their bottom line over time, with additional benefits for employees, customers, investors and the wider economy.”

A truly open and inclusive company culture can also help businesses attract and keep the best talent, which is crucial at the time of the ‘Great Resignation’, and can make employees more motivated and engaged. One study found that organisations with more diverse teams have a 22 per cent lower turnover than those without. (5) They can also serve their clients better, boosting sales and profits.

“Gender diversity has been an important investment theme for us through the years,” says Sels. “We believe that diverse teams benefit from diversity of thought and make fewer mistakes because they challenge each other. They are also more aligned with their clients, tend to be stronger when it comes to marketing and have products that are better adapted to the needs of their customers.”

A 2015 report forecast that USD12 trillion could be added to global GDP by 2025 by advancing women’s equality.(6) In contrast, globally, the loss in human capital wealth due to gender inequality alone is estimated at USD160.2 trillion,(7) so the stakes are high.

Measuring the ‘S’ in ESG

Key to understanding the ‘S’ in ESG and the impact it is having is quantifying success.

ESG rating agencies and investors are enhancing their analysis of social issues and putting pressure on companies to be more transparent. Increasingly, shareholders are asking businesses for more detailed disclosures about outcomes and impact of their initiatives and commitments.

This should add up to clearer ways to assess the impact of company policies and practices on social issues in the future, so investors know where to put their money for best effect.

“Environmental issues may take the spotlight, but social issues are just as important,” Fan says. “Investors have a key role to play in building a future that prioritises resilience, social mobility and the environment alongside economic growth.”

Read more insight from our investment experts here, and discover our high-conviction investment themes in our latest Investment Outlook.

1 Tracking Coronavirus Vaccinations Around the WorldTracking Coronavirus Vaccinations Around the World Open In New Window, New York Times, accessed March 2022 

2 Seven charts that show COVID-19’s impact on women’s employmentSeven charts that show COVID-19’s impact on women’s employment Open In New Window, McKinsey & Company, March 2021 

3 Diversity wins: How inclusion mattersDiversity wins: How inclusion matters Open In New Window, McKinsey & Company, May 2020 

4 Euromonitor International’s Voice of the Consumer: Lifestyles Survey 2021Euromonitor International’s Voice of the Consumer: Lifestyles Survey 2021 Open In New Window 

5 Inclusive Mobility: How Mobilizing a Diverse Workforce Can Drive Business PerformanceInclusive Mobility: How Mobilizing a Diverse Workforce Can Drive Business Performance Open In New Window, Deloitte, 2018 

6 The power of parityThe power of parity Open In New Window, McKinsey & Company, September 2015 

7 How large is the gender dividend? Measuring selected impacts and costs of gender inequalityHow large is the gender dividend? Measuring selected impacts and costs of gender inequality Open In New Window, World Bank, February 2020 

“Sustainable investments” include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors (collectively, “sustainability”) to varying degrees. Certain instruments we include within this category may be in the process of changing to deliver sustainability outcomes.

There is no guarantee that sustainable investments will produce returns similar to those which don’t consider these factors. Sustainable investments may diverge from traditional market benchmarks.

In addition, there is no standard definition of, or measurement criteria for sustainable investments, or the impact of sustainable investments (“sustainability impact”). Sustainable investment and sustainability impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors. 

HSBC may rely on measurement criteria devised and/or reported by third party providers or issuers. HSBC does not always conduct its own specific due diligence in relation to measurement criteria. There is no guarantee: (a) that the nature of the sustainability impact or measurement criteria of an investment will be aligned with any particular investor’s sustainability goals; or (b) that the stated level or target level of sustainability impact will be achieved.

Sustainable investing is an evolving area and new regulations may come into effect which may affect how an investment is categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.

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