Although the Covid-19 pandemic has underscored the need to focus more on social issues in the investment decision-making process,, the absence of uniform metrics combined with data availability creates significant barriers, according to a study by Greenwich Associates undertaken on behalf of BNP Paribas Asset Management.
The study polled 96 institutional investors and 33 intermediary distributors in the UK, France, Germany, Italy, the Netherlands and Nordic countries during June 2020. It found that while 37% of respondents saw ‘no barriers’ to investing in regard to social factors, 42% cited the “lack of established/standard metrics” as a problem while 31% mentioned the “lack of clarity over what socially responsible investment includes.”
Overall, the study showed 81% of respondents already employ ESG criteria in all of part of their portfolios and an additional 16% plan to do so. The environment and governance components remain the most important elements of investment approaches, but social aspects are closing the gap with 79% canvassed stating they can have a positive impact on long-term investment performance and risk management. This is a 20-percentage point hike from the period before the crisis compared to the 11% jump to 74% for the environment and 4% rise to 76% for governance in the same time horizon.
Going forward, the majority plan to significantly increase the use of social metrics. Almost half (47%) already use exclusionary metrics, with a further 26% planning to follow suit. Around 33% empolu labour standards metrics, with the same percentage expecting to incorporate them.
Social metrics typically include a company’s treatment of its employees, as well as its impact on wider society through its relationships with customers, suppliers and local communities. They not only focus on how a company curbs potential damage but also how it creates social benefits. Assessing the criteria can be more challenging than for example, the environment, that tend to focus on reducing harm, or governance, which often operates within existing legal or stewardship frameworks.
Frédéric Janbon, CEO of BNPP AM, said, “The Covid-19 crisis has clearly prompted a shift in investor perception of social factors, which are now widely seen as having a critical and positive impact on long-term value creation and risk mitigation. It has also highlighted the interconnection between the way in which companies approach social issues such as treatment of employees or addressing inequalities in their long-term sustainability strategy.”
Jane Ambachtsheer, Global Head of Sustainability at BNPP AM, says, “While social factors are an extremely important component of companies’ ESG scores, they have often been perceived as less prominent. This can be attributed in part to the fact that the nature of social indicators can seem less tangible or measurable, with standards that are more likely to vary by region – however, the same can hold for environmental and governance factors.”