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The social factor: opportunities in ESG investing

Companies grapple with a range of data choices and fragmented regulation

September 2021
Anthony Belcher

Head of Sustainable Finance, ICE Data Services

The “social” aspect of ESG investing has gained prominence as COVID-19 and social justice movements spotlight workforce diversity, employment conditions and supply chain disruptions.

The predecessor to ESG investing was socially responsible investing (SRI) which involves strategies that exclude companies in industries viewed negatively, such as firearms. The origins of SRI are thought to date back to the Quakers, where in 1758 they prohibited members from participating in the slave trade.

Today, ESG “social factors” have evolved to cover the relationship between a company and its stakeholders. Social factors are on investors’ minds: in BlackRock’s 2021 proxy voting guidelines, one of the world’s largest asset managers noted that it expects U.S. companies to disclose workforce demographics, such as race, ethnicity and gender in line with the U.S. Equal Employment Opportunity Commission’s EEO-1 Survey. It noted that a company’s approach to human capital management is a critical factor in fostering an inclusive, diverse and engaged workforce, which contributes to business continuity, innovation and long-term value creation. Peers like State Street Global Advisors have called for similar disclosures.

Social indicators can be difficult to integrate in investment strategies: social issues are complex to assess and compare, cover a broad range of topics and are evaluated differently in various countries. In contrast to governance and environmental standards - where there are explicit targets such as "Net Zero" - there is no consistent regulatory standard, and many companies lack a uniform reporting framework.

There are also differences in reporting levels and standards between different regions. ICE has identified that in Europe slightly more environmental factors have been disclosed on average (40% of all sector relevant items of the STOXX 600 vs 39% social) whereas in the U.S. social is higher (33% social vs. 27% environmental for the ICE U.S. 1000).

Diversity in the spotlight

The push for ESG disclosures is gaining momentum, and the likelihood of rulemaking by the SEC in connection with human capital disclosure has increased. Similarly, the FCA is pushing for diversity disclosures by listed companies, and has proposed a mandated level of diversity on listed company boards for women and ethnic minorities in the U.K. Pressure from investors is evident: one of the U.K.’s largest investment companies, Legal & General, has warned it will vote against any FTSE 100 company that still has an all-white board by 2022.

At ICE Data Services, we see a common struggle: companies must assess a dizzying array of datasets to assess which can best help them meet shifting stakeholder and regulatory demands. In the U.S., ICE provides companies - mainly NYSE-listed - with access to social-focused metrics from public disclosures and updates them based on feedback from company investor relations and sustainability teams. Further, our desktop product helps these companies benchmark themselves against listed peers on ESG metrics. This enables us to incorporate ongoing feedback from both investors and corporate issuers into our reference data.

In addition, ICE provides BofA Global Research with ESG reference data to enhance its global equity and credit analysis - including ESG-related metrics, incorporated into research reports it provides to clients. ICE Data Service customers can also subscribe to receive primary ESG data points directly, such as board diversity metrics, and nearly 500 other ESG-related metrics which are part of a data set that continually grows as company disclosures evolve.

The European scene

In Europe, we aim to tailor our offering so clients can use our data to help support their compliance with key ESG regulatory frameworks. In particular, the Sustainable Finance Disclosure Regulation is focused on financial markets and compels buyside firms to report key ESG metrics across investments in their portfolio.

These metrics include identifying whether investee companies have adopted policies which evidence compliance with the UN Global Compact, OECD Guidelines for multinational enterprises, workplace accident prevention, supplier code of conduct or the means to protect whistleblowers. There is also interest in gender pay gap figures, and the ratio between average employee salaries and the CEO. Additionally, ICE’s service can screen for negative factors - such as companies who violate principles like human rights abuses and specific violations of the UN Global Compact.

In Europe, a draft report noted that a social taxonomy could also help investors make more informed decisions and direct resources towards socially responsible activities and companies. Though a social taxonomy may not be implemented imminently, ICE stays abreast of regulatory trends to ensure our data evolves with market demand.

Impact investing flourishes

As a subset of sustainable finance, impact investing aims to advance specific environmental or social causes while achieving good investment returns. The impact investing market is at $USD715 billion according to the Global Impact Investing Network, which noted that most respondents to its 2020 survey said their investments were meeting or exceeding their financial expectations.

Impact investing has particular application in the municipal bond market, which funds public works such as bridges, parks, libraries and other infrastructure. Here, ICE and risQ - a company focused on geospatial climate, economic and demographic data - offer a service that allows users to understand and score the potential social impact of an investment. The social impact scores help quantify multiple dimensions of socioeconomic vulnerability, with higher scores indicating that investment in a given community is expected to have a larger potential social impact. When assessing similar bonds issued by different local governments, investors can use this data to help make more informed decisions about where to allocate capital.

In a similar vein, social bonds aim to raise funds to use for projects with positive social outcomes. Issuance of social bonds this year has already eclipsed all of 2020 at over $US180 billion, according to ICE’s data. Interestingly, the U.S. lags Europe, the Middle East and Asia-Pacific in having these bonds social-certified by a third party. This raises the potential for “social washing”, where companies may attempt to appear more socially responsible than they actually are.

ICE’s Social Bond Index tracks the performance of debt issued for specific social purposes. Qualifying bonds must have a clearly designated use of proceeds for projects that aim to address a specific social issue as outlined by the International Capital Market Association (“ICMA”) Social Bond Principles. Social project categories include basic infrastructure, affordable housing, employment generation, food security and socioeconomic advancement. The ICMA principles recommend a clear process and disclosure for issuers, which investors, banks, underwriters and others can use to help them understand the characteristics of a given Social Bond. ICE’s Social Bond Index can be used to help people understand the diversity of the market, to help gauge relative performance versus broader indices or as a performance benchmark for a similarly aligned portfolio.

An alternate approach to social impact investing shifts its focus - with investment strategies that are profit-driven but place social impact goals at their center, known as “shared value” investing. We’ve already seen a return premium (“Greenium”) for early investors in the environmental sector. As analysis, data and focus bring greater transparency to social factors, could the same be possible in the social investing arena?

While financial markets may be volatile, interest in sustainable finance continues to flourish: 70% of respondents to a recent BNP Paribas survey identified social factors as a focal point, versus 50% before the pandemic. And as scrutiny around social risks intensifies, we’re committed to working closely with companies, investors and policymakers so that our ESG solutions meet their needs.

Sustainable finance: know your terms

  • Socially responsible investing (SRI) involves screening investments to exclude businesses that conflict with an investor's values. Examples include avoiding stocks that generate revenue from tobacco, fossil fuels, firearms or gambling.
  • Environmental, social and corporate governance (ESG) investing involves investors incorporating extra-financial factors into their investment decision-making process.
  • Impact investing involves a direct connection between an investor’s values and the use of their capital. Here, investors aim to have both a positive social impact and generate good financial performance.
  • Shared value investing is profit-driven investing which creates tangible societal benefits. This recognizes economic value often comes from social impact that improves shareholder returns.