Industry Voice: Investor engagement: addressing the 'S' in ESG

At BMO Global Asset Management, we have been engaging with companies on environmental, social and governance (ESG) issues for two decades to help create a more sustainable future for us all. During this time, engagement has developed from a relatively niche approach to a mainstream investor activity. In fact, it's central to what it means to be a 21^st century investor. As pioneers, we've been at the forefront of this transformation.

However, the ‘S' of ESG (environmental, social and governance) has been typically more difficult for investors to define and quantify than ‘E' and ‘G' factors. Social issues are less tangible and there is less mature available data to show how they can impact company performance. Furthermore, their scope has increasingly widened over the past two decades as a reflection of the evolving business environment.

Traditionally, ‘S' factors include human rights, labour issues, occupational health & safety, and product safety and quality. More recently, they have also come to incorporate issues such as bribery and corruption, diversity, automation, data privacy and security, tax payments and access to finance, as well as medicines and nutrition.

Enter 2020. The COVID-19 pandemic has brought unprecedented challenges to the global economy and profoundly impacted society, shaking our fundamental assumptions about the way we live. The crisis, which could erase development gains across many countries, has also painfully exposed existing and persisting social and economic inequalities. 2020 also saw public uprisings against systemic issues of racial inequalities and police brutality following the death of George Floyd in the US, mobilising people globally to rally for racial justice. Many companies were prompted to take a fresh look at the adequacy of their own diversity policies.

Against this backdrop, social issues are now among the most pressing issues for companies globally. Their license to operate hinges more than ever on their ability to engage and manage their stakeholders - not just through the coronavirus crisis, but in general. It has also become progressively clearer that all elements of ESG - ‘S' included - are fundamentally linked and of equal importance. The Just Transition concept, which calls for the protection of workers' and communities' livelihoods as we shift to a low-carbon economy, is a case in point. Solutions to environmental issues must not be viewed with tunnel vision: we need to consider the impacts any changes we propose would have on society.

This decade, we expect investors and data providers to overcome the challenges that had prevented the analysis and integration of social factors, and step up their engagement towards social issues, whilst carefully balancing interconnections with E and G issues. The Workforce Disclosure Initiative, which we have supported, is an example of how investor action can drive more consistent, reliable ‘S' data. It aims to improve corporate transparency and accountability on workforce issues, such as wage gaps, diversity and climate change responses, to provide companies and investors with better data and help increase the provision of good jobs worldwide.

Increased attention to social issues is just one key development that we expect to see shaping the future of investor engagement this decade as we move further towards creating a fairer and more sustainable future. Interested in discovering more? Click here to read more on what the future looks like for investor engagement.

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