Bridging the social gap in ESG investing

Founder and CEO of The S Factor Co. speaks out on need for macro perspective on social issues and lack of nuance in labelling

Bridging the social gap in ESG investing

Information is a powerful thing, but when one focuses too much on individual data points and draws no trend lines between them, even the most powerful signal can remain unheard. That’s the problem Bonnie Lyn de Bartok saw more than 10 years ago when it came to social factors in ESG.

“I’ve been working in social development for over 20 years, which has given me a unique perspective observing operations from the other side of any investment at the ground level,” said the founder and CEO of The S. Factor Co., a firm that endeavours to quantify the social impact of company’s decisions and activities. “I saw that paying attention to social factors really produced predictive patterns that uncovered risks of distrust and, in some cases, disruption.”

A rich taxonomy

Over the course of her work, de Bartok realized that while investors were aware of one-project-at-a-time business cases showing how social factors can impact companies, they weren’t seeing the aggregate effects and trends. In other words, there was no macro perspective to show a consistent pattern that investors could act on.

“We established the correlation between social management and efficiency and outperformance over a decade ago,” de Bartok said. “We started producing our index products in 2010, which market our first product that formally drew a correlation. So we’ve been looking at this for a long time.”

That time has certainly been well spent. The S Factor Co. has developed a taxonomy of ESG factors that includes four key categories – employee relationships, ethics, supply chain, and the community – each of which encompasses several themes measured by an intimidating array of approximately 1,200 indicators and metrics. According to de Bartok, her company has the largest number of norms-based screens and metrics across the entire ESG universe.

To develop that wealth of indicators and measures, the firm had to mine extensively from pre-existing social impact frameworks, including ones used by operators and investors. Frameworks on the operational side, de Bartok said, are influenced heavily by academia, best practices, and input from industry associations that have faced numerous disruptions related to social issues.

“Thousands of people and experts have had input on those standards. We didn’t need to be really creative to incorporate them; we just mapped the key topics together, and reduced or normalized each definition across those standards,” she said. “We’re looking at things like anti-discrimination, diversity and inclusion, emergency preparedness … At the board level, we’re also looking at accountability for social issues such as business integrity and planning, pay ratios, and equality.”

She also noted that across the market for ESG products, there’s hardly a single one that really looks at social impact from an external community perspective. Her firm picks up the slack by using a social lens to consider problems like air emissions, grievance management, product stewardship, waste management, and a nearly bottomless grab-bag of other issues that, if managed well, can be preventative.

“The significance of our work specifically is to monitor both the internal and external environment as they relate to social impacts,” de Bartok said. “Specifically, we want to see the effect of decisions made throughout the company’s operations.”

Two out of three ain’t good

She emphasized that the social impact data and index products her firm offers were designed with no particular ESG strategy in mind. In other words, it doesn’t matter whether an investor uses negative screening, impact investment, or some other approach; the same benchmark can be used for different strategies.

“Investors’ strategies can target best-in-practice, best-in-class, or minimum threshold of performance in those areas,” de Bartok said. “We can also look at momentum strategies, which involve stakeholder activation or engagement that demands transparency and improvement from portfolio companies. There’s also the option of isolating the risk exposure for laggard companies that are not performing in social areas at all.”

She also underscored that shining a light on social factors exposes a whole host of oxymoronic cases in ESG investing where companies are given credit for being upstanding in one area, but not marked down for shortfalls in others.

“Why are banks in our global top 20 sustainability lists for going paperless, even though they’ve got billions of dollars invested in environmentally destructive companies?” de Bartok said. “We can ask the same question about some companies that have horrific human rights records, but have also reduced their carbon footprint by automating their machines.”

A huge part of the problem, in her estimation, is the use of catch-all language about impact in ESG. Some investment strategies may call themselves ESG funds, for instance, even though they’re all about being carbon-focused and nothing else. Taken to the extreme, this type of practice leads to an inherent and clear danger of impact washing.

“There are mission-based impact funds that address a specific issue, and I don’t think they should call them ESG funds if they’re not covering all aspects of ESG,” de Bartok said. “By the same token, I think a lot of responsible investing data products are called ESG funds, even though they’re just addressing E and a little bit of G with no social factors at all baked in. At the end of the day, we should all just be more specific – if it’s carbon-focused, just call it that.”

A finger on the social pulse

Right now, companies and asset managers with a self-professed commitment to ESG are under pressure to provide transparent disclosures. Third-party data providers are also coming out of the woodwork, offering deep dives, X-rays, and snapshots to help investors and advisors pursue the responsible investing strategy of their choice, as well as give companies a chance to know where they stand in their industry’s ESG rankings.

But even with this explosion of options, de Bartok maintains that the industry is nowhere near as complete as it should be. While there’s US$46.6 trillion in AUM placed in investment strategies that speak to a myriad of ESG factors, they’re deafeningly silent with respect to the 1,200 social factors that her firm monitors.

“That's the big question: do wealth managers and institutional investors even get that?” she said. “They have to be aware that all these social factors now being highlighted by the pandemic aren’t within the genetic makeup of the products and strategies they’re investing in. And the reality is we can help them navigate it – we have our finger on that pulse.”


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