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While ESG issues have long been a concern of institutional investors, it was the events of 2020 -- most notably the public reaction to the death of George Floyd - that brought sharper focus on the social impact of their portfolios. 

Historically, ESG research among institutional investors has focused mostly on the “E” and the “G,” leaving social issues as somewhat of a forgotten middle child. There was no shortage of companies jumping on the bandwagon last year to express their views on racial injustice and diversity and inclusion. 

ESG Accountability

While many business leaders were publicly embracing diversity and inclusion as company policy, Standard & Poor announced that it would be holding them accountable for actual results when deciding who they’ll be including in their S&P 500 ESG Index.

According to the United Nations Principles for Responsible Investment report on ESG integration, the social element of ESG issues can be the most difficult for investors to assess.

While environmental and governance issues are relatively easy to track as they are linked to real market data, and can be accompanied by lots of regulations, social issues are less tangible.That makes it very difficult to develop a quantitative model for understanding how these matters impact corporate performance.  

Increasingly, asset owners, investment managers and brokers are applying a social lens toward corporate value to recognize the extent to which social issues can impact financial performance, risk and return. There’s no question that the heat is on to increase socially responsible investing. As shareholders demand action, companies will need to adapt or face the consequences. 

Diversity and Inclusion Matter 

Racial inequality, however, isn’t the only issue driving the move to more socially responsible investing. Investors are also interested in other aspects of the ‘S’ component of ESG , including how a company manages relationships with its workforce, the communities in which it operates and the geopolitical environment, among other things. 

It’s evident that diversity and inclusion matters to a growing number of investors. Some of the criteria they’re using to decide what companies they’re willing to invest in includes:

• Hiring practices; awarding advancement opportunities and raises to employees.
  
• Ethical and diverse supply chain vendors.
  
• Mission or higher purpose.
  
• Diverse workforce.
  
• Performance history for consumer protection issues, including lawsuits, recalls, and regulatory penalties.
  
• Public stance on social justice issues, as well as lobbying efforts.
  

Those are just a few of the gating factors ESG-minded investors are considering. Bottom line, what they want to know is, are the companies their fund managers are investing in doing all they can to make a positive impact in the communities where they are located? What’s more, they want to know how can that social impact be measured.

Deepening the Impact of Corporate Social Responsibility

One diversity and inclusion opportunity that often gets lost in the broader social impact conversation relates to issues and challenges confronting returning U.S. military veterans. To risk stating the obvious, veterans are not a homogeneous group, but are as diverse a group of people as is the country itself. A company directing its social impact efforts toward veterans is helping women, people of color and Americans of nearly every ethnicity and socio-economic background. 

In its 2018 Military to Civilian Transition report, the U.S. Department of Veterans Affairs had this to say about returning military veterans: 

“While the men and women of our armed forces are better trained, better educated, and better prepared for transition than ever before, they still face unique challenges in accessing health care, attaining education, and establishing careers that necessitate definitive action to help take care of their special needs.”  

Returning military veterans have much to offer their communities, but many have endured life altering physical injuries or are coping with post traumatic stress. It’s estimated that 550 more veterans, beyond the projected 20 per day, will take their own lives within the next year due to the pandemic. One study suggests that increased social isolation and higher levels of unemployment are pushing the projections higher. 

Developing proactive ESG strategies that include a veterans-focused “S” component could be a compelling value proposition for like-minded investors.

Accountability is becoming the popular refrain for ESG funds and their component companies. If you’re interested in a respected resource to evaluate a company’s social impact commitment and performance, try the Global Reporting Initiative (GRI). The GRI doesn’t confine itself to environmental issues. It includes information on how companies treat their employees, the suppliers they use, and how they’re giving back to their communities.

Of the world’s 250 largest companies, 80 percent issue Corporate Social Responsibility (CSR) reports using GRI’s Sustainability Reporting Standards.