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Questions an investor should consider when thinking about company operations from a social perspective:

  • Do the company’s products or services contribute to the overall good of society? Some products, such as tobacco or landmines, are typically excluded from a sustainable portfolio.
  • How does the company give back to the communities in which it operates? Does it have a foundation or make donations of its products and services? Are employees encouraged to volunteer their time?
  • How does the company treat its employees? What programs, benefits and opportunities are offered?
  • How does the company engage with its employees?
  • Is there diversity in the company’s workforce?
  • How does the company manage its supply chain?
  • What cybersecurity risks does the company face? 

Examining the Social Component of ESG More Closely

Companies that successfully address the social aspect of ESG often demonstrate a strong stakeholder focus. Good performance stems from the company’s ability to identify and address the needs of internal and external stakeholders, including the company’s overall impact on society. Procter & Gamble, for example, uses direct engagement and feedback from stakeholders to determine their areas of focus for social initiatives.  Internally, the company has strong labor management, and externally, they have had a positive social impact by using their platform to promote awareness for equality and diversity. Their stakeholder-centric culture is also evident in their ability to address the needs of their diverse customer base. For example, they have identified the challenge that blind people face in distinguishing shampoo and conditioner containers and they redesigned their products to promote accessibility. Companies with the strongest social performance push their stakeholder focus beyond immediate internal and external stakeholders to include local communities as well. Home Depot supports the communities in which they operate through donations and employee volunteerism. As an example, the Home Depot Foundation has partnerships with different organizations to build and repair homes for veterans.

When evaluating social performance of a company, one must also consider the material components of the business and the possible risks from regular business activities. For example, companies that sell physical products are at a greater risk for controversy and legal issues related to their supply chain management which can include ethical treatment of workers as well as the safety and sustainability of their raw materials. Lululemon, an athletic clothing retailer, is exposed to supply chain risks, but we believe they have adequately addressed these risks through their strict zero tolerance approach with manufacturers that do not meet their supplier policies and ethical standards. The company is also diligent about the safety and sustainability of its raw materials and works to hold their suppliers to relevant external standards.

Pandemic Impact on “S” and The Road Ahead

The business disruption that has occurred in tandem with the COVID-19 pandemic has magnified the importance of strong stakeholder relations, which form the core of the social component of ESG.  Stakeholders in any organization include all the touchpoints involved in the delivery a company’s product or service and broadly encompasses groups such as customers, employees, suppliers, communities, the government, and shareholders. Robust corporate social structures are geared toward sustained success and eschew short-term “quick fixes” in favor of actions that are supportive of long-run value creation. During the pandemic, some organizations have taken action to protect workers (by avoiding layoffs and furloughs), supporting supply chains (by providing monetary support in some instances), and aiding their communities (by helping to fill needed gaps, such as delivering personal protection equipment and supporting small businesses). These actions are helping to preserve crucial supply chains, build stakeholder loyalty, and bolster employee morale—all critical parts of a sustainable business and generally indicative of well-run, profitable, lower-risk entities.
The evolution of the social component of ESG analysis is likely being accelerated due to the impacts of the COVID-19 crisis and rising social unrest. The increased focus on the well-being of stakeholders has helped to identify companies that will be less susceptible to future business shocks given their strong preparedness for sudden, unforeseen events like COVID-19. The increasing relevance of corporate America’s relationship with stakeholders has given rise to the notion of “stakeholder capitalism” which recognizes how critical all factors are in a company’s road to sustainable value creation. J.P. Morgan’s CEO Jamie Dimon offered his perspective recently, noting that “The American dream is alive, but fraying. Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.” Regardless of how the “S” in ESG evolves, the concept of “the stakeholder” will play a central role in that evolution.