The most commonly available social data concern workforce gender diversity, health and safety, product recalls, and human rights policies. But data quality remains sketchy. For example, the fact that a company has a human rights policy doesn’t mean it is a good policy or well implemented.
It’s also difficult to compare social metrics across companies and industries. Unlike carbon footprints and governance standards, which can be easily compared across companies or sectors, social issues differ across industries.
In the apparel industry, for example, key issues include forced or child labor, the proportion of employees covered by trade unions or bargaining agreements, grievance reporting mechanisms, and supplier codes of conduct.
In retail banking, predatory lending is a big social concern, along with access to services for customers from lower-income backgrounds, privacy and data security, and fines levied for regulatory breaches. Food and beverage companies should be judged on product quality and recalls, investment in safety and quality systems, and production time lost because of workplace injury or safety incidents.
These issues will gain more prominence because official scrutiny of “S” factors is increasing steadily.
Investors Face a Tsunami of “S”-Related Legislation
Our research shows that, between 2011 and 2022, key Western governments and quasi-governments took 23 significant actions—such as introducing legislation or guiding principles and holding parliamentary inquiries—to curb forced labor and human rights abuses. Most actions (17) took place in the second half of that period.
This slow-moving tsunami of legislation will force companies to carry out and report due diligence in their operations and supply chains. Government moves to ban products made with forced labor are already underway in the US and will soon be followed by the European Union.
Grassroots awareness of social issues is becoming more vocal. COVID-19 highlighted the inequality of vaccine distribution and the strain on healthcare, while supply chain disruptions caused by the pandemic and by the war in Ukraine have shed light on challenging conditions in some export-producing countries. Rising inflation and the cost-of-living crisis are increasing public awareness of social issues.
Investors, in our view, should take two steps to accommodate the growing importance of “S” factors in their portfolios.
Data Science and Qualitative Analysis Can Drive Insights
The first is to address issues of data quality and availability. Where data are available, their materiality for various industries should be mapped appropriately. Then, data science and qualitative analysis can help drive better insights.
For example, specialized third-party providers may have more in-depth knowledge of “S” factors than in-house securities analysts, but they typically cover fewer companies. Using data science, investors can access new data sources with the help of artificial intelligence.
Understanding the data is important to avoid drawing false conclusions. “S” controversies are more common in some industries, such as autos. But don’t assume that industries with less data have a correspondingly low level of controversies. Similarly, fundamental research can verify that a company’s human rights policy is effective and appropriately implemented.
Three Dimensions to Understanding “S” Issues
The second step is to develop a research framework that can identify key “S”-related risks and opportunities.
We have identified three broad themes to help investors make sense of the evolving “S” investment environment: a changing world, a just world and a healthy world (Display).