Understanding ESG Part 2 - Social Causes
Updated: Apr 12, 2020
Welcome back to our series on understanding ESG investing. If you have not yet read the first entry, we recommend you do so here before continuing. It will provide a helpful foundation for your overall understanding as well as outlining the environmental component of ESG investing. In this lesson, we’ll be covering the S in ESG, which stands for social. This metric tracks the social initiatives a company is involved in as well as the positive and negative social consequences of their business activity. This can include but is not limited to:
The pay gap between the CEO and the median company salary.
The composition of company leadership - is it diverse and representative of society?
The presence or lack of HR initiatives designed to promote workplace safety and opportunity.
The companies level of community engagement.
The pay difference between male and female employees that do the same job.
Their level of compliance with international human rights laws.
Overall philanthropyHow companies handle customer privacy.
The wages and working conditions of outsourced employees.
As we’ve stated before, when interpreting this type of data there are a couple of helpful things to keep in mind. While it is useful to interpret a company's overall score as either positive or negative you can get additional context by comparing it to other scores from companies in the same industry. Comparing Nike to Delta Airlines doesn’t necessarily help you as much as comparing Nike and Adidas. And, as we’ve stated before it is also important to know that ESG investing typically takes a more active approach to making change than simply avoiding “bad” companies. You are welcome to use our tools to screen out “bad” companies if you like but in order to get the most out of an ESG investing strategy consider using these scores to identify areas of opportunity where investors can help push a company to change in a positive way. Simply ignoring companies that contribute to the problem doesn’t go as far as trying to play an active role in getting these companies to become part of the solution.