Social and governance investing – beyond the E in ESG | AAG Wealth Management

Social and governance investing – beyond the E in ESG

Posted: September 16, 2021

Discover why companies with good social and governance records offer excellent opportunities for investors.

With the Glasgow COP26 climate-change conference nearly upon us, much of the talk is of investing to limit global warming.

But with all this emphasis on the environment, businesses must not lose focus on social and governance factors – the S and G in ESG investing. As part of our commitment to responsible investment, St. James’s Place aims to ensure they don’t.

Governance refers to the way companies are led – for example, how their boards and shareholder groups are made up and remunerated, and how they make decisions.

Social factors look at how companies manage their relationships with workforces, supply chains and communities. These factors are crucial because good practice in S and G can help increase profits and financial sustainability, while bad practice can be disastrous for corporate reputations and share prices.

Well-run companies perform better financially, so fund managers have paid close attention to governance since long before ESG became popular.

The emphasis on social investing is newer and has grown in response to various companies being exposed for neglecting the rights and wellbeing of staff, communities and workers in supply chains.

Petra Lee, Responsible Investment Analyst at St. James’s Place Wealth Management, says: “The focus on social issues has grown further because COVID-19 brought to light so many problems, such as imbalanced vaccination rates and social inequality. ”

“Supply chains in the fashion industry are also an increasingly recognised problem. It’s great for consumers to buy cheap clothes. But if you think of all the factors that made them that cheap, who has sacrificed what? Social mobility is yet another issue. For example, in the UK alone, the government publishes a long list of companies that have failed to pay minimum wage.”

How social and governance factors link to business performance

Many studies have shown that social performance contributes to financial performance and therefore share prices. For example, analysis by S&P Global Ratings found accounting for social concerns when investing can protect portfolios, especially as part of a comprehensive ESG investing strategy1.

The market tends to reward companies that minimise their exposure to social issues. For example, selling controversial products, relying on materials from geopolitical hot spots, and using an unpredictable labour force can hurt profits and increase volatility, said S&P.

Meanwhile, numerous studies have shown that diversity in boards – an essential aspect of good governance – is positive for long-term performance as it encourages innovation, avoids group think and improves decision making. For example, a 2020 McKinsey report found companies with higher levels of ethnic diversity were 36% more profitable than their peers2.

How to invest in social and governance factors

St. James’s Place invests in social and governance factors via numerous processes and initiatives, from signing modern-slavery and human-rights conventions to making sure supply chains have increased traceability and integrating consideration of communities into our investment decision processes.

Lee says one challenge is that there is increasing consensus about how to measure and benchmark climate-change action, but there is less agreement on social issues, which can involve more complex factors.

A typical dilemma is whether to withdraw investments from a country with a poor human-rights record, even though doing so could impoverish its population further. Another is that using ethically sourced materials can make goods more expensive, so companies need to be sure there is a profitable market for this.

St. James’s Place therefore prefers to actively engage with companies with poorer ESG practices rather than screen them out of our portfolios.

What else is St. James’s Place doing?

St. James’s Place has committed publicly to leading on positive ESG impacts. For example, we have joined Climate Action 100+, which engages with 167 top companies to move them towards net zero, and signed the UN PRI, which promotes sustainable investment practices.

But social and governance factors are equally important to us. In the social field, St. James’s Place continues to work with sustainable suppliers; build our diverse, inclusive workforce; and create a culture of learning and development.

We also have strong governance practices throughout our business, reflected in our membership of FTSE4Good Index, Business in the Community – the Prince’s Responsible Business Network, the Good Business Charter and the UN Global Contact Network UK.

Lee says all these initiatives continue to evolve in response to the needs of staff and communities. “For example, throughout the COVID-19 pandemic, we gave employees unlimited volunteering opportunities,” she says.

“We have active social networks in LGBT+ communities; offer wellbeing and support networks to our staff; and we have a successful charitable foundation. The key to such initiatives is to make sure that, as a community, we’re there for each other.”

Our world is changing faster than anyone predicted. We believe responsible investing has a huge role to play in shaping a better world and building a sustainable future.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

1 What is the ‘S’ in ESG?, S&P Global, August 2021
2 Diversity wins: how inclusion matters, McKinsey & Company, May 2020


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