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Why the ‘S’ in ESG is finally in focus, and how to consider it in your portfolio

In the second article of our three-part series on Environmental, Social and Governance (ESG) investing, we look at the key social issues investors need to consider and explore two fund ideas that could help.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Social investment factors have sometimes been overlooked compared to Environmental and Governance ones. But since the start of the pandemic, social issues have been brought to our attention like never before.

The pandemic exposed glaring inequalities in areas like income, health and diversity. Investors are now increasingly scrutinising the way companies treat their staff, suppliers and customers. It’s more and more important investors do the research to understand the social practices of the companies they invest in, to make sure they’re not taking any unexpected risks.

What social risks should investors consider?

Diversity is an increasingly important social factor for investors to think about. Studies show that diverse teams improve performance and lead to better decisions. If a senior management team is dominated by any one social group, it might struggle to understand and represent the views of a diverse workforce, or a diverse customer base. It could also lack sufficient challenge in their decision making.

Assessing how companies uphold human rights, labour rights and freedom of association, both within their business and their supply chains, is another important way to understand the culture of a business. A company operates best when the workforce is positive and productive. It should also help reduce employee turnover, absenteeism and strike action.

Case Study: when social issues cost investors dearly

Companies that don’t take social issues seriously could face serious reputational damage. In July 2020, fast fashion company Boohoo was embroiled in scandal. A Leicester-based garment factory in its supply chain was found committing serious health and safety breaches and paying its workers below the national minimum wage. The company's share price later fell more than 40%, wiping £2.1bn off its valuation and it’s still yet to hit pre-scandal levels.

Investors should also consider external social factors. For instance, a business should look to have a good relationship with its local community. This can help avoid any political interference, protest or other disruption. It should also try not to source products from controversial areas, to avoid negative press attention and consumer backlash.

Finally, its products should be thoroughly quality controlled, as the company could be held legally responsible if its products cause damage, injury or death.

What about social opportunities?

Analysing social factors isn’t just about trying to reduce risk. It’s also about assessing the impact that social megatrends, that look likely to drive society forward over the coming decades, can have on your investments.

One example is automation and artificial intelligence (AI). They offer the potential for faster, more precise production, lower labour costs and reduced health and safety risks. This has significant implications for investors.

Consider the transport industry. Some suggest self-driving vehicles could replace taxi, bus and lorry drivers within the coming decades. This will benefit companies that embrace automation and IA. Companies that don’t innovate will be left behind.

Digital disruption is another social megatrend. Established companies are increasingly being knocked off their perches by competitors who have harnessed digital innovation.

Airbnb, for example, has completely upended the travel industry by connecting travellers directly to property owners willing to host them. For investors, digital disruption can be both a risk and an opportunity. Considering which companies will thrive, and which ones will struggle, in a digital economy is more important than ever.

Changing demographics should also be taken into account. The average life expectancy in the UK has risen from 71 in 1960 to 81 in 2020. At the same time, the birth rate has fallen, meaning the overall median age has risen from 35.6 to 40.5. Older people are generally wealthier than younger people, but tend to spend less on consumer goods. That’s a risk for some industries, while other industries, like healthcare, could see increased demand.

This isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. Remember all investments can fall as well as rise in value so you could get back less than you invest.

Considering social issues in your portfolio

This week is Good Money Week. It's a national campaign that aims to raise awareness of responsible investing. We think it could be a great time to make sure your portfolio considers social risks and has the potential to benefit from social megatrends.

If you don’t have the time or knowledge to consider social factors when investing in individual companies, you could consider a fund. There are lots of funds that take social risks into account and look to benefit from social megatrends. We look at two in more detail below.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Want to learn more?

If you want to learn more about investing responsibly, see the new Responsible Investment section of our website.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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