Chapter 4 - Social Factors Flashcards
Environmental Megatrends with severe Social Impact
(3 Megatrends/5 Points)
Climate Change and Transition Risks:
* may cause job loss
Water Scarcity:
* limited availability of fresh water
* wastewater treatment is expensive and requires knowledge
Mass Migration:
* may be due to water scarcity and desertification
* 150-200 million climate change migrants by 2050
Social Megatrends
(9 Megatrends)
- globalization
- automation and AI in manufacturing and service sectors
- inequality and wealth creation
- digital disruption and social media
- changes to work, leisure time, and education
- changes to individual rights and responsibilities and family structures
- changing demographics, including health and longevity
- urbanization
- religion
Globalization (Megatrend) Implications
(Explanation + 2 Implications)
International Trade and the Exchange of Ideas and Culture.
* Offshoring: disappearance of industries like Textiles in Western countries due to relocation to lower wage countries
* Dependencies: IT products dominated by US and Asian companies
Automation and AI (Megatrend) Implications
(3 Implications)
Advantages:
* faster production and lower labor cost
* replaces hard, physical or monotonous work
Disadvantages:
* displaces workers as technology renders their skill or experience unnecessary
Inequality and Wealth Creation (Megatrend) Implications
(3 Implications)
- average income of richest 10% is 9-times higher than poorest 10% across OECD countries.
- may reduce educational opportunities and social mobility, resulting in less skilled and less healthy society with lower purchasing power
- some companies are aggressive in corporate tax optimisation, which makes them even richer
Implications of Megatrends
Digital Disruption, Social Media and Access to Electronic Devices
(2 Implications)
- Digital Disruption: new digital technologies and business models affect the value of existing goods and services
- Big Data: data may be used and sold in more extreme or socially unacceptable ways
Changes to Work, Leisure Time and Education (Megatrend) Implications
(3 Implications)
- automation and part-time employment reduced working hours of developed countries
- constant connection to work may blur work-life boundary
- some sectors suffer from a lack of qualified employees and are facing a “war on talent”
Implications of Megatrends
Changes to Individual Rights, Responsibilities and Family Structures
(2 Implications)
- less dependent on family structure for financial support
- inequality between men and woman still exist in both opportunities and wage gap
Megatrend
Changing Demographics, including Health and Longevity, Implications
(3 Implications)
Effects of Aging Population:
* ratio between active and inactive workforce drops, impacting tax revenues and pension systems
* older people have higher savings but spend less on consumer goods
* in categories like healthcare, expenditure rises sharply when population ages
Urbanization (Megatrend) Implications
(4 Implications)
- price out local working class due to higher costs in urban areas
- “urban heat islands” - where urban areas produce and retain heat
- higher mortalitiy from diseases like cancer and heart diseases
- poor health for people living in urban slums
Religion (Megatrend) Implications
(2 Megatrends)
- Christian Investors: avoid investing in companies inconsistent with christian values, e.g. alcohol, pornography, gambling and tobacco
- Islamic Investors: avoid investing in companies inconsistent with shariah principles, e.g. alcohol, pornography, gambling, pork and interest-paying investments
Implementing Social Factors in Investment Decision
(3 Steps)
- determine which social factors are most controversial or financially material in each industry
- assess how exposed certain companies are to these sector-specific social factors and how the company manages these risks
- finally, assess ciritcal social factors in the supply chain
Company Internal Social Factors
(4 Factors)
Social factors within a company.
* Human Capital Development
* Working Conditions, Health and Safety
* Human Rights
* Employment Standard and Labor Rights (e.g. freedom of association, employee relations, forced labor, living wage)
External Social Factors
(4 Factors)
Social factors related to how the product impacts society.
* Stakeholder Opposition and Controversial Sourcing
* Product Liability and Consumer Protection
* Social Opportunities
* Animal Welfare and Antimicrobal Resistance
Human Capital Development as Social Factor
(3 Factors)
Ensure that workforce is:
* well equipped to perform its tasks and responsibilities
* operating under the latest standards and regulations
* remains motivated
Working Conditions, Health and Safety as Social Factors
(3 Factors)
- protecting the workforce from accidents and fatalities (permanent employees and contractors)
- working conditions that promote employee well-being, e.g. ergonomic workplaces and flexible working hours
- focus increasingly on mental health (burn-out risk) and employee benefits to promote well-being outside work (e.g. medical checks, gym membership, training on nutrition-related risks)
Human Rights as Social Factors
(11 points)
Rights for all human beings, regardless of:
* race
* sex
* nationality
* ethnicity
* language
* religion
* any other status (e.g. age, ability, socioeconomic level, etc.)
Human Rights include the following:
* right to life and liberty
* freedom from slavery and torture
* freedom of opinion and expression
* right to work and education
Universal Declaration of Human Rights (UDHR)
(2 Points)
By UN General Assembly in 1948.
Important foundation for international human rights.
United Nations Guiding Principles on Business and Human Rights (UNGPs)
(5 Points)
Developed by Special Representative of the Secretary-General (SRSG) John Ruggie.
Guiding principles that provide first global standard for preventing and addressing the risk of adverse impacts on human rights linked to business activity.
3 pillars how states and businesses should implement framework:
* state duty to protect human rights
* corporate responsibility to respect human rights
* access to remedy for victims of business-related abuses
OECD Guidelines for Multinational Enterprises
(2 Points)
- a set of government-backed recommendations on responsible business conduct (voluntary)
- guidelines do not focus on financial materiality, but rather on responsibility for adverse impacts on society
Corporate Human Rights Benchmark (CHRB)
(2 Points)
- collaboration led by investors and civil society organizations to create the first open and public benchmark of corporate human rights performance
- provides comparative snapshot year-on-year of largest companies on human rights approach and how they respond to serious allegations
Corporate Human Rights Benchmark (CHRB) Questions
(6 Questions)
- governance and policy commitments
- embedding respect and human rights due diligance
- remedies and grievance mechanisms
- performance - company human rights practices
- preformance - responses to serious allegations
- transparency
Human Rights 100+
(3 Points)
- collaborative initiative for investors by Principles for Responsible Investment (PRI)
- platform to encompass a broad range of social issues, allowing investors to prioritize them in their stewardship activities
- includes investor collaborative engagement with companies, policymakers and other stakeholders to make progress on the overall goal
International Labour Organization (ILO) 8 Fundamental Conventions
(8 Conventions)
- freedom of association and protection of the right to organise
- right to organise and collective bargain
- forced labour
- abolition of forced labour
- minimum wage
- worst forms of child labour
- equal remuneration
- discrimination (employment and occupation)
Freedom of Association and Employee Relations as Labor Right
(2 Points)
- freedom to form or join an association or trade union that advocates for the interests of the employees
- with freedom of association, other labor rights violations (forced labor, child labor, discrimination) are better safeguarded
Modern Slavery and Forced Labor
(5 Points)
Modern Slavery:
* exploitation that a person cannot refuse or leave because of threats, violance, coercion, deception and /or abuse of power
* umbrella term for practices such as forced labor, debt bondage, forced marriage and human trafficking
Forced Labor:
* ILO: “All work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily.”
* 25 million people estimated to be in forced labor
In 2015 UK Parliament adopted Modern Slavery Act to combat modern slavery.
Living Wage as Labor Right
A wage that is sufficient to cover workers’ basic living expenses, such as food, clothing, housing, healthcare, and education.
Platform Living Wage Financials (PLWF)
(5 Points)
Established 2018 by coalition of (mainly dutch) financial institutions.
Encourage and monitor investee companies to address the non-payment of a living wage in their global supply chains.
They:
* measure their preformance on living wage
* discuss the assessment results
* support innovative pilots
Stakeholder Opposition
(3 Points)
- strive for good relationships with stakeholders, including local communities
- ensure that company can continue operating without political interference or informal protest and disruption
- can become business and reputational risk when they come to light
Controversial Sourcing
(3 Points)
- resources extracted in a conflict zone and sold to finance the war (e.g. blood diamonds and conflict minerals)
- cheap products, but debate over ethics of cost-drive practices
- can become business and reputational risk when they come to light
Free Prior Informed Consent (FPIC)
(5 Points)
To establish bottom-up participation for Indigenous People.
* Free: no manipulation or coercion of affected people
* Prior: consent is sought sufficiently in advance, time for the consultation process must be guaranteed by the relative agents
* Informed: affected people receive satisfactory information on the key points of the projects, such as: nature, size, place, reversibility, scope of the project, reason and duration
* Consent: is a process in which participation and consulation are central pillars
Consumer Protection
(4 Points)
Laws and government regulation to protect the rights of consumers.
Safeguarded by:
* enforcing product safety
* distributing consumer-related information
* preventing deceptive marketing
Product Liability
(5 Points)
Legal responsibility imposed on business to give them the responsibility for defective prodcuts.
3 main types of product liability:
* business being found liable to consumers when a court finds design flaws
* manufacturing defects
* failure to warn consumers of a possible danger
Leads likely to reputational risk when consumers express opinion on social media or boycott product.
Social Opportunities
(2 Points)
- lack of social opportunities is a significant social issue, especially in developing countries
- intially, specific investors like development finance institutions, NGOs and foundations focused on these topics, but there is a growing recognition that affordable access to basic products and services is a good business model
Access to Medicine Index
Tool that analyzes how 20 of the world’s largest pharmaceutical companies are addressing access to medicine in 106 low- to middle-income countries for 82 disease.
(20-106-82)
Animal Welfare and Antimicrobial Resistance
(2 Points)
- Intensive farming practices also harm humans, e.g. increased antimicrobial resistance against antibiotics etc, may make standard treatments increasingly ineffective.
- Farm Animal Investment Risk and Return (FAIRR) is an investor initiative which focuses on this topic.
Farm Animal Investment Risk and Return (FAIRR)
(2 Points)
- investor initiative focused on the risk and opportunities linked to intensive livestock production
- focuses particular on increased prevalence of antimicrobal resistance due to farming practices and poor antibiotic stewardship
Social Issue Impacts are Specific to…
(3 Points)
- Country Specific
- Sector Specific
- Company Specific
Country Specific Social Issues
(4 Issues and Examples)
- significance of social issues depends on country’s regional context, level of economic development, regulatory framework (e.g. labor law doesn’t fully comply with ILO principles), cultural or historical factors
- e.g. aging population in developed countries, but not in emerging markets
- legal responsibility for companies, to take responsibility and check conditions in supply chain, becoming mandatory in certain jurisdictions
- e.g. UK, France, Netherlands, EU, …
Minimum (Social) Safeguards of the EU Taxonomy
(5 Safeguards)
OECD Guidelines for Multinational Enterprises
UN Guiding Principles on Business and Human Rights
* International Labor Organization’s (ILO) Declaration on Fundamental Rights and Principles at Work
* 8 ILO Core Conventions
* International Bill of Human Rights
UK Modern Slavery Act
Requires medium- and large-sized companies to provide yearly slavery and human trafficking statement, detailing steps taken to prevent modern slavery in their business and supply chain.
Sector Specific Social Issues
(3 Issues)
- certain sectors have bigger social risks due to child labor in supply chain (clothing, cotton) or the nature of the business (mining)
- social trends impact sectors differently, e.g. automation and AI will have different impact on transport (self-driving cars) then it has to maintenance (hard to automate)
- technological developments can help tackling social injustices, e.g. satellite imagery to identify illegal deforestation
Company Level Social Issues
(2 Issues)
- depends on company’s culture, systems, operations and governance
- older, more established companies might have better systems in place to manage social risks in their supply chain
Ratio Analysis and Financial Modeling of Social Issues
(6 Points)
Useful to quantify potential Impact of Social Factor Scenarios and include into Ratio Analysis and Financial Modeling of Investment.
Scenarios to include in Ratio Analysis:
* OHS issues (accidents and fatalities -> can result in huge fines and liabilities
* human capital management issue -> can lead to higher operation costs due to training of new employees when turnover is high
* supply chain issues -> impact brand reputation and revenues if consumer boycott products
* local protests -> business disruptions at plants and factories
* poor working conditions -> can result in issues with product safety
Automation
Technology by which a process or procedure is performed with minimum human assistance. It is associated with faster production and cheaper labor costs, replacing hard, physical, or monotonous work.
‘Just’ Transition
A transition that shares the financial and social burden in a fair way. A ‘just’ transition is one that avoids burdening ordinary workers with unemployment, poverty, and exclusion as part of the transition to a low carbon economy.
Materiality and Risk Assessment on Social Issues
(5 Points)
- determine what the impact of social factors and trends could be on investee companies in different sectors or operating in different countries
- e.g. mining and oil and gas industry more suspectible to human rights violations or health and safety issues
- materiality assessment should be part of company’s traditional risk assessment
- non-financial risk (e.g. social risk) could have material impact and should be taken into account
- companies that identify social trends early, and adapt to benefit from it, could provide investment oportunities
Better Life Index
OECD examines issues of well-being in its Better Life Index, which rates a wide range of developed and emerging economies in a number of areas, including life satisfaction. Designed to let you visualise and compare some of the key factors – like education, housing, environment, and so on.
Social Double Materiality Approach
Take the (positive and negative) “social return on investments” into account alongside the financial materiality.
Turnover
Total amount of sales a company makes over a set period.
Liability
Something a person or company owes, usually a sum of money.
Receivables
Balance of money due to a firm for goods or services delivered or used but not yet paid for by the customers.
Leverage
Using borrowed money to increase potential returns.
Current Ratio
Companies ability to pay short-term obligations. Compares company’s current assets to current liabilities.
OECD drivers for growing Wealth Inequalities
(3 Points)
- globalization
- skill-biased technological change
- changes in countries’ policy approach
Bangladesh Accord
(2 Points)
Followed the collapse of the Rana Plaza,
an eight-story commercial building in Dhaka, Bangladesh, which resulted in a
death toll of 1,134 people.
As a result, over 175 brands, such as Adidas, Marks and Spencer, and H&M, have signed the Bangladesh Accord, where they pledge to commit to higher fire and health and safety standards in Bangladesh.
