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CFA ESG Investing > Chapter 4 - Social Factors > Flashcards

Chapter 4 - Social Factors Flashcards

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1
Q

Environmental Megatrends with severe Social Impact

(3 Megatrends/5 Points)

A

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

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2
Q

Social Megatrends

(9 Megatrends)

A
  • 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
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3
Q

Globalization (Megatrend) Implications

(Explanation + 2 Implications)

A

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

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4
Q

Automation and AI (Megatrend) Implications

(3 Implications)

A

Advantages:
* faster production and lower labor cost
* replaces hard, physical or monotonous work

Disadvantages:
* displaces workers as technology renders their skill or experience unnecessary

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5
Q

Inequality and Wealth Creation (Megatrend) Implications

(3 Implications)

A
  • 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
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6
Q

Implications of Megatrends

Digital Disruption, Social Media and Access to Electronic Devices

(2 Implications)

A
  • 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
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7
Q

Changes to Work, Leisure Time and Education (Megatrend) Implications

(3 Implications)

A
  • 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”
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8
Q

Implications of Megatrends

Changes to Individual Rights, Responsibilities and Family Structures

(2 Implications)

A
  • less dependent on family structure for financial support
  • inequality between men and woman still exist in both opportunities and wage gap
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9
Q

Megatrend

Changing Demographics, including Health and Longevity, Implications

(3 Implications)

A

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

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10
Q

Urbanization (Megatrend) Implications

(4 Implications)

A
  • 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
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11
Q

Religion (Megatrend) Implications

(2 Megatrends)

A
  • 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
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12
Q

Implementing Social Factors in Investment Decision

(3 Steps)

A
  1. determine which social factors are most controversial or financially material in each industry
  2. assess how exposed certain companies are to these sector-specific social factors and how the company manages these risks
  3. finally, assess ciritcal social factors in the supply chain
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13
Q

Company Internal Social Factors

(4 Factors)

A

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)

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14
Q

External Social Factors

(4 Factors)

A

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

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15
Q

Human Capital Development as Social Factor

(3 Factors)

A

Ensure that workforce is:
* well equipped to perform its tasks and responsibilities
* operating under the latest standards and regulations
* remains motivated

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16
Q

Working Conditions, Health and Safety as Social Factors

(3 Factors)

A
  • 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)
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17
Q

Human Rights as Social Factors

(11 points)

A

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

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18
Q

Universal Declaration of Human Rights (UDHR)

(2 Points)

A

By UN General Assembly in 1948.
Important foundation for international human rights.

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19
Q

United Nations Guiding Principles on Business and Human Rights (UNGPs)

(5 Points)

A

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

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20
Q

OECD Guidelines for Multinational Enterprises

(2 Points)

A
  • 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
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21
Q

Corporate Human Rights Benchmark (CHRB)

(2 Points)

A
  • 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
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22
Q

Corporate Human Rights Benchmark (CHRB) Questions

(6 Questions)

A
  • 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
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23
Q

Human Rights 100+

(3 Points)

A
  • 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
24
Q

International Labour Organization (ILO) 8 Fundamental Conventions

(8 Conventions)

A
  • 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)
25
Q

Freedom of Association and Employee Relations as Labor Right

(2 Points)

A
  • 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
26
Q

Modern Slavery and Forced Labor

(5 Points)

A

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.

27
Q

Living Wage as Labor Right

A

A wage that is sufficient to cover workers’ basic living expenses, such as food, clothing, housing, healthcare, and education.

28
Q

Platform Living Wage Financials (PLWF)

(5 Points)

A

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

29
Q

Stakeholder Opposition

(3 Points)

A
  • 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
30
Q

Controversial Sourcing

(3 Points)

A
  • 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
31
Q

Free Prior Informed Consent (FPIC)

(5 Points)

A

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

32
Q

Consumer Protection

(4 Points)

A

Laws and government regulation to protect the rights of consumers.
Safeguarded by:
* enforcing product safety
* distributing consumer-related information
* preventing deceptive marketing

33
Q

Product Liability

(5 Points)

A

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.

34
Q

Social Opportunities

(2 Points)

A
  • 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
35
Q

Access to Medicine Index

A

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)

36
Q

Animal Welfare and Antimicrobial Resistance

(2 Points)

A
  • 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.
37
Q

Farm Animal Investment Risk and Return (FAIRR)

(2 Points)

A
  • 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
38
Q

Social Issue Impacts are Specific to…

(3 Points)

A
  • Country Specific
  • Sector Specific
  • Company Specific
39
Q

Country Specific Social Issues

(4 Issues and Examples)

A
  • 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, …
40
Q

Minimum (Social) Safeguards of the EU Taxonomy

(5 Safeguards)

A

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

41
Q

UK Modern Slavery Act

A

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.

42
Q

Sector Specific Social Issues

(3 Issues)

A
  • 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
43
Q

Company Level Social Issues

(2 Issues)

A
  • 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
44
Q

Ratio Analysis and Financial Modeling of Social Issues

(6 Points)

A

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

45
Q

Automation

A

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.

46
Q

‘Just’ Transition

A

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.

47
Q

Materiality and Risk Assessment on Social Issues

(5 Points)

A
  • 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
48
Q

Better Life Index

A

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.

49
Q

Social Double Materiality Approach

A

Take the (positive and negative) “social return on investments” into account alongside the financial materiality.

50
Q

Turnover

A

Total amount of sales a company makes over a set period.

51
Q

Liability

A

Something a person or company owes, usually a sum of money.

52
Q

Receivables

A

Balance of money due to a firm for goods or services delivered or used but not yet paid for by the customers.

53
Q

Leverage

A

Using borrowed money to increase potential returns.

54
Q

Current Ratio

A

Companies ability to pay short-term obligations. Compares company’s current assets to current liabilities.

55
Q

OECD drivers for growing Wealth Inequalities

(3 Points)

A
  • globalization
  • skill-biased technological change
  • changes in countries’ policy approach
56
Q

Bangladesh Accord

(2 Points)

A

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.

CFA ESG Investing (10 decks)

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