Social Factors Flashcards
Social Mega trends
• Investors must look at systemic relationship between megatrends and business activities
• Social megatrends that are considered:
o Globalisation
o Automation and artificial intelligence (AI)
o Inequality and wealth creation
o Digital disruption, social media and access to electronic devices
o Changes in work, leisure time and education
o Changes in individual rights and responsibilities in family structures
o Changing demographics, including health and longevity
o Urbanisation
o Religion
• Environmental megatrends that have social implications:
o Climate change and transition risk
o Water scarcity
o Pollution
o Loss of natural resources and ecosystem services
Globalisation
• Integration of local and national economies into global market
• Consequences:
o Rapid increase in cross-border movement of goods, services, technology and capital
o Increased efficiency of market – more products at lower cost
o Detrimental to social well-being due to social structure inequality
• Implications:
o Offshoring: lower wages for garment industry in developing countries, clothes now produced in Vietnam, Bangladesh and China
o Dependency: US-based and Asia produce IT products (mobile phones, computers), Europe is dependent
Automation and AI
• Technology by which process is performed with minimal human assistance • Consequences: o Faster production and lower costs o Replaces hard and monotonous work o Social disadvantage in it replaces workers jobs • Sector effects: o Healthcare o Security o Automotive • Implication for investors: o Transportation will become automated o Major job losses o Upskilling potential to enable staff to work in more AI-enabled world
Inequality and wealth creation
• OECD report:
o Richest 10 % of population is 9x richer than poorest 90 % across the OECD
o This is called income inequality
• Consequences:
o Reduced opportunities and social mobility
o Less skilled and less healthy society
o Lower purchasing power in the lower and middle classes
• Implication for investors:
o Tax strategies
o Conservative tax strategies that may impact bottom line
Digital disruption, social media and access to electronic devices
• New digital technologies and business models that affect the value proposition of exisiting goods and services
• Opportunities:
o Big data: huge amount of data can be collected and stored
o More personalised products
o Internet of things (IoT) – semi-intelligent appliances can communicate with each other and the internet autonomously
• Risks:
o Data ownership: privacy and monetisation
o Social media and political campaigns – Cambridge Analytica
Changes to work, leisure and education
• OECD’s Better Life Index
o Developed world average hours worked decreases (automation and part time employment
o Average level of education has increased (measured as higher education degree)
o Increased flexible working patterns
• Implications for investors:
o Companies’ human capital management
o Reaction to structural changes in the labour market
Changes to individual rights and responsibilities
• Autonomy:
o People have autonomy for making economic decisions (instead of family or community tie ups)
o Individuals less reliant on family for economic security
• Diversity:
o More women entering the market
o Challenges exist:
More likely to remain unemployed
Accept lower quality jobs
Wage gaps
• Implications for investors:
o Growing evidence that diversity = better financial return
o Diversity included in risk analysis and stock selection
Changing demographics
• Aging populations:
o Life expectancy increasing – UK has increased by 2 years from 2002-2010
o Falling birth rates – UK median age increased from 28 in 1950 to 40 in 2010
• Consequences:
o Ratio between active and inactive workforce drops – tax revenues and pension scheme implications
o Older people have higher savings but lower outgoings – represents a significant business risk
Urbanisation
• Population has been shifting from rural to urban areas – 1950s 30 % in urban, 65 % in urban by 2050
• Consequences:
o Economic: increases and changes in costs, pricing local workforce out of market
o Environmental: ‘urban heat islands’ retained heat
o Social: Poor urban areas suffer disproportionately from disease, injury and premature death
• Implications for investors:
o Opportunity for infrastructure development
o Require companies to address social and environmental issues for urban living
Religion
• Religion effect can be social factors or due to faith-based investing
• Social factors:
o Preferences for consumer
o Religion based politics and conflicts
• Faith-based investing:
o Christian investor: aligned to the Bible – contraceptives, abortion, embryonic stem-cell research, WMD, tobacco, alcohol
o Islamic investor: Shariah principles – alcohol, pornography, gambling, pork – also investments that pay or receive income as interests
• Implications for investors:
o Faith-based play role in ESG advocacy and engagement
o Norms-based first movers
Environmental mega trends with social implications
• Climate change and transition risk
o Transition should be ‘just’ transition
o Sectors employee millions of people (energy, coal, manufacturing)
o Cannot lead to ordinary workers bearing costs via poverty and unemployment
• Water scarcity
o Corporations with water use could challenge communities availability for water
o Challenging:
Wastewater treatment is highly capital intensive
Rapid increase in population of many countries is difficult race to win
Enormous costs and skillsets involved in maintaining wastewater treatment plants
• Mass migration
o Caused by scarcity of fresh water and desertification
o Migration from developing to developed countries: ‘environmental migrants’
o 150-200 m climate change migrants by 2050
Investor process to implement social factors
- Determine which social factors are applicable or financially material in each industry
- Assess how exposed certain companies are to sector-specific social factors – may depend on business model or nature and geographic location of business
- Access critical social factors in the supply chain
- SASB gives framework
Internal factors
o Definition: Factors that affect internal stakeholder such as company employees o Examples: Human capital development Health and safety Human rights Labour rights: • Freedom of association and employee relations • Forced labour • Living wage
External factors
o Definition
Factors that affect external stakeholders such as customers, local communities and governments
o Examples:
Stakeholder opposition and controversial sourcing
Product liability and consumer protection
Social opportunities
Animal welfare and antimicrobial resistance
HSE (Internal)
• Focus: protecting employees from accidents and fatalities
• Occupational health: limit employees exposure to occupational diseases such as vibration white finger
• Example Rana Plaza Disaster (2013):
o 8-story garment factory
o 1,200 dead, 2,500 injured
o Building owners ignored cracks as had order demands to fulfil
o Result: 175 brands signed Bangladesh Accord – higher standards in Bangladesh
• Investor implications:
o Do O&G report only permanent employees or also contractors
o Broader work practices such as ergonomic workplaces or flexible hours for mental health
Human Rights (Internal)
• Inherent to all human beings regardless of race, sex, religion, ethnicity or any other status
• Include:
o Right to life and liberty
o Freedom from slavery and torture
o Freedom of opinion and expression
o Right to work and education
• Usually occur:
o Deep within supply chains
o Direct, first and second tier suppliers less likely to be implicated
• Universal Declaration of Human Rights (UDHR)
o UN General Assembly in 1948
o Common standard for all nations and peoples
• United Nations Guiding Principles on Business and Human Rights (UNGPs)
o Global standards for preventing and addressing human rights linked to business activity
o Framework for enhancing standards
o Three pillars:
State of duty to protect human rights
Corporate responsibility to respect human rights
Access to remedy for business related abuses
• OECD Guidelines for Multinational Enterprises (MNEs)
o Government backed recommendations for business conduct
o Study: Responsible Business Conduct for Institutional Investors – helps implement due diligence for OECD guidelines for MNEs to prevent or address human and labour rights impacts
o Voluntary principles and standards:
Employment and industrial relations
Human rights
Environment
Information disclosure
• Corporate Human Rights Benchmark (CHRB)
o Collaboration by investors and civil society organisations to create first open and public benchmark for human rights performance
o Measurement:
YoY snapshot of largest companies
Themes and indicators
o Themes selected:
Governance and policy commitments
Transparency
Embedding respect and human rights due diligence
Performance – Reponses to serious allegations and company human rights practices
Labour rights (Internal)
• International Labour Standards (ILO)
o Aim: provide opportunities for men and women to obtain decent and productive work
o Terms:
Freedom of association and protection of the right to organise
Right to organise and collective bargaining
Minimum age
Abolition of forced labour
Equal remuneration
Discrimination
• Freedom of association and employee relations
o Less likely issue in investee but can be in the supply chain
o Company operates better when workforce is positive and productive
o Example: retail – Walmart has anti-union stance
o Freedom of association allows other labour violations to be better protected such as child labour or forced labour
• Forced labour
o All work or service that is exacted under menace of penalty and not offered voluntarily
o 25 m are in forced labour
o In second tier and beyond supply chain
o Not always violence, also immigration authority threats, debt bondage included
• Living wage
o Sectors that rely on mass manual labour (retail, food, electronics), wages are often insignificant to cover basic expenses (food, clothing, housing)
o Living wage prevents child labour and brings people out of poverty
o Platform Living Wage Financials (PLWF)
Coalition of financial institutions that encourage and monitor investee companies
They:
• Measure performance on living wage
• Discuss assessment results
• Support innovative pilots
Human capital development (Internal)
• Take into account the development of its workforce
• Consequences for workforce:
o Well equipped for competing tasks
o Operates under latest standards and regulations
o Remains motivated
o Enhances social inclusion but also competitiveness and employability
• Implications for investors:
o Identify required skills for company to deliver on strategy, skill shortages
o Has attractive value proposition to attract talent been developed?
o Has the company monitored investment in human capital development (training hours, coaching) and return on investment (KPIs such as employee turnover)
Stakeholder opposition and controversial sourcing (External)
• Companies should focus on local communities (near operations) and have stakeholder process to understand their needs and concerns
• Free Prior Informed Consent (FPIC)
o When developing on ancestral land or use of resources owned by indigenous people
o Free:
No manipulation of indigenous people, self-directed by those affected
o Prior:
Consent sought in advance of any commencing so consultation process can be guaranteed
o Informed:
Indigenous people have satisfactory information on key points like nature, size, pace and reversibility
Difficult as different groups find certain information more useful
o Consent
Process which participation and consultation are central pillars
• Controversial sourcing
o Companies get cheap products sourced from emerging countries
o DRC profited from mining, militias profited, violence perpetuated
• Business and reputational risks
Product liability and consumer protection (External)
• Consumer protection: o Laws and regulation to protect rights of consumers o Safeguarded by Enforcing product safety Distribute consumer information Prevent deceptive marketing • Product liability o Legal responsibility imposed on business for manufacturing or selling defective goods o Businesses bear responsibility – civil lawsuits and lucrative money judgements o Types: Business liable if court finds flaws Manufacturing defects Failure to warn consumers • Risks: o Reputational risks – boycotting o Particularly with consumer products
Social opportunities (External)
• Lack of social opportunities is an issue in many developing countries
• SDGs: basic needs including health, education, energy and financial inclusion
• Access to medicine index:
o Analyses 20 of the largest pharma companies
o Evaluates how they address access to medicine in low- and middle-income countries
Animal welfare and antimicrobial resistance (External)
• Drivers:
o Ethical concerns to minimise harm caused to animals
o Understand negative impacts on human health resulting from intensive farming practices – antimicrobial resistance
• Farm Animal Investment Risk and Return (FAIRR)
o Increased prevalence of antimicrobial resistance – due to intensive farming and uncontrolled antibiotic use
o Companies could face lawsuits
Identifying material social factors
Overview • Factors above don’t apply equally to every sector and geography • Stages: o Understand material factors from geographical and industry level o Determine company level exposure, by sector and geography o Look at key suppliers, plants, customers and main tax jurisdictions Country • Social issue depends on country: o Level of economic development o Regulatory framework o Historical factors • Examples: o Aging population: developed issue o Urban movement: developing Sector • Social issue depends on company: o Culture o Systems o Operations o Governance • Impacts of social issues: o Bottom line o Increase workforce issue o Decrease corporate responsibility (human rights) and consumer expectations (animal welfare)
Amazon
• Multinational technology company based in Seattle, USA
• E-commerce, cloud computing, digital streaming and AI
• The hot warehouse (2011)
o Workers had to work in 38 C heat in Pennsylvania
o Employees suffered dehydration and collapsed
o Loading-bay doors not opened due to risk of theft
• 15-mile day
o ‘Pickers’ travel with trolley and handheld scanner
o Give real-time information on how quickly working
• Suicidal employees
o 189 calls in US from Amazon warehouses to emergency services in US between 2013 and 2018
o Relating to suicidal employees – aggressive surveillance and dangerous working conditions cited
• Increasing minimum living wage (2018)
o Response to Amazon not paying a living wage
o Increase US and UK employees will get equivalent of GBP 9.50 an hour
Apple
• Multinational technology company based in Cupertino, California, USA
• Designs, develops and sells consumer electronics, computer software and online services
• Foxconn and Inventec reports (2006)
o Producers of iPod in China
o One facility had 200,000 workers living there – 60 hour weeks – GBP 77 a month
o Apple launched investigation and now does yearly audits from 2007 onwards
• Foxconn investigation (2010)
o Apple led investigation around Foxconn suicides
o 18 employees resulting in 14 deaths
• BBC investigation (2014)
o Excessive hours and problems persisted
o Apple publicly disagreed with report
Quality of management
• After identifying social factors, must compare quality to peers
• Key areas:
o Corporate strategy
o Policy
o Processes and measures implemented
• Measure current performance and that over time
• Poor performance can indicate poor management in general
Tesco equal pay
• British multinational groceries and general merchandise retailer
• Third largest in the world by gross revenues (GBP 51 bn in revenues, 1.8 bn in profits)
• Since July:
o Facing GBP 4 bn in back pay from female shopworkers
o Predominant female shop workers paid GBP 3 per hour less than dominated male distribution centres
• Section 66 of Equality Act 2010:
o If the terms of A’s work do not include a sex equality clause, they are treated as including one
• Tesco Action Group:
o 8000 current and former Tesco employees
o Separate group with 1000 members
Ratio analysis and financial modelling
• Social examples for ratio analysis:
o Occupational health and safety – result in fines
o Human capital management issues – greater operating costs due to employee turnover
o Supply chain issues – brand reputation
o Local protests – business disruptions
o Poor working conditions – bad product safety
• Can be represented by higher discount rate
