Social Factors

Question 1

Social Mega trends

Answer 1

• 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

Question 2

Globalisation

Answer 2

• 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

Question 3

Automation and AI

Answer 3

•	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

Question 4

Inequality and wealth creation

Answer 4

• 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

Question 5

Digital disruption, social media and access to electronic devices

Answer 5

• 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

Question 6

Changes to work, leisure and education

Answer 6

• 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

Question 7

Changes to individual rights and responsibilities

Answer 7

• 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

Question 8

Changing demographics

Answer 8

• 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

Question 9

Urbanisation

Answer 9

• 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

Question 10

Religion

Answer 10

• 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

Question 11

Environmental mega trends with social implications

Answer 11

• 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

Question 12

Investor process to implement social factors

Answer 12

• 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

Question 13

Internal factors

Answer 13

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

Question 14

External factors

Answer 14

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

Question 15

HSE (Internal)

Answer 15

• 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

Question 16

Human Rights (Internal)

Answer 16

• 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

Question 17

Labour rights (Internal)

Answer 17

• 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

Question 18

Human capital development (Internal)

Answer 18

• 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)

Question 19

Stakeholder opposition and controversial sourcing (External)

Answer 19

• 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

Question 20

Product liability and consumer protection (External)

Answer 20

•	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

Question 21

Social opportunities (External)

Answer 21

• 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

Question 22

Animal welfare and antimicrobial resistance (External)

Answer 22

• 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

Question 23

Identifying material social factors

Answer 23

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)

Question 24

Amazon

Answer 24

• 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

Question 25

Apple

Answer 25

• 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

Question 26

Quality of management

Answer 26

• 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

Question 27

Tesco equal pay

Answer 27

• 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

Question 28

Ratio analysis and financial modelling

Answer 28

• 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