ESG Focus: Materiality Matters – Part 2

ESG Focus | Mar 22 2021

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FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

ESG Focus: Materiality Matters – Part 2

The "S" in ESG is more than a pleasant sentiment – its roots run deep into materiality – hence FNArena flags the social themes that will eventually hit corporations on their operational and strategic front lines – mental health, gender and modern slavery.

ESG Focus: Tallying social materiality

-Developing tools for accountability
-The true cost of mental health
-Gender materiality in spotlight
-The price of modern slavery

By Sarah Mills

In Part 1 of this series (link below), FNArena examined the materiality and outcomes nexus, as outlined by First Sentier Investments. This article spotlights the fund manager's approach to determining materiality and ensuring outcomes are achieved in its specific areas of focus.

In its webinar: Navigating Investment in a Post-Covid World, First Sentier explored the materiality of mental health, gender and modern slavery to investors, and the challenges of building meaningful metrics in this area.

For example, the funds manager is building its own set of more universal diversity measures; and is developing tools such as materiality maps, holistic metrics, and new workplace health and safety measurements.

If anyone doubts the materiality of social issues, one need look no further than the recent fall from the grace of the aged care industry.

Or for a recent indivual example:  the Swiss National Contact Point for the OECD Guidelines for Multinational Enterprises has accepted a human rights complaint against UBS for Uighur labour camp contractor ties through its exposure to surveillance firm Hikvision.

Where this will go has yet to be seen, but it is an example of potential liability exposures that investors face globally; and particularly for investors in finance.

The European Union Commission legislated to pass its Taxonomy Regulation for the finance industry last June and financial institutions will have to report on the sustainable finance taxonomy criteria  by December 31.

This will affect financiers globally and investors will have to fine-tune their social materiality receivers, given all the white noise in the market.

Tools for accountability

First Sentier is working to improve corporate accountability through collaborating with corporations and tying investment to remuneration, and structure, and reports on progress.

Engagement and collaboration are of increasing importance, particularly when investing in emerging economies.

“Trustworthiness of management is a key determinant for our decisions,” says FSSA Investment Managers investment analyst Angus Sandison.

“Long-term investors look for long term track records – how do they perform in times of stress, such as the financial crisis?”

Modern slavery repository – a quick update

Sandison says that First Sentier’s modern slavery ambitions received a setback from covid.

This was witnessed globally, as governments' modern slavery ambitions took a back seat to the covid crisis.

Australia’s rollout of its modern slavery repository was delayed by nearly a year, and the government published its first batch of 121 supply chain statements from Australian corporations in November, with the deadline for laggards extended to as late as March 31, 2021.

The Modern Slavery Act requires all businesses with an annual turnover of $100m to publish “modern slavery statements” each year.

Coles Group ((COL)) and Wesfarmers ((WES)) were among the early reporters.

There are many economic and geopolitical factors driving the global anti-modern slavery push, which we covered in Part 1 of this series.

Sorting the wheat from the chaff

Back to First Sentier, the institution started mapping modern slavery risks a year ago, but FSSA Investment Managers investment analyst Angus Sandison says it became difficult to determine the short and medium-term impacts to companies of covid when supply chains were so chaotic.

First Sentier is concentrating its efforts on corporations with Asian supply chains.

“Investing in Asia is a minefield,” says Angus Sandisson. “62% of slavery occurs in Asia, so this is an area of focus.”

He says many “truly global” Indian businesses have been crippled in recent years after failing to meet basic workplace conditions. 

This in turn bounced back on those within the supply chain. 

In a bid to manage this risk, First Sentier’s approach is to first engage the business, given many businesses will blatantly misreport metrics. 

The institution doesn’t expect perfection but if the company is demonstrating progress then First Sentier continues to engage. 

“The important thing to be aware of is gaps and materiality,” says Sandison. “Some issues are likely to gain more traction than others, depending on how material they are (to the company).”

“We try to know first and why it is important. Engagement occurs early, divestment only happens later in the journey when other avenues are exhausted.” 

Again Sandison emphasises the importance of trustworthiness of management and long track records in getting a handle on social sustainability.

“What we typically look for are companies where sustainability and stewardship is part of the DNA. “

Mental health – the trillion-dollar materiality issue

First Sentier is also focusing on the more novel metric of mental health and is pushing corporations to report on mental health injury rates. 

“Employers who had previously thought of workplace health in terms of ‘lost time incident rates’ have been prompted to consider physical and mental health more holistically,” says First Sentier’s responsible investment specialist Kate Turner. 

“With employees feeling isolated, stressed and overwhelmed, employers have been challenged to take proactive steps to support the mental wellness of their people.”

Mental health is an interesting choice of metric given that to date, mental health has been an area of very low corporate focus, despite its obvious materiality.

Bullying, harassment, toxic work environments can all affect productivity and increase staff churn and turnover.

This increases operational expenses, enhances the prospect of lawsuits, and generates a health bill and domestic productivity toll that affects the broader economy.

As the oil supercycle played out, it may have been there was enough fat on the bone to sweep these costs under the carpet. 

Regardless of the reason, Institutions managing trillions in funds are less likely to continue accepting it. 

Sickness-related absences alone are costing the western world billions, if not trillions of dollars.

Turner says corporations are not managing mental health well at the moment, given it is difficult to measure quantitatively, but expects this will change as measurement tools improve.

First Sentier notes that UK consultants are working to create a mental health benchmark for FTSE100 companies. 

In November, CCLA, a public sector and charities investment manager launched a benchmark for investors to measure the management of employee mental wellbeing in large companies, according to IPE Magazine.

The benchmark assesses whether a company promotes mental health awareness among employees and contractors, or considers related safeguarding in job design, and whether managers are trained to provide positive mental health support in the workplace.

Shortly after covid hit, CCLA mobilised a coalition of investors managing GBP2.2trn in assets, including the Church of England Pensions Board, Norwegian Church Endowment Fund, Brunel Pension Partnership and Aviva, and wrote on their behalf to the chief executive officers of every FTSE100 company.

CCLA says it is the first health benchmark covering companies globally. 

“There are mental health indices available elsewhere, but because they are voluntary, the worst performers are neither captured nor held to account,” says CCLA’s stewardship lead Amy Browne.

The benchmark will rank companies regardless of disclosure.

Britain appears to be the epicentre of the mental health accountability push, and FNArena examines Britain as an augur for how this theme may play out globally. 

Prince William, The Duke of Cambridge, supports the cause, and has addressed FTSE100 employers at several events about mental health and wellbeing in the workforce.

On materiality, he points out that mental health issues are the leading cause of sickness absence in the UK, costing GBP26bn a year.

Unilever estimates that about half of all long-term sick leave in the UK is due to stress, depression and anxiety; and 95% of employees who call in sick with stress give a different reason.

ACAS says almost 9 in 10 FTSE-100 employers under-report mental health problems in the workplace. 

Change would require a considerable revamp of the hierarchical industrial relations policies that have guided human capital management for centuries.

But some believe the institutional focus on materiality in this area could revolutionise workplace relations.

The first thing that comes to mind when one thinks of mental health and materiality is casualisation of the workforce, a trend that has accelerated in the West over the past 30 years.

The affects of casual work on mental health are well documented and, given the availability of ABS and other data providers, it would represent relatively low-hanging fruit as a metric for institutions serious about accelerating progress on both mental health and gender issues.

Women are usually the first victims of this practice, thanks to child-bearing and rearing; and often arbitrary and biased advancement criteria which damage their full-time career prospects. So one assumes casualisation is also relevant to gender issues, ticking another SDG box.

There has been some discussion about improving work security to improve mental health; but FNArena has yet to find any indicators or benchmarks monitoring this, and it is unlikely to be an issue for the market within the next 18 months, especially given the prioritisation of renewables.

Gender represents a potential $3trn productivity grab

Gender equality is another material factor for institutional consideration, according to First Sentier.

The European Union argues gender equality will boost gross domestic product by generating higher employment and productivity.

The EU estimates that by 2050, improving gender equality would boost EU GDP per capita in the region of 6.1% to 9%, which equates to a staggering 1.95trn to 3.15trn euros.

Given ageing populations and the sagging growth profile of the West, institutions are scouring the planet for just such contributors to GDP.

A multitude of global studies have also consistently linked greater sustainability and profitability to board diversity, especially through gender representation.

One only has to observe the outstanding performance of Australia Post's Christine Holgate to acknowledge the truth of this, for which, by the way, she was rewarded with a witch-hunt for being so audacious as to stand up to Australia's cosy male-dominated banking and political stalwarts, in her bid to drive even greater profitability and innovation by turning Australia Post into a bank.

It was not a battle her male predecessor, who presided over a considerable decline in the organisation, chose to fight; and like most women, Holgate was treated apallingly for daring to step out of line.

Fortunately, gender diversity and workplace diversity generally is one area in which institutions feel they can make a swift impact.

First Sentier’s Turner says institutions have been very active in the gender space for the past few years and are now contemplating how they can take lessons learnt and apply them to broader diversity issues.

“In terms of gender diversity, using a metric like ‘proportion of women in managerial positions’ is a way to track progress and measure success,” says Turner. 

“But in order to achieve this, a number of underlying issues need to be addressed, including the impact of casualisation of the workplace on women, flexible working, access to effective and affordable childcare and aged care etc.”

“So whilst the metrics are important, what is more important are the implementation plans in order to achieve those metrics and targets.” 

First Sentier says that when it comes to gender diversity, the first target is to gain 40:40:20 (male: female: other) representation on ASX200 boards and management.

Corporations are being required to report on their progress towards these metrics and how they are achieving them and why.

It should be some years before governments legislate, and institutions hold corporations accountable, on more material corporate operational issues such as casualisation.

Meanwhile, the EU gender report finds that improvements in gender equality could generate up to 10.5m additional jobs by 2050; jobs that will be sorely needed as the union’s population ages. 

One just hopes they aren’t all in aged care, nursing, teaching and childcare. We could do with some more Holgates in Australia.

Part 3 of this series on materiality focuses on the environmental sustainability choices that form the focus of First Sentier’s ESG portfolio.

Materialty Matters Part 1 (https://www.fnarena.com/index.php/2021/03/16/esg-focus-materiality-matters-part-1/)

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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