Revolutionize Your Investments With These Social KPIs

Products and Services. KPI = The ‘What’, ‘Where’ and ‘How’

Let’s start at the beginning: comprehending the core products and services offered by your portfolio companies. If you think about this in terms of three key sections: that "what," "where," and "how”.

The "What": Products and Services Classification

Understanding what a company offers is the first step in assessing its ESG footprint. The Global Industry Classification Standard (GICS) provides a structured way to categorize companies based on their primary business activities, facilitating a clear understanding of their products and services.

Investors often seek, however, a more nuanced and detailed layer of analysis beyond what GICS provides. It's estimated that 70% of companies offer information that drills down deeper than GICS categories. For example, the category of 'Food Retail' fails to distinguish between companies contributing to societal issues, such as the obesity epidemic through the sale of unhealthy fast food and sugary beverages, and those that do not. Such distinctions are crucial for investors aiming to understand the social impacts of their portfolio companies fully.

More granular categories allow investors to tailor their portfolios with greater precision. This could involve differentiating between various types of medical devices or services, among other specifics.

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The "Where": Geographical Footprint

The geographical locations where companies operate their businesses significantly influence their ‘S’ assessments.

PT Bank Central Asia, for instance, is contributing to SDG 1 (No Poverty) through its retail banking services. With 100% of its revenue coming from Indonesia, the bank is playing a crucial role in providing access to financial services in a country where access is not widespread. This aligns with target 1.4 of SDG 1, which emphasizes the need for all men and women to have access to financial services. In countries with an existing strong presence of financial services, the impact delivered would be limited.

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The "How": Operational Practices

Once the "what" and "where" are established, the "how" focuses on the methods companies use to produce their goods or deliver their services. This aspect encompasses a wide range of practices, from supply chain management and resource use to labor practices and community engagement.

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Workforce Diversity and Inclusion

KPI: % Women in Senior Management

In the private equity (PE) and venture capital (VC) spaces, diversity, equity, and inclusion (DEI) initiatives are beginning to take root, albeit slowly. McKinsey's analysis highlights the significant influence that PE firms, with over $3.9 trillion in assets under management globally, have on shaping the business landscape. Despite this potential, PE firms lag behind corporate America in gender and racial diversity, particularly at senior levels. However, the industry is recognizing the strong business case for diversity: firms in the top quartile for gender and ethnic diversity are more likely to outperform financially. Since May 2020, there's been an uptick in PE firms focusing on DEI, driven by both societal pressures and the prospect of financial benefits.

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Employee Engagement and Satisfaction

KPI: Churn

High levels of employee engagement and satisfaction correlate strongly with improved productivity and profitability. However, you’d be hard-pressed to find any single stat disclosed by a company for employee engagement, so it can sometimes be beneficial to look at churn rate as a proxy.

Recruiting a replacement can cost from half to double the annual pay of the departing employee, significantly affecting a company's financial health when unemployment is low and talent is scarce.

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Supply Chain Ethics and Human Rights

KPI: Number of violations

Supply chain ethics and adherence to human rights standards are significant in the assessment of social KPIs. Patagonia stands out for its commitment to ethical supply chains, implementing fair trade practices, and ensuring workers in its supply chain are treated fairly. Such ethical considerations not only mitigate reputational risks but also align with the values of socially conscious investors.

Private investors have a unique position to influence and drive change in supply chain practices through their investment choices and engagement strategies. Investors should adopt a policy commitment to respect internationally recognized human rights, implement due diligence processes to identify and mitigate negative impacts and enable access to remedy for affected individuals.

More than half of UK customers, for example, want companies to stand on issues like sustainability, transparency, and fair employment practices. This demand is part of a broader trend where consumers prioritize sustainability and ethics in their purchasing decisions.

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Community Engagement and Development

KPI: $/£/€ Spent on Corporate Social Responsibility

A company's involvement in community development and engagement initiatives reflects its commitment to social sustainability. Google's parent company, Alphabet, has launched various projects aimed at social impact, such as Google.org, which supports non-profits and innovators using technology to tackle global challenges.

Engaging marginalized communities effectively requires a deep understanding of the specific challenges and barriers they face. Strategies include recognizing the varied landscapes of marginalized communities and employing tailored approaches to ensure meaningful inclusion.

This guide by the UK Government has a good roadmap to put this into practice.

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Conclusion

As investors continue to integrate ESG considerations into their decision-making processes, the importance of social factors cannot be overstated. By closely monitoring KPIs related to diversity and inclusion, employee engagement, supply chain ethics, and community engagement investors can identify companies poised for sustainable growth. These social KPIs, when combined with environmental and governance metrics, provide a holistic view of a company's ESG profile, enabling investors to make choices that align with both their financial goals and social values.

Next week, we will be looking at the role of governance, and how the most overlooked letter of ESG could hold the most pressing issues for investors.

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