ESG Focus: Materiality Matters – Part 1

The story below has been republished to rephrase First Sentier's investment approach vis a vis the United Nations’ 17 SDGs, see first sentence under Targeting UN Sustainability Goals. The original story was published on 10 March 2021.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 1The highly coveted "sustainability premium" is the holy grail of ESG investors globally, and determining materiality is the key to attaining this. First Sentier shares some of its preferred metrics.-Materiality meets “social licence” and outcomes-Certain SDG indicators – the low-hanging fruit – come first-Grappling with the materiality of social themes in the supply chains of emerging economies By Sarah MillsIt is early days yet for ESG but we at FNArena are always trying to determine the more material ESG metrics to investors.We also like to follow the money trail: where, why and when institutions are allocating their funds.Speaking to these issues, First Sentier Investors has published a paper and held a webinar titled Navigating Investment in a Post-Covid World.The paper discusses material indicators for broad sustainability, renewable energy, biodiversity, modern slavery, mental health and gender.It also provides an interesting insight into the focus and approach of fund managers in the ESG investment space, as well as insightful information on the link between materiality and the social theme.Part 1 of this series examines First Sentier’s approach to materiality and the challenges of investing in emerging economies.Part 2 will examine materiality in mental health, gender and modern slavery.Part 3 will examine the environmental materiality: biodiversity, climate change, water, and oceans. Where materiality meets outcomesFirst Sentier says it focuses on both materiality and on a company’s “social licence to operate” when allocating funds.Or, as First Sentier responsible investment specialist Kate Turner puts it: “the space where materiality intersects with outcomes.”The social licence premise is that a company has a “right” to do business so long as they accept the basic rights of others to receive a living wage, breathe clean air, and drink fresh water, for example. Social licence is becoming an increasingly material factor, and a sustainability issue, as the threat of regulation looms.“We only invest where management operates the business effectively and in the interests of all stakeholders,” says Turner.“Those that don’t look after their customers, employees, suppliers and larger community are unlikely to be rewarding long-term investments,” she asserts, noting corporate failures are often indicators of low sustainability in these areas.Social issues are also becoming increasingly material as funds pivot to invest in emerging economies with a clear growth path (as opposed to developed economies with ageing populations but reasonable working conditions).This is particularly important given that raising standards and sustainability in emerging economies is also a focus of the UN's Social Developemnt Goals (SDG), meaning a large proportion of institutional funding will be funnelled into these economies – another revenue source for shareholders.Given this is the case, investors are grappling with understanding the materiality of social outcomes to a company’s longevity in these regions.As an example, FSSA Investment Managers investment analyst Angus Sandison notes that the crippling of many large Indian corporations over the past few years, in particular, can be sheeted back to “social” themes. Not only did direct investors in these companies suffer, but those with supply chain exposures to these organisations were also burnt. So institutional focus on supply-chain management is intensifying globally.