Vontobel Conviction Equities Boutique

Social factors: An actionable investment focus rather than a philanthropic luxury

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While the “E” in ESG has taken prominence in impact investing over the past years, the “S” has only recently come to the forefront shining a light on social factors such as poverty, health care, education and inequality.

1. For many social factors are still a philanthropic luxury rather than an actionable investment focus. What are the reasons for this?

Part of the issue is a lack of systematic regulatory zeal, taxes and incentives on social matters that would be comparable to the commitment environmental issues have received. There is no net-zero equivalent on the social front as of today. Despite the existence of pink quotas in few countries, there is no carbon tax equivalent that punishes companies for a lack of adequate female representation at top management level despite the productivity cost less diverse teams incur. The lack of a mechanism that directly hits the pockets is the main reason for the lack of investment focus on the ‘S’ vs. the ‘E’. Regulatory scrutiny with carrots, in form of subsidies for good social actions and sticks, with taxes, is likely to spill over from environmental issues to the social realm.

2. How do you measure social impact?

The United Nations (UN) Sustainable Development Goals (SDGs) provide a helpful framework for setting investment strategies and measuring investment outcomes. These goals help to identify focus areas which can be used to construct portfolios by systematically selecting companies that contribute tangibly to solving sustainability issues. Only companies that generate most of their revenues via products and services that represent real solutions or that contribute to the specified goal should be eligible for inclusion in impact portfolios. Furthermore, the SDGs should be translated into impact areas that are tied to concrete key performance indicators against which companies can be evaluated for portfolio inclusion. For example, we can measure the impact of food and agriculture companies by quantifying the tons of food sustainably produced and the equivalent in kilocalories per person, or their effects on biodiversity.

3. How can investors add the “S” in their portfolios?

For example, investing in listed companies that cut healthcare costs, can help to reduce inequalities and provision of healthcare accessibility. We believe that making healthcare more affordable is key as savings can allow national healthcare systems to go further, treat more people and cover more diseases with the same budget. That includes, companies that sell generic/biosimilar drugs at cheaper prices than the patent-protected alternatives, or in advanced diagnostic med-tech companies whose products can reduce hospitalisation and accelerating the recovery process thanks to earlier, faster, and more accurate disease detection.

Other examples include banks supporting greater financial inclusion, as having a bank account is generally linked to a higher propensity to save, building a credit record and hence being able to apply for a mortgage to buy a roof and build wealth, or for a car loan to go to work.

Our economy is moving towards a sustainable future. By selecting companies that use their talent and innovation to deliver solutions, products or services to sustainability challenges, investors can obtain a “double dividend” which comprises both financial returns and a positive impact on our planet and society.



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