Spotlight on the ‘S’ in ESG

The social aspects of ESG investing have become more important than ever since the global pandemic. Here Edwin Lo, Chief Investment Officer, Uniting Financial Services, gives some insight into the Church’s approach to socially conscious investing.

Environmental, social and governance (ESG) investing has moved into the mainstream over the past decade. However, many investors are more familiar with the ‘E’ (environmental) and the ‘G’ (governance) aspects of ESG than they are with the ‘S’ (the way in which companies interact with employees and communities).

Following the COVID-19 pandemic, however, social factors have become a larger part of the ESG agenda. The pandemic caused significant disruption to labour markets, saw a marked increase in fraud and the misuse of personal data, while production and transportation constraints exposed the fragility of corporate supply chains.

For companies, this has led to an increased focus on social factors and their impact on corporate reputation. For investors and investment managers, it means taking a closer look at social issues and the risks they pose as a core part of the investment process.

The importance of the investment policy

From its formation in 1977, the Uniting Church in Australia was an early adopter of ESG investing. Its financial investment decisions are governed by an ethical investment policy, first written in 1980 as a practical outworking of the Church’s beliefs and values.

Today the 14 Investment Principles set out in the Ethical and ESG Investment Policy are closely aligned to the United Nations Sustainable Development Goals (SDGs), which are a blueprint for peace and prosperity for people and the planet. Of these 14 Principles, 11 are related to avoiding investments that have a negative impact on people, while the remainder focus on environmental concerns such as pollution and energy sources.

The Church and Uniting Financial Services (UFS), as its treasury and investment arm, seek to avoid investment in companies that derive a material proportion (five percent or more) of their revenue from activities which:

• Contribute to the serious inhibition of human rights.
• Result in discrimination in employment or education on the basis of race or gender.
• Fraudulently market or deceitfully advertise products or activities.
• Entice the poor into financial over-commitment.
• Exploit the poor through unfair housing arrangements.
• Exploit underprivileged persons by providing wages or working conditions that are significantly below the accepted norms in the society in which the activity is undertaken.
• Denigrate, or hold up to ridicule, individuals or groups in a manner inconsistent with the dignity of the person as affirmed in the Christian faith. These include activities which express racist, sexist, or ethnic slurs or promote discrimination or hatred.
• Damage the health of human beings (physically and relationally) even when used in moderation, for example through the activity being highly addictive.
• Participate in, enable or encourage the illegal evasion of the payment of taxes.
• Create or perpetuate excessive reliance on militarism.
• Engage in the manufacture of armaments or means of mass destruction, other than those that would reasonably be required in internationally accepted law enforcement.

Socially conscious investing in practice

So, what does this investment policy mean in practice?

For UFS, it means investing through managers who are leaders in the ESG space and are contributing to positive global change by excluding those companies that do harm and actively investing in those that do good.

As an example, part of our equity portfolio is managed by Ausbil Investment Management, which has become a leading authority on modern slavery and human trafficking. Ausbil has conducted a number of overseas trips to industrial sites and regularly meets with the companies it analyses to identify shortcomings in the treatment of workers within their supply chains.

Another manager, PIMCO, engages companies and bond issuers on matters including community and stakeholder relationships; human and labour rights; health and safety; and product innovation and wellness. PIMCO also engages governments, who are among the largest issuers of bonds, on issues such as social development financing.

A third manager, Palisade, manages infrastructure investments and real assets. Palisade closely monitors diversity metrics and works with companies to set targets for gender diversity. It also provides funding to various community initiatives, including providing scholarships each year to support gender diversity in traditionally male or female dominated sectors.

UFS regularly reviews its investment panel to ensure that investor funds are being managed prudently and ethically, in line with the Church’s investment policy.

In summary, while social factors have always formed a part of ESG analysis, now more than ever there is global recognition that no human should have to suffer as a result of business operations. Positively, we are seeing investors, governments and corporations increasingly working together to tackle many of our most complex social issues and effect positive change.

Important information: The Uniting Financial Services (UFS) unregistered managed investment schemes are available for investment only to wholesale investors. Prospective wholesale investors who wish to invest via our unregistered managed investment schemes can access the Information Memoranda for these any of these funds on the UFS website. While the information in this email has been prepared with all reasonable care, UFS accepts no responsibility or liability for any errors, omissions or misstatements however caused. No action has been taken to register or qualify these products or otherwise permit a public offering of these products in any jurisdiction outside Australia. Past performance is not indicative of future performance.