Written By: Andrew Parry
Head of Sustainable Investment
Newton Investment Management

Andrew Parry of Newton Investment Management explains why he expects the social or “s” element of ESG to soon be receiving the same level of scrutiny as environmental factors

Five years ago, climate change was a topic that most investors acknowledged as a systemic risk, yet, when discussed in terms of portfolio management, it was largely viewed as an externality that had failed to manifest itself in financial returns. How times have changed.

Now, nine out of ten of the world’s largest economies have committed to achieving net-zero carbon emissions, one third of the world’s asset managers have joined the Net Zero Asset Management initiative, and, more importantly, the economics of the fossil-fuel industry have been transformed by the internalisation of climate change into companies’ business models. What was previously a movement led by activists has now become an economic imperative that promises to reshape the world.

While the environmental, or “E”, element of ESG has received ever greater prominence over the last five years, the social or “S” element has lagged some way behind, but we believe there are reasons to believe the latter has now reached a critical juncture.

Social concerns to the fore
In the (we hope) soon-to-be post-Covid world, social concerns have been elevated in the sustainable investment debate. While investors are increasingly vocal about issues such as human capital management, there is frustration that a lack of tangible data, and limited evidence that social considerations are linked to financial outcomes, are hindering progress towards achieving a more comprehensive inclusion of social factors in portfolio decision-making. Despite these challenges, however, we believe that investors may well be at the same tipping point in the social debate that climate was at five years ago. The question is, therefore, are we about to see the transformation of the social dimension of ESG into a transformative economic force too?

Businesses as social enterprises
The Covid-19 crisis reminds us daily that all businesses are de facto social enterprises. Institutional investor surveys, such as the Edelman Corporate Trust Barometer 2020 report,¹ highlight the increased prominence of social issues. These findings are echoed in a recent Pensions Policy Institute report in which 75% of pension schemes surveyed expected members to become more concerned about social considerations in investment decisions.²

The rising awareness of social matters for individual savers reflects their immediacy through their own experiences or in their own communities. The increased focus on stewardship by pension funds and wealth managers is a mechanism for elevating these concerns, and one that provides a voice to a wider range of stakeholders and makes all investors potential activists now.

Hard to measure
The broad scope and qualitative nature of social factors can make it hard to measure impact and understand how to implement the management of these risks effectively. The growing awareness of the topic is also increasing the range of factors being considered, which adds to the challenge. However, the complexities of a topic matter little if there is a growing clamour for tackling stubborn systemic challenges.

Institutional investors are increasingly using their voice for social matters too. The absence of data is being filled by engagement activities that call for greater disclosure and clear goals for achieving inclusive and diverse workforces. Strong governance is needed to translate easy corporate rhetoric into tangible action through clearly defined goals. Here, shareholders are calling for stronger evidence of intent, starting at the board and executive level, and exercising their voting power to underscore the imperative for change.

Future of human capital
The investment industry is also being forced to look at its own performance on social matters, which is often sadly lacking when it comes to inclusion and diversity. The growing activism of clients is being turned on asset managers, pushing them to hold themselves to the same standards that they demand of others. While more is needed, programmes such as the Thirty Percent Coalition, #100BlackInterns and Women Returners are signs of progress.

When backed by greater efforts on improving cognitive diversity, the industry can be helped to break out of its own echo chamber. The power of social movements is illustrated by the success of #100BlackInterns, which has rapidly spread to over 20 industries beyond financial services and morphed into #10000BlackInterns.

Mental wellbeing
The rapid recovery from the Covid-induced recession is revealing skill shortages and changing how companies organise human capital management. In many industries, the pattern of work may never be the same again. Covid has demonstrated that flexibility can bring productivity benefits, as well as giving access to a more diverse talent pool. The arrival of children in many a video conference call has humanised the work experience for many and reminded us that there is a life beyond the office. The pandemic has also raised awareness of mental illness as the downside of those productivity gains. There is now greater appreciation that mental wellbeing needs to be managed in the same way as physical wellbeing.

Focus on supply chains
It is not solely in direct activities that social matters are coming to the fore. Issues in supply chains, such as forced labour, have come increasingly to prominence, often amplified by political and legal pressures. Scrutiny of supply chains is notoriously hard, but the positive side of social media and the internet is that issues can be rapidly revealed and can cause damage to reputations and sales. While traditional reported social data remains elusive, other forms of information can be even more powerful.

Collaborative action is an important element of achieving greater corporate accountability. Not-for-profit organisations, such as the Workforce Disclosure Initiative,³ have played a central role in driving improved transparency in all forms of human capital management to fill the data gap.

As interest grows, one note of caution is that the hyperfocus on sustainable investing may appear somewhat reminiscent of previous bubbles in investment, specifically the dot.com boom and bust. Anyone involved in ESG investing for longer than the last few years will have mixed emotions over the recent surge in interest from investors. For much of the last decade, sustainable investing was a niche activity. Flows were meagre even though performance tended to be good.

The recent surge of flows into ESG investing is a vindication of the belief and tenacity of earlier pioneers, although it can be galling to see recent converts hoovering up much of the spoils. What is more gratifying, however, is that this burgeoning interest is reflective of wider shifts in society, including among politicians. Awareness of the importance of managing not only the environmental impact (for example, recent wintry conditions in an unprepared Texas) but the social consequences (see last summer’s Black Lives Matter-led protests) of our economic lives is beginning to shift the focus from product labels to the fundamental reorientation of business models and the allocation of corporate capital.

Five years ahead
In conclusion then, we believe that in important and visible ways, investors are all activists now. The recent and rapid growth of both active and passive environmental, ESG and sustainable assets has been accompanied by a rise in active engagement and proxy voting. Rather than pliantly voting with management, investors are increasingly voting against management. This new-found, vigorous investor activism only promises to grow as we emerge from our current Covid-19 environment.

Looking five years ahead, we believe the growing awareness of the systemic nature of social issues should ensure that they get the prominence that climate change receives today. It is an opportunity for business to show leadership and innovation – especially in a world where so much of government policy has been outsourced to the private sector.

As is increasingly the case today with environmental factors, the activism around social issues of shareholders needs to be built upon and turned into engagement, with a forward-looking perspective on a multi-stakeholder world. The data will follow and should be no excuse for inaction. Behaviour is visible and shapes outcomes more than reporting will ever do. The prescient corporation will see that effective stakeholder management is about ensuring future relevance.


Important information
These opinions should not be construed as investment or any other advice and are subject to change. This document is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors. Issued in the UK by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation.


1. Edelman. Edelman Trust Barometer Special Report: Institutional Investors. October 2020.

2. Pensions Policy Institute. Engaging with ESG: Environmental, Social and Governance Factors. April 2021.

3. ShareAction. Workforce disclosure initiative: work disclosure in 2020: trends and insights. March 2021


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Published: August 1, 2021
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