Social value: can technology measure the ‘S’ in ESG?

ESG investors, fund man­agers and com­pa­nies are increas­ing­ly aware of the dan­ger of green­wash­ing and the need for hard met­rics. This is a par­tic­u­lar chal­lenge for the ‘S’ in the acronym. 

It’s becom­ing eas­i­er to ver­i­fy a company’s envi­ron­men­tal impact and to a less­er extent, its gov­er­nance. But assess­ing and bench­mark­ing its social impact is much hard­er. 

Accord­ing to rat­ings agency Moody’s, social con­sid­er­a­tions were the most fre­quent­ly cit­ed ESG issue last year, dri­ven by the Covid pan­dem­ic. But how can investors get a prop­er sense of whether a company’s sup­ply chains are free of sweat­shops and mod­ern slav­ery con­tra­ven­tions, for exam­ple? 

Over the last few years, a grow­ing num­ber of com­pa­nies and plat­forms have sprung up that aim to address the issue by pro­vid­ing pro­vide clear, com­pre­hen­sive and accu­rate met­rics on social val­ue. RepRisk and Fact­set are among those that use algo­rithms, arti­fi­cial intel­li­gence (AI), social media sen­ti­ment, nat­ur­al lan­guage pro­cess­ing (NLP) and data to mea­sure social val­ue and impact for the ben­e­fit of ESG investors, while help­ing com­pa­nies man­age their risk in this area. Tech­nolo­gies such as blockchain can pro­vide more detailed, accu­rate and time­ly infor­ma­tion about sup­ply chains.

RepRisk, for instance, lever­ages a com­bi­na­tion of AI and machine learn­ing with human intel­li­gence to sys­tem­at­i­cal­ly analyse the pub­licly avail­able infor­ma­tion of over 200,000 pub­lic and pri­vate com­pa­nies and more than 55,000 infra­struc­ture projects in 23 lan­guages. 

“Essen­tial­ly, RepRisk serves as a real­i­ty check for how com­pa­nies con­duct their busi­ness around the world – do they walk their talk when it comes to human rights, labour stan­dards, cor­rup­tion and envi­ron­men­tal issues?” explains Alexan­dra Mihailes­cu Cichon, the company’s exec­u­tive vice-pres­i­dent for sales and mar­ket­ing. “This per­spec­tive, togeth­er with a trans­par­ent, rules-based method­ol­o­gy and dai­ly updates, ensures that our clients have con­sis­tent, time­ly and action­able data at their fin­ger­tips.”

Sceptical investors

Social Val­ue Por­tal helps busi­ness­es quan­ti­fy and com­mu­ni­cate social, eco­nom­ic and envi­ron­men­tal val­ue cre­ation. Accord­ing to CEO Guy Bat­tle, “clar­i­ty around the social val­ue ini­tia­tives that a firm is look­ing to deliv­er allows peo­ple on the ground – whether it be fund or asset man­agers, prop­er­ty man­agers, sup­pli­ers, occu­piers or cor­po­rate employ­ees – to pull in the same direc­tion, tar­get impor­tant ini­tia­tives and help com­mu­ni­ties thrive. And the way you’ll get that clar­i­ty is from a con­sis­tent and account­able frame­work to report and mea­sure against.”

How­ev­er, some investors are scep­ti­cal about the accu­ra­cy and help­ful­ness of the infor­ma­tion that these tech­no­log­i­cal eval­u­a­tions pro­duce. Sophie Lawrence is stew­ard­ship and engage­ment lead at Rath­bone Green­bank Invest­ments. She says that until there is a more com­pre­hen­sive reg­u­la­to­ry frame­work in place requir­ing the dis­clo­sure of com­pa­ra­ble, inde­pen­dent­ly ver­i­fied social data by com­pa­nies, “we would cau­tion against an over­re­liance on third-par­ty ESG data tools which use tech­nol­o­gy to scrape com­pa­ny-report­ed social data and aggre­gate it for investors. This approach risks cre­at­ing an over­ly sim­plis­tic view of com­pa­ny per­for­mance.”

Johan Van­der­lught is sus­tain­able finance spe­cial­ist at Van Lan­schot Kem­pen, an inde­pen­dent wealth man­ag­er. The met­rics employed depend on the AI tech­niques a data provider choos­es to use, he says. 

“Trans­paren­cy regard­ing data and method­ol­o­gy is a chal­lenge with tra­di­tion­al data providers like MSCI, Sus­tain­a­lyt­ics, and ISS ESG, and remains even more so with AI ESG data providers. Ulti­mate­ly, the qual­i­ty of the data is depen­dent on the inde­pen­dence of the data source, and this is no dif­fer­ent for social data than for envi­ron­men­tal data.”

There are numer­ous fac­tors and vari­ables to man­age. How­ev­er, the oppor­tu­ni­ties for dif­fer­ent inter­pre­ta­tions of facts and fig­ures are also exten­sive. Tiia Sam­mal­lahti, CEO and founder of whatimpact.com – a provider of tech­nol­o­gy that helps com­pa­nies on social val­ue through part­ner­ships with char­i­ties – takes the exam­ple of a food retail­er donat­ing to local home­less peo­ple.

“They may also auto­mat­i­cal­ly increase that val­ue by includ­ing the wider ben­e­fits of home­less peo­ple being bet­ter nour­ished and there­fore more empow­ered to move into employ­ment or hous­ing,” she says. “But this doesn’t nec­es­sar­i­ly take into account whether the food being pro­vid­ed is healthy.” 

Sam­mal­lahti sug­gests that qual­i­ta­tive sur­veys and inter­view data could be more accu­rate and use­ful than fig­ures pub­lished by the com­pa­ny con­cerned or met­rics derived from algo­rithms. “The key is to com­bine tools that are robust in their proxy num­bers with qual­i­ta­tive, evi­dence-based report­ing that ver­i­fies the impact,” she argues. “This enables a more accu­rate cal­cu­la­tion to be matched with the results.”

Competitive benefits

Investors can and should demand more data from com­pa­nies and data providers that is focused on the effects of the com­pa­nies’ poli­cies and impacts, while pay­ing clos­er atten­tion to sup­ply chains, accord­ing to Nico­la Stopps, founder of Sim­ply Sus­tain­able, an ESG con­sul­tan­cy. 

“This is key, because emerg­ing evi­dence shows that the inte­gra­tion of ‘S’ cri­te­ria in invest­ment analy­sis leads to improved returns, less volatil­i­ty and low­er down­side risk,” she says. “Bet­ter inte­gra­tion of social indi­ca­tors in par­tic­u­lar can help to iden­ti­fy more resilient and prof­itable invest­ment oppor­tu­ni­ties that are already aligned with estab­lished and antic­i­pat­ed reg­u­la­tion. It is key for investors to devel­op a strat­e­gy for their total port­fo­lio cov­er­ing engage­ment, advo­ca­cy, and inte­gra­tion. Vol­un­tary poli­cies and ‘tick-box’ exer­cis­es are not a solu­tion for avoid­ing invest­ment risks.”

Despite the com­plex­i­ties and con­tra­dic­tions, Ioan­nis Ioan­nou, asso­ciate pro­fes­sor of strat­e­gy and entre­pre­neur­ship at the Lon­don Busi­ness School, is gen­er­al­ly opti­mistic. He believes that com­pe­ti­tion across tech­nol­o­gy com­pa­nies with dif­fer­ent approach­es plus new entrants into the indus­try will be ben­e­fi­cial in the longer term.

That’s because ESG issues in gen­er­al – and S issues more specif­i­cal­ly – are com­plex and con­tin­u­ous­ly evolv­ing.  

“We are far from being able to have a sin­gle opti­mal approach or one ide­al met­ric that would ade­quate­ly cap­ture what is hap­pen­ing on the ground,” he says. “The more ideas we have, the more approach­es, and the more we crit­i­cise and scru­ti­nise them as they com­pete with each oth­er, the high­er the chances that once the indus­try starts con­sol­i­dat­ing, we will have met­rics and approach­es that are more robust.”