Total time: 10:29

Andy Poreda: Hi everyone, and welcome back to another episode of The Hitchhiker's Guide to ESG investing. I'm Andy Poreda, ESG Research Analyst at Sage Advisory, and today I have my team member with me, Sara Rodriguez, another ESG Research Analyst at Sage. We continue our deep dive into the components of ESG, and today's episode is going to cover the S in ESG, and why a focus on a company's social landscape is so important. S, which stands for social, is any social factors that are primarily arising when a company operates both internally and externally with the various stakeholders that the company deals with. This could be employees that the company has as part of their organization and it can also be the community at large or possibly consumers of the product. I think it's a really interesting topic to talk about today because what's going on in society with the COVID-19 pandemic, as well as the Black Lives Matter movement. There are a lot of issues that are coming up. Sara, do you want to talk about some of the issues that you are seeing coming up in society at large today?

00:59

Sara Rodriguez: Yeah, absolutely. Thanks for having me today Andy. When 2020 first started out, we really thought this was going to be the year of having an environmental focus in ESG, we thought that climate was going to be the big thing that everybody was really going to be focusing on. And absolutely, that is still true, but we can see that the events that have taken place so far this year, have really put a spotlight on the social issues as well. Through COVID-19, we have really seen this new focus on seeing how companies are protecting their employees, protecting their customers, and engaging with their communities. In addition to COVID-19, the Black Lives Matter movement has put the spotlight on racial injustice and has brought attention to issues of racial diversity and inclusion in companies. This has really promoted investors to act with a greater sense of urgency on meaningful initiatives for more inclusivity and diversity, and equitable workspaces. We want to see how companies are mitigating risk in the social category of ESG. The companies that are doing better in these areas are going to be better positioned to survive through the downturn and recover after the pandemic is over.

02:15

Andy Poreda: Well, very interesting, Sara. I think these are issues that societies and companies have to figure out. But I guess the question is, why should an investor care? What's the reasoning behind it? If I am investing in this company, why does it matter to me?

02:29

Sara Rodriguez: Right, so the whole idea behind ESG investing is that society already cares about these issues, but investors should care about them too, and that is because these issues can actually affect the financial condition, or the operating performance of a company. Just looking at this year alone, we can see how much extreme market volatility COVID-19 has caused. Investing in companies that pay attention to social issues can be a way for investors to reflect their values, while also allowing these investors to gain higher and more reliable returns on their investments. That’s because the market tends to reward companies that minimize their exposure to social issues. For example, when we see a company that has gone through a controversy that maybe has led to labor strikes or consumer protests, those are going to be events that really can affect the company's profitability, and they can also really damage the company's reputation. So, these social factors are definitely important, and carry weight when it comes to financial materiality. This isn't just kind of a “feel good” investing approach. This is something that turns out to be much bigger than that.

03:41

Andy Poreda: Very interesting. I think if we’re talking about the S I think it's probably great to boil down some of this into a little more detail. The first step I think we start looking at is the social capital. Can you kind of discuss this idea of social capital and what types of issues are covered there?

03:58

Sara Rodriguez: When we think about social capital, we really think about how companies are interacting with their customers and how companies are interacting with their communities. So, just to highlight an example of a company that we've looked into recently here at Sage – Cisco Systems Inc. is a company that designs software and technology products to help people access the internet, and actually about 80% of internet usage goes through Cisco Systems products. So, when we think about their relationship with their customers, handling data privacy is something that's going to be super important to them. Something that we think Cisco does really well is maintaining a transparent approach to their data privacy practices, they really let their customers know what data they collect, how it's used, and who has access to it. So, that's an example of a way that Cisco manages their interactions with their customers. In addition, Cisco is headquartered in San Francisco which has a problem with affordable housing and has a very large homeless population. Cisco has really prioritized investing back into their community to help mitigate those social issues.

05:09

Andy Poreda: Interesting Sara, and so I guess the other part of the S is really the human capital side, can you break down the human capital side? As we mentioned earlier, COVID-19 has really brought that idea to light. I'm curious about some of the issues that you find material to a company when we're discussing this human capital.

05:28

Sara Rodriguez: Absolutely, I think human capital is huge, and especially in 2020, it's definitely become a big area of focus. So, I touched on it a little bit before, but one of the issues that falls under the category of human capital is diversity and inclusion. So, we see this issue and we see that the Black Lives Matter movement has really brought this to the forefront of people's attention, and investors and stakeholders are really wanting to see companies put emphasis on inclusive hiring practices, as well as policies that support people both inclusive of gender and inclusive of race and ethnicity. Something we really like that Cisco does is they have a lot of policies that help support women. They've put in place policies and programs that help level the playing field for their women and minority employees. Oftentimes, women and people of color have a harder time climbing up the corporate ladder because they lack the same type of mentorship opportunities that other people would have. Another thing that we can see Cisco doing really well is they're very transparent about their diversity. They offer up a lot of data on who works for them in terms of gender and race. They are not perfect, they've had issues with diversity and inclusion in the past, and that's something they're still going to have to continue working on. But these issues already have a spotlight being put on them, and it's something that's going to be increasingly important in the future. We're going to see more people asking for transparency in this data, and they're going to want to see what companies are doing to promote diversity and inclusion in their hiring practices.

6:59

Sara Rodriguez: And then also, when we think of human capital, we think about supply chain management. That is huge for a lot of companies, especially if they have a global supply chain. Having a global supply chain is something that can present a lot of risk and can possibly financially affect a company depending on how they manage those situations. Cisco has a network of over 200,000 employees worldwide. They have a lot of policies in place to help manage the risks that come with outsourcing to countries like China, Malaysia, and Thailand that might not have the same human rights laws in place to protect the workers. Since Cisco is a technology company, they're required to use minerals that have been labeled as conflict minerals, because they've been tied to economically benefiting groups that commit human rights violations in African countries. Cisco combats this by regularly conducting due diligence on minerals in its supply chains to ensure that their mining does not benefit these groups. They’ve also developed technology to help track these minerals and where they come from.

08:06

Andy Poreda: Wow Sara, it really seems like your example of Cisco as a technology company, and some of the material issues that they deal with from a social aspect is really interesting. Are there any other social factors that Sage considers when looking at this that may not be applicable to a company like Cisco?

08:23

Sara Rodriguez: Yeah, in addition to the ones we've already talked about, I think employee health and safety is a really big one. I think that's something that's come up during COVID-19, we've been looking to see which companies are offering paid sick leave if they weren't already. In addition to that, we look at access and affordability to a company's products. So, when we're thinking about things like essential goods, such as a utility, or maybe a pharmaceutical company that offers drugs, are they offering their products at a price that people can readily afford? I think that's another issue that's very important and can be financially material to companies.

09:02

Andy Poreda: Very insightful. Well, 2020 and 2021 will be really exciting for investors to kind of follow some of these S stories that we've mentioned, and I think investors will increasingly realize how material these are to their decisions that they make. That’s all the time I think we have for today Sara, thanks for all the insight and if you have any more information that you'd like to see please visit us at sageadvisory.com and @sageadvisory on LinkedIn and Instagram. Have a good one.

09:30

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