Why 'social' screening is critical in ESG

Tony Davidow writes that companies with strong social policies and practices can be an agent of change we need in these times.

By Anthony B. Davidow

(Tony Davidow is president and founder of T. Davidow Consulting, an independent advisory firm focused on the challenges facing the financial services industry. His focus is on helping advisers and investors incorporate complex strategies in their portfolios.)

WILTON, CONN. (Callaway Climate Insights) — We often focus on the ‘E’ in ESG,  and don’t pay enough attention to the ‘S’ and ‘G’. Let’s take this opportunity to consider the value of social screening, and how it rewards companies with strong social policies and practices.  

The past week has seen an escalation of racial tensions, protests, riots and looting after the reprehensible death of George Floyd.

Police brutality and the death of another African American man has fueled centuries-old feelings of inequality and racism.

Celebrities and athletes have spoken out about this endless assault of black men. Kareem Abdul-Jabbar recently wrote an emotional op-ed for the Los Angeles Times.

"… Racism in America is like dust in the air. It seems invisible — even if you're choking on it — until you let the sun in. Then you see it's everywhere. As long as we keep shining that light, we have a chance of cleaning it wherever it lands. But we have to stay vigilant, because it's always still in the air."

Politicians and business leaders are struggling to bring calm to this situation. Politicians will no doubt campaign on how they would deal with it, and business leaders will show empathy and support for their workers. Ultimately, it will take more than words to transform injustice in America.

Randall Stephenson, CEO of AT&T (T) in a CNBC interview has called on CEOs to speak up and do more. “All of us CEOs have large African American employee bodies. We owe it to them to make sure that we’re speaking to this, that we’re asking our policymakers to step up, that we’re asking our political leaders to step up and recognize and just say it: ‘We have a big problem and it needs to be dealt with.’” 

Social screening

Some companies have instilled a culture of embracing diversity and creating an environment that fosters inclusivity. What if you could identify those companies and reward them for a positive corporate culture?

When considering ESG, we often focus much of our attention on the environmental aspects, but the reality is that the social screening is critical to identifying good companies with strong policies and practices. Social screening rewards companies with strong employee engagement, a good human rights track record, broad employee diversity and fair labor practices. These companies recognize the value of diversity, and the need to embrace employee differences. They proactively promote minorities and encourage mentoring.

For some companies, it is part of their corporate culture. It helps them retain and attract better candidates. Employees have higher engagement scores and typically stay at companies longer. They are more apt to recommend a friend join a company. Tone-deaf companies will have a hard time attracting and retaining employees.  

Environmental screening rewards companies focused on climate change, energy consumption, the use of natural resources, and reducing their carbon footprint. Governance screening identifies companies with independent boards, fair executive compensation and strong checks and balances. 

Collectively, ESG screening identifies companies with strong social policies and procedures, a track record in caring for the environment and good corporate governance. These companies have historically exhibited strong risk-adjusted returns.

Read What makes ESG investing better?

In light of the heightened tensions, many companies will need to adapt their policies and practices to be more inclusive and socially aware. Those who take the lead are likely to reap the rewards of a more sophisticated investing public. As more investors begin to pay attention to corporate policies and action, companies with high ESG ratings will continue to see a more discerning public reward them by buying their stock. 

As more investors begin to understand the approach, ESG is poised to see significant growth and will likely be rewarded with outperformance. Good companies — with strong social policies and practices — can be the agents of change that we need in these challenging times.

Above, Earth Strike protest in London, January 2020. Photo: Charles Hutchins/Flickr (CC BY 2.0).