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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Over the last decade, the financial materiality of sustainability considerations — often regrouped under the acronym ESG — has steadily moved up investment agendas. Historically, investors have directed their attention mostly to environmental (E) and governance (G) concerns. However, key developments, notably deglobalisation, greater focus on labour relations and supply chain management, AI and the need for a just net-zero transition, all point to the growing financial materiality of the social (S) dimension. Applying such a lens can help investors assess companies in areas that are increasingly vital to long-term success, such as corporate culture and supply chain management. We have also observed that in certain circumstances, social themes may serve as an additional diversifier. For instance, companies in areas such as education have historically displayed defensive qualities.
In 2023, Wellington held over 17,500 meetings with more than 5,500 public-market issuers,1 covering an array of topics, including social themes. The outcomes of these discussions enrich the wider research mosaic that investment teams across the firm leverage. They also help inform our proprietary ESG scores, our research on the risks and opportunities of a just net-zero energy transition and our anti-modern-slavery framework. Our 2023 tracked engagements also reflect the growing importance of social topics (Figure 1).
Figure 1
Social factors are a critical part of Wellington’s engagement activity
Tracked engagement by category
TOP 5 TOPICS
Product sustainability & innovation
Environmental practices
Climate physical risk
Climate transition risk
Science-based/net-zero targets
TOP 5 TOPICS
Culture, talent, labour management, and health & safety
Supply chain management/modern slavery
Product quality & safety
Employee incentives & development
Litigation & regulation
TOP 5 TOPICS
Capital/resource allocation
Succession planning
Fundamental credit quality
Executive compensation
Board structure & composition
Source: Wellington. For illustrative purposes only. Data is from 3,411 tracked meetings in which E, S or G topics were covered. Most engagements cover multiple E, S and G topics and therefore the tracked engagements by category are indicative only. Data as of 31 December 2023.
Against this backdrop, we set out three specific ways to translate social risks and opportunities into the potential for greater and more sustainable returns. The three avenues we explore take distinct directions — adopting a stewardship, thematic and impact perspective, respectively — but all share a focus on active management and engagement.
In our view, stewardship always has a strong social component as we consider responsible and strategic management of natural, human and financial resources as an essential prerequisite to creating lasting value. Companies that consistently balance the needs of all stakeholders to the benefit of people, planet and profit are, in our view, best placed to maintain market leadership and deliver superior profitability over the long run. The long-term nature of stewardship investing — with names typically held for at least a decade — also means that proactive engagement is critical. Social topics are a major agenda item during these discussions.
Case study: supply chains and responsible sourcing
Global supply chains often constitute a blind spot for companies and investors alike, yet recent disruptions have demonstrated how extracting maximum efficiencies from sourcing and inventory management has created unintended vulnerabilities and reputational risk. We therefore look for solid evidence that portfolio companies are proactively addressing these risks and building more resilient and sustainable supply chains. For instance, we approached:
Another lens through which to capture social risks and opportunities is to focus on long-term next-generation themes, many of which have a strong social aspect. By bringing into play a wide range of research perspectives from different teams across our core themes of innovation, sustainability and inclusion, we believe it is possible to determine likely winners of these structural social trends and build diversified portfolios with attractive risk/return potential.
Case study: innovation in health care
Recent advances in science, tools and technologies are paving the way for treatments that are more effective, more precise and have fewer side effects. We see particularly promising developments in medical technology (medtech) and biotechnology (biotech). These innovations could deliver major medical and social benefits, such as better diagnosis and treatment. On the flipside, they also raise new ethical and social questions. Provided these concerns are addressed, we think the market for innovative technologies and therapies could create significant opportunities that thematic investors could be well placed to exploit. Examples of opportunities we have identified include:
An alternative avenue is to invest explicitly with a dual objective, targeting both competitive financial returns and measurable positive impact. We believe that by investing in solutions that address some of the most pressing global challenges, many of which have a strong social dimension, we can provide a highly additive approach that:
In our view, diversification can be enhanced further by impact-related fixed income investments as they allow investors to target promising areas — mostly not captured by public equity markets — across the full fixed income spectrum, from municipal to corporate bonds, and from government agency to social government bonds. Fixed income offers the additional benefit of being able to deploy capital at scale in response to immediate environmental or social challenges.
Case study: education
Education and job training is a key area for social impact. Solutions for improving in-person teaching and expanding remote-access education, especially for low-income populations, can have positive multiplier effects that may be widespread and enduring. We see this theme as an important diversifier as certain areas of education have historically demonstrated defensive qualities. We think attractive opportunities include:
We think that an active focus on social risks and opportunities can help investors build more robust and diversified portfolios that benefit from exposure to the most innovative companies and issuers. We have identified three main avenues for capturing the attractive return and sustainability potential associated with social investing. In our opinion, they provide tangible examples of how the inclusion of social considerations can materially enhance traditional core portfolios.
1Source: Wellington. For illustrative purposes only. Data represents meetings with public-market issuers as of 31 December 2023. “Issuers” refers to companies and sovereigns. For the Wellington Management group of companies. While all meetings inform our investment processes, ESG topics are not covered at every meeting. | 2Nathalie Conrad PhD et al, “Incidence, prevalence, and co-occurrence of autoimmune disorders over time and by age, sex, and socioeconomic status: a population-based cohort study of 22 million individuals in the UK”, The Lancet, 3 June 2023.
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