Corporate materiality analyses show a growing interest in social issues bolstered by regulators that broaden their reach in these areas. This shift was instigated by Covid and the issues it brought to the fore, but also by global discussions about racism, gender equality, and sexual harassment. Stakeholders see the interconnectedness between public health, social issues, and business continuity.

Which upcoming regulations and treaties relate to the social element of ESG?

We will likely soon see the Corporate Sustainability Reporting Directive (CSRD), which is replacing the Non-Financial Reporting Directive (NFRD). This will push companies to report based on double-materiality assessments. Another directive is the Corporate Sustainability Due Diligence Directive (CSDDD), which is still under development. Under this, businesses will have to map and address the adverse social impacts of their activities, including those generated by their supply chains.

One regulation which is already in force is the Sustainable Finance Disclosure Regulation (SFDR), which includes minimum social safeguards in the environmental taxonomy and the principal adverse impact statement. These compel asset managers to put pressure on investee companies to better perform on specific social indicators.

Have external factors prompted the shift in focus toward social issues?

Yes, conflicts spark interest in social considerations and inspire new rules. Two such cases are the coup in Myanmar and the conflict in the Democratic Republic of Congo, especially in the sector of mineral extraction, as in the latter case. We can also see how geopolitical tensions rose between the United States and China due to the passage of the Uyghur Forced Labor Prevention Act, which prohibits the import of products from Xinjiang into the US unless it can be demonstrated that forced labour was not used.

How do traditional ESG approaches still play a role in screening out players with poor ESG ratings?

Traditional ESG approaches are still the foundation for proper due diligence in investing. These include normative screenings that follow the compliance with Global Standards, such as the UN Global Compact Principles, or behavioural screenings that assess a company’s past controversies. Activity screenings are done to exclude companies involved in controversial activities, such as coal extraction. We also conduct what are called positive screenings. Under these, companies in a given industry are rated based on their ESG performances, and the bottom performers are excluded.

Which best practices do you advise to avoid investing in companies with lower credentials?

On top of the traditional due diligence, we strongly advise taking a systemic screening approach. Some companies, which seem to perform well in ESG, might still lack certain policies related to due diligence or human rights, and even fall through the cracks of traditional ESG providers and fail compliance with the UN Global Compact Principles. Also, some traditional ESG providers might not have sufficient knowledge of salient human rights issues in a particular industry to properly assess a company’s actions. At Degroof Petercam Asset Management (DPAM), we apply systemic screening throughout the company. We closely adhere to the UN Guiding Principles for Businesses and Human Rights, under which three pillars specify the role of the state and businesses in respect of human rights. We carry out a top-down analysis of high-risk sectors that might have a negative impact on human rights, and then we conduct a bottom-up analysis on the companies in these sectors. We state our concerns, discuss these and engage with management. Together with other investors we try to improve companies’ human rights commitments and their due diligence.

This is how DPAM shows its commitment to ESG, human rights, and the social well-being of those impacted by companies in which we invest.