By Thomas Sørensen and Henning Padberg, portfolio managers of Nordea’s Global Climate and Social Impact strategy
Environmental and social issues are closely linked. Man-made climate change, for example, affects societies through changes in water, air, food, the ecosystem, our livelihoods and infrastructure.
Despite this interconnection, the ESG landscape has been dominated by the ‘E’ – with the spotlight mostly fixated on finding solutions to combat climate change. While this remains crucial, the outbreak of Covid-19 has devastatingly displayed the importance of social stability and cohesion – with every country, sector and individual impacted by the pandemic.
In order to achieve an inclusive green economy, the spotlight on the social, or ‘S’, in ESG must intensify. Fortunately, we are starting to witness positive developments. For example, regulation is becoming more defined in terms of social issues and – as was the case with environmental reporting – social reporting is moving from the voluntary to the mandatory. Ratings agencies are also recognising the importance of social considerations.
Of the UN SDGs, 11 are dedicated to social empowerment. To achieve the 2030 goals outlined by the UN, an estimated $5-7trn of ‘S’ investment is needed per year – but only half of this is currently being spent. This annual investment gap of about $2-4trn presents a huge opportunity for companies able to meet this demand. For investors, this means bridging the financial gap by backing those companies offering social goods and services. This is not just about prioritising social issues – it also makes financial sense.
Yesterday (20 February) marked the World Day of Social Justice, which was created to heighten awareness of issues such as poverty, exclusion, gender inequality, unemployment, human rights, and social protections. Below, we outline four companies providing innovative solutions in the social sphere, across both developed and emerging economies. Each stock is held in our Global Climate and Social Impact strategy.
UMH Properties is a pure play on the US affordable residential market, where there is a shortage of affordable housing and demand is far higher than supply. UMH is being increasingly buoyed by governmental policy, given the acute housing crisis looming in the country. By recently tapping government funding, it has been able to lower its cost of funding from 7% to below 4%. In addition, with the current Biden administration mandating 100,000 new affordable homes be built in the next three years, there is a great opportunity for the company’s growth to accelerate.
Roughly half the world’s population lack access to essential health services, while 50% of adults in middle and high-income countries are likely to suffer from a mental health condition at some point in their life. In the workplace, mental health concerns are a major cause of absenteeism, with 80% of employees missing work for this specific reason. Canada’s LifeWorks is seeking to change this, by proving organisations with employee assistance and wellness programmes to improve staff wellbeing. Working with more than 24,000 groups worldwide, LifeWorks’ personalised digital health solution assists more than 26 million people.
There is also tremendous scope for powerful change in emerging markets. For example, Kenya’s largest telecommunications provider Safaricom is one of the most profitable companies in the East and Central Africa regions. Smartphones serve as the basic medium to connect to the internet for Kenyans, as just 12% of people have access to fixed broadband. In addition, less than 40% of the population have a bank account, but Safaricom’s mobile payment platform M-Pesa significantly expands financial inclusion by enabling transactions via this system.
As for Asia, the second-largest bank in Indonesia, Bank Rakyat, is one of the most successful microfinance institutions in the world. Many people in Indonesia do not have access to a bank account, so Bank Rakyat’s small loans are crucial in enabling families to establish and expand their own small businesses. To reach the hinterland of the country, where the unbanked are located, the company has invested in its own satellite technology. The company is also involved in running SME training programs. Bank Rakyat can provide loans at reasonable rates, as its non-performing loan ratio is actually very small compared to traditional bank lending. This is positive for the company and investors, as well as society at large.
Corporate profitability depends on the continued wellbeing of the world’s society. Post-Covid-19, investor interest in ESG will intensify and extend beyond climate change to include the ‘S’ factor. We believe there is an exciting investment opportunity behind this megatrend – and we need to act now.