In August 2019, the Business Roundtable—an association of 181 CEOs of major global companies—published a “Statement on the purpose of a corporation,” which had traditionally been defined as maximizing shareholder returns. Corporations, the Business Roundtable now asserted, should exist to benefit all stakeholders, including customers, suppliers, employees and communities, not just shareholders.

This was a massive change, and was driven by the increased focus on the part of many institutions on “responsible investing,” an umbrella term used to describe three different investment strategies: Environmental, Social, and Governance (ESG) investing; Socially Responsible Investing (SRI); and Impact Investing. ESG investing in particular has grown in popularity in recent years among retail investors.
 
In ESG investing, issues such as climate change (part of the “E-factor”) and the composition of corporate boards (part of the “G-factor”) become a key component of investor decision-making. But while some companies have long focused on social issues such as treatment of employees, worker safety and community involvement (part of the “S-factor”), these issues have generally featured less prominently in investment decisions than environmental and governmental factors. Until now.
 
The events of this year have changed the landscape, elevating the social component of ESG investing to the forefront. That’s why 2020 will be the “Year of the ‘S-factor.’”
 
A New Purpose
The two major events of 2020 so far—a worldwide pandemic and urgent efforts to confront the problem of systemic racism—have spurred corporations to take the new statement of purpose from the Business Roundtable and quickly put it into practice. What has followed is a redoubled focus on employees and communities.
 
As Covid-19 infections spread from country to country, causing thousands of deaths and forcing billions of people around the globe to quarantine in their homes, corporate profits and shareholder returns suddenly took a backseat to employee health and safety. Companies of varying sizes made bold commitments to retain their workforce despite economic uncertainty, and some vowed to even increase benefits and support to their employees.
 
Communities also took center stage after the death of George Floyd. Protests decrying racism against Black people erupted across the country and eventually, the world.  Corporations couldn’t help but take notice. Fortune 500 companies as well as many others made significant donation to organizations dedicated to fighting racism, while at the same time making commitments to improve diversity and inclusion practices within their own corporate walls.
 
The Covid-19 pandemic has required companies to put the health and safety of their employees above all else and work swiftly to develop policies and standards to manage health risks in the workplace. And businesses that have traditionally been reliant on face-to-face interactions have had to adapt to new virtual methods of customer interaction in order to ensure their employees are not put at risk. However, many companies have found that in making this shift to protect employees, they can still serve clients and continue to generate revenue, though perhaps not at the same pre-Covid rate.
 
A recent study from the Journal of Financial Economics analyzing employees’ reviews of their companies found that higher ratings from employees correlate with improvements in sales growth, profitability and predictability of earnings. On the flip side, the same study found that lower employee reviews were associated with deterioration in the same corporate metrics.
 
The same can be said of the link between profitability and a company’s commitment to diversity and inclusion. U.S. businesses spend nearly $8 billion a year on D&I training, according to a recent article in the Harvard Business Review. Despite this investment, a study from BetterUp found 40% of minority employees still say they feel isolated at work, expressing a lack of inclusion and lack of acceptance.
 
BetterUp’s research also found that a high sense of employee belonging is linked to a 56% increase in job performance, a 50% drop in turnover risk and a 75% reduction in sick days. And, as most business leaders know, all of these points factor into better overall business performance. 
 
Socially conscious actions have always mattered to some extent, but in today’s environment they matter even more, not only to employees, customers and communities but also to shareholders. Yes, investors care primarily about returns, but they increasingly want to see that companies are making business decisions based on what is right versus what is easy or most economical. As such, corporations are being challenged to demonstrate and put into action policies and practices that truly benefit all stakeholders.
 
Doing Good AND Doing Well
Addressing a wider range of often competing stakeholder interests is a challenging task that requires more than words to achieve. It requires corporations to routinely address the complex impacts their decisions and actions have on diverse stakeholder interests. While the interests of employees, communities and shareholders may sometimes compete with each other, addressing those interests isn’t a zero-sum game. 
 
Even before the major events of 2020, ESG investors were asking corporations to provide more information about their social initiatives and achievements to help assess long-term value. Now, more than ever, how companies treat their employees and the communities they serve will have a significant impact on both their business and stock market performance.  

Kent McClanahan is head of responsible investing at RBC Wealth Management.

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