Social Materiality: A New Lens for Sustainable Investing

Guest Commentary by Liz Umlas

As the concept of ESG – addressing environmental, social, and governance factors in business and investment considerations – gains traction, the focus often seems more firmly on the first and last than on the middle issue.  I sought to address this deficit of attention earlier this month at a gathering of the Geneva financial community, where I presented on the integration of social criteria into investment decisions.  While the sustainable investing community claims that ESG is becoming mainstream, my impression is that those outside social investing who even know what the acronym means seem to apply it narrowly, through the lens of corporate financial risk, instead of more broadly, factoring in the human impact – what I’d like to call “social materiality”.  More on that below.

At the presentation, I shared the podium with Antoine Mach, a co-founder of Geneva-based Covalence, SA, whose mission is to “increase the density of information about business ethics and to bring this information to finance professionals.”  The participants were members of Sustainable Finance Geneva (SFG), of which Antoine and I are among several co-founders.  Launched in 2008, SFG seeks to “promote sustainability and responsibility within the Geneva financial community.”

As I prepared my remarks on how – and why – some investors assess corporate impacts on society and specific stakeholders, a useful case study reared into view.  While Vedanta Resources, the London-listed Indian mining and metals company, has been embroiled in controversy for some time over its proposed bauxite mining project in the Indian state of Orissa, the story recently came to a head.  A few weeks ago, the Indian Ministry of Environment denied Vedanta permission to mine bauxite in the Niyamgiri Hills of Orissa, not only for environmental reasons, but also because the project would destroy the way of life of two indigenous tribes in the area: the Dongria Kondh and the Kutia.

Responsible Investor reported that the company’s share price dropped 10% after the Indian government’s ruling, and that UK pension funds attributed the drop to “the financial risk of poor management of ESG issues.”  The pension funds “slammed” Vedanta for ignoring shareholder concerns about social issues, as they and others had tried to raise these issues with the company since 2008.  Even before the government’s ruling, Ethical Investment Research Services (EIRIS) released a report concluding that “Vedanta Resources needed to strengthen its board governance to address investors’ concerns” on human rights and the environment, according to Rajesh Chhabara in EthicalCorp.  EIRIS also found Vedanta’s failure to consult indigenous communities in Orissa led to “intense scrutiny and criticism” from international NGOs, as reported on

The case brings together quite neatly a number of points I wanted to make for my audience.  First, the interconnectedness of E+S+G: companies’ social and environmental impacts can be integrally linked, for better or worse, and can trace back to governance performance.  And ESG issues are not “non-financial,” the term preferred by mainstream investors a few years ago, but often financially material, as a growing body of research shows.

More importantly, taking “social impacts” into account in investing is not simply about considering how a company’s social impact might affect its financial bottom line.  It’s about looking at the people affected by corporate activity, and understanding the negative impacts of corporate behavior on others.  In a recent article entitled “Whose Risk Is It?  Viewing Corporate Catastrophe through a Human Rights Lens,” John Sherman, a Senior Fellow at the Harvard-Kennedy School, develops the idea of the need for corporations to “incorporate more effectively the interests of external stakeholders who may be harmed”.  And in his latest report, UN Special Representative on Business and Human Rights John Ruggie underscores that “human rights due diligence” goes beyond risks to the company and includes “the risks a company’s activities and associated relationships may pose to the rights of affected individuals and communities”.  Looking at a company’s impact on other stakeholders is not a new concept within socially responsible investing (SRI), but it is encouraging to see it develop within the realm of business and human rights.  How far the practice will get in corporations, and within mainstream investment, remains a big question.

For some time now, I’ve been mulling over the term “social materiality” to capture those corporate impacts that are vital to stakeholders’ well-being.  Can there be a way to look at materiality in social, cultural or other terms, and not simply or ultimately in financial terms?  If responsible investment is about taking a broad(er) view of corporate impact on society, then in order to practice it properly, we need the tools to express social materiality in a way that doesn’t push everything through the narrow lens of financial risk.

Edited by Bill Baue

Liz Umlas Bio

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9 Responses to Social Materiality: A New Lens for Sustainable Investing

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  2. John Sherman says:

    Good points. I have been struck by the gap between what is material to key company stakeholders, including a growing number of investors who are concerned about the potential social and environmental consequences of company conduct, and the prevailing legal definition of materiality, which is too narrow. This gap doesn’t help companies to make good risk decisions, which is a lose-lose for shareholders and society.

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