The rise of the ‘S’ in ESG is being Deliverooed
Investors are increasing their focus on the ‘S’ in ESG, the avoidance of the IPO of Deliveroo by leading UK institutions highlights the greater focus on the human risks within investments.
William Bryant, Head of Advisory
In many conversations that I have had with investors and fund managers about the integration of environmental, Social and Governance (‘ESG’) factors into the investment process, the area that has resulted in the scratching of heads has been the Social factor.Governance factors have been an area of focus for investors for many years. Understanding your rights and where you sit in the capital structure based on the securities you hold is key in the assessment of the risks that you are taking on board when making an investment in corporate or sovereign securities, and the same principles can be applied to a range of other asset classes too.Over time, Environmental factors have increased in their significance, and in many cases can be easily quantified. Corporates have started placing targets on reducing their environmental footprints around issues such as greenhouse gas emissions, water usage, and waste output, and reporting on their efforts and progress. With a focus on carbon pricing, these environmental externalities have become financially material.Turning to the Social side, there has been much conversation around how the ‘S’ or human factor can be considered. Often this is harder to objectively quantify and qualitative assessments seem to have been the inputs into investment due diligence for ‘social’ factors. But despite the lack of quantifiable data on ‘S’, investors are increasingly focused on it as a factor that they consider as there are associated material financial risks.The COVID pandemic has certainly shone a light on too many areas of human life that were taken for granted prior to 2020. One of the key areas thrust into the light is the level of human inequality and insecurity within rich nations. Technology companies have caused transformations in numerous sectors, and for many investors they are seen as relatively low risk from an ESG perspective, they do not have visible externalities such as smoke billowing from chimneys. But investors are highlighting these investments for their social and governance externalities, in the headlines now is the imminent IPO of Deliveroo.As with many recent tech listings there are significant governance concerns, due to the nature of the dual-class share structure, whereby Deliveroo’s founder will hold the majority of the voting shares with a small minority ownership stake. These governance factors have resulted in several large UK institutions, who have strongly focused on explicitly integrating ESG into their investment processes in recent years, stepping back from taking up allocations in the upcoming IPO, and even lobbying for exclusion from premium indices so that they do not have to hold passively.But it is the increased concern around the social externalities of a firm that relies heavily on the gig workforce is the new element that is currently being scrutinised. The listing of Deliveroo in London comes quickly in the wake of a court’s decision that Uber’s UK drivers should be treated as employees, rather than self-employed contractors, and therefore eligible for benefits of employees at a UK company. The recognition that companies bear financial responsibilities to their workers, even if they have not been traditionally viewed as employees creates financial concerns within business models where margins remain thin.The head of corporate finance and stewardship at M&G, Rupert Krefting, was reported in the FT as saying that the reliance on the gig workers presented -‘risks to the sustainability of its business model for long-term investors’
- a sentiment that was echoed by other leading institutional investors. As investors recognise that the widespread use of self-employed workers, who may not even earn minimum wage, as was highlighted in a recent investigation, may bring regulatory scrutiny and increased costs.On Monday (29 March) Deliveroo announced it would target a price at the lower end of the intended range. As with most things, from an investment perspective, investors will have to view the IPO through the lens of risk and return, and the performance of Deliveroo post listing will be the result of a number of factors. One thing is clear, institutional investors are increasingly comfortable using their platform to avoid risks that they might not have addressed in years gone by, and be vocal in expressing their concerns. Get in touch at info@northpeakadvisory.com if you would like discuss how you can spark lasting change within your firm.