As our world changes, so do our clients’ opportunities for impact. Sustainability Research Lead Sophie Griffith breaks down our Research team’s approach to staying current through an overview of our recent updates to the Democracy Pillar.
As our world changes, so do our clients’ opportunities for impact. Sustainability Research Lead Sophie Griffith breaks down our Research team’s approach to staying current through an overview of our recent updates to the Democracy Pillar.
by Sophie Griffith
Sustainability is a constantly evolving landscape. With that in mind, our team aims to continually incorporate the latest research and perspectives to help our clients express their impact goals through their investments. We support clients by mapping their values to their portfolios through our 19 impact areas (or sustainability pillars as we call them), such as women’s rights, climate change, and sustainable agriculture. Each of these 19 pillars is regularly and rigorously updated.
Today we’re pulling the curtain back on this process with Sustainability Research Lead Sophie Griffith. She answers the questions most frequently asked about the recently updated pillar, Democracy, and the research process as a whole.
FAQ #1 How does Ethic think about company impacts on democracy?
When we think about how companies can impact democracy, some direct impacts quickly come to mind: activities such as lobbying and engaging in business with repressive regimes have pretty clear implications for democratic governments.
But other means of impact may not come to mind as easily. Ethic’s Democracy Pillar recognizes that democratic institutions are complex and interconnected with so many parts of society. For example, citizen participation in political activities is a key part of democracy. How can companies improve access, or create barriers, to that participation? Research shows that areas with high levels of air pollution see less political participation, and companies with high emissions are major contributors to that air pollution. The Democracy Pillar takes that into account and flags some of the most polluting companies.
FAQ #2 How does the pillar update process work?
Each Ethic pillar undergoes a rigorous update process that starts with an in-depth review of academic research and ends with recommendations to the Ethic Data team about how best to measure and quantify company impacts on relevant issues. Those metrics are then incorporated into our Sustainability Model, the company evaluation system we use to align our clients’ values with their portfolios.
The research process consists of three key steps:
- Defining the issue: We review a wide range of definitions of democracy from subject matter experts in academia and public policy organizations. Our goal is to ensure that our definition aligns with the most current thinking on the meaning and measurement of democracy.
- Identifying impact mechanisms: We review existing research frameworks on the key practices that contribute to a well-functioning democracy and use them to identify impactful behavior. In this case, we use a list of democracy indicators from the Varieties of Democracy (V-Dem) project.
- Identifying impactful company behavior: We systematically review indicators from our large collection of company-level data for any metrics that can be tied to our research framework (in this case, V-Dem’s democracy indicators). We do this process twice: first, we consider all of our already-available company behavior screens, and then we consider the metrics we would like to acquire in the future.
When the research process is complete, we pass our recommendations to the Sustainability Data team and agree on the major additions and deletions to the pillar’s company behavior screens together.
FAQ #3 What were some major additions and deletions to the Democracy Pillar’s company behavior screens?
When we find research that demonstrates a company’s impact on a key democratic practice (as outlined by V-Dem’s democracy indicators), we recommend new screens to add to the pillar. Here are a couple of examples.
Employee Human Rights: An estimated 27 million people live in forced labor, including 17 million in the private sector. Freedom from forced labor is one of the civil liberties that are key to democracy, and forced labor may also interfere with other liberties, including freedom of movement and suffrage. Companies that use forced labor in their supply chain are complicit in the violation of these civil liberties.
Women in the Workforce: Rates of female labor participation are associated with a variety of indicators of women’s civil liberties. Companies with high rates of female employees, particularly those in management positions, can help promote civil liberties for women.
The research process can also lead to deleting company behavior screens from a pillar. This can happen for a few reasons. For example, we may determine that the behavior’s impact mechanism (i.e., the pathway through which the behavior affects democracy-related outcomes) is not supported by strong enough evidence.
Another reason we sometimes recommend deletions is to keep the pillar’s scope under control and ensure it represents a clear topic area. In the case of the Democracy Pillar, for example, we found that the inclusion of health equality (which is a key democratic practice as measured by V-Dem) would be problematic for the pillar’s structure. The range of company screens we offer that impact health equality is vast, and the topic arguably encompasses nearly all of the company behavior screens we offer in the Sustainability Model. Although pillars do, by design, have some overlap, our review determined that adding all plausible health equality impacts to the Democracy Pillar would diminish the pillar’s usefulness to clients seeking to specify their sustainability issue priorities.
As a result, we opted to remove behavior screens that only affect health equality from the scope of the Democracy Pillar. Examples include screens related to firearm involvement and overall military weapons. Health-related company behaviors may still be included in the pillar if we can show other non-health-related impacts on democracy (e.g., landmines and cluster bombs are still included because of the tie between unexploded munitions in an area and political participation).
We recommend that clients interested in impacts on health equality consider our Health & Wellness Pillar, which can be used in tandem with the Democracy Pillar or on its own.
FAQ #4 Were there any stand-out company stories worth mentioning?
Yes! Here are a few examples:
Glencore PLC, a multinational commodities and mining company based in Switzerland, is expected to pay over $1.5 billion in legal settlements after it pleaded guilty to a decade-long bribery scandal. The company was accused of bribing government officials in numerous countries, including Nigeria, Brazil, Venezuela, and the Democratic Republic of the Congo. Glencore can be flagged in Ethic’s Democracy Pillar with the Bribery & Corruption screen, depending on clients’ sustainability and financial considerations.
New Fortress Energy Inc. (NFE) is a New Jersey-based energy company that specializes in the transportation and storage of liquefied fracked gas, a hazardous substance. In 2019, the company allegedly initiated operations in San Juan, Puerto Rico without obtaining community input or communicating the safety and environmental risks to local residents. More recently, NFE has come into conflict with New Jersey communities over a liquefied fracked gas project, which community groups say poses safety and environmental threats. The company can be flagged in Ethic’s Democracy Pillar with the Community Relations screen, depending on clients’ sustainability and financial considerations.
MTN Group, a South African telecommunications company, is party to a joint venture with an Iranian state-owned engineering firm. MTN Irancell, the largest provider of telecom services in Iran and one of Iran’s largest companies, is alleged to have illegally sourced U.S. technology despite U.S. sanctions on doing business with Iran. The company can be flagged in Ethic’s Democracy Pillar with the Controversial Regimes screen, depending on clients’ sustainability and financial considerations.
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