Social and Governance Factors
This domain tests whether you can assess social and governance factors as drivers of risk and value, not as compliance checklists. The exam expects sector-specific judgement and evidence of how S and G factors transmit into cash flow, cost of capital and licence to operate.
Core rules
- Social factors include labour standards (ILO core conventions), health and safety, human capital, supply-chain labour, community relations, product safety, data privacy, diversity and just transition. Impacts often appear through fines, stoppages, turnover, litigation and reputational damage.
- Governance factors include board independence and diversity, dual-class shares, audit quality, remuneration alignment, related-party transactions, shareholder rights, takeover defences, tax transparency, anti-bribery and cyber oversight.
- Materiality varies. Labour risk is acute in apparel and mining; product safety in food and pharmaceuticals; data privacy in technology; bribery in construction and extractives.
- Assessment approach. Use controversies, KPIs, policy strength, remediation and management incentives. Governance is often weighted heavily because it affects whether other risks are managed.
- Engagement. Social and governance issues frequently require private engagement, escalation and voting rather than exclusion alone.
Worked example
A retailer sources 60% of garments from a region with weak labour enforcement. A supplier audit finds unpaid overtime; remediation costs €8m, and a threatened boycott could cut sales by 3% on €2bn revenue. Gross sales at risk = €60m. Assume a 10% EBITDA margin, so EBITDA at risk = €6m, plus €8m remediation = €14m pre-tax. At a 7× EV/EBITDA multiple, the implied value at risk is about €98m. Reasoning: the social issue is material because it can affect revenue, costs and reputation simultaneously. The analysis should also test whether the company has supplier traceability, grievance mechanisms and board-level oversight; a strong policy without remediation is weak evidence.
Traps that cost marks
- Treating social factors as unquantifiable and therefore immaterial.
- Equating diversity targets with inclusion outcomes.
- Assuming director independence definitions are identical across markets.
- Ignoring supply-chain labour risk because workers are not direct employees.
- Scoring governance by checklist without assessing effectiveness.
- Ignoring controlling-shareholder or dual-class structures that override minority rights.