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The Importance of Prioritising the ‘S’ in ESG
"The current issue the S in ESG faces is ‘if you can’t measure it, you can’t change it"'. Follow Benedict Haslam as he provides an insight into our series addressing the importance of Environmental, Social and Governance factors in an organisation.
09 December, 2022

Environmental, Social and Governance (ESG) is certainly a hot topic in corporate conversation today. Conversations around ESG often focus on the E, the environmental factors — but are those the ones that drive the most meaningful impact? The S in ESG is about creating a better world for everyone. Although social measures are more difficult to quantify than other areas of ESG, they are becoming more important to investors and stakeholders, and give organisations strong credentials to be more resilient and retain top talent.

Traditionally, the environmental pillar has been seen as the primary and most tangible issue and often been the core focus of ESG initiatives over the last decade. The awareness of the critical environmental issues we face has grown and must not be downplayed. Discussions surrounding greenhouse gas emissions, sustainable energy solutions and climate change have come to the foreground, exacerbated by major world events such as the exposure of an overreliance of fossil fuels supplied by Russia subsequent to supply issues linked to the invasion of Ukraine.

So why is the S in ESG only now becoming increasingly important?

The coronavirus pandemic has brought about a major shift in discussion with a new focus on the S — the social factors within ESG. There has been a notable transition in consumer focus towards transparently made products, a transference in investor sentiment towards more ethical investments, and a change in corporate outlook to keep pace with social pressures as more organisations prioritise human capital, racial equality, and talent development. The pandemic saw organisations put under pressure to address social issues by stakeholders such as income inequality, employee turnover, community engagement, and gender and diversity. Moreover, we live in a time of hyper transparency, consumer and employee engagement and activism, so companies must consider how they create value for stakeholders beyond shareholders. A focus on social factors within a firm can attract and retain their workforce, keep employee satisfaction high and have a direct impact on organisations’ bottom line. The S in ESG is therefore becomingly increasingly critical for companies to address.

However, value creation can be elusive, and social measures in particular can be difficult to quantify. This has set the stage for the current issue the S in ESG faces as ‘if you can’t measure it, you can’t change it’. So how can the social impact from business activity be measured, and how could we look for reporting models to provide reliable data to stakeholders? There are lots of standard metrics for measuring the E in ESG, from CDP to BREEAM, and perhaps the S can follow suit. The S is currently the least understood in terms of metrics, and mirroring the structure of E, with a set of objectives, types of contributions to those objectives, and a ‘do no significant harm’ criteria would be a good place to start. The S has three main areas to cover: the work force, consumers and affected communities. It would be sensible to base the measurements around these, with objectives of quality of work life, consumer well-being and sustainable communities.

The implementation of S, especially a somewhat standardised one, is still a fresh challenge, but one that is gaining traction. As Ebony Thomas of Bank of America suggests, what is exciting about S today is that in some ways it is a whiteboard for organisations, opening up an exciting space for public-private partnerships, creating a need for innovative solutions to historic problems requiring collaboration never before seen, perhaps requiring a combined approach between the E and S disclosures.

An example of a success story when it comes to the social perspective is Netflix – they offer 52 weeks of paid parental leave to both the birth parent and non-birth parent, which can be taken at any time – in comparison to the global standard of 18 weeks. Spotify offers a similar initiative and believes that this resulted in a spike of job applications which has not since dwindled. Both of these firms support inclusionary movements such as LGBTQ+, Black Lives Matter and sustainability, appealing to socially conscious consumers through marketing and social media presence.

But due to the lack of framework, the S is an issue that large corporations can get away with not addressing. Öhman Fonder (Sweden’s largest asset manager) and Folksam (one of Sweden’s largest insurance and pension providers) conduct ESG due diligence case studies on all companies they invest into, and were concerned by Amazon’s human rights performance. Amazon’s rapid growth has left the company being criticised for working conditions in warehouses, illegal firings of staff asking and overly frequent workplace accidents. After filing a shareholder proposal on human rights ahead of Amazon’s annual general meeting, Amazon launched its new Global Human Rights Principles. This was one of the aims of Öhman and Folksam, but their other objectives have not been materialised: Amazon has not published a process for how this should be implemented across the organisation and value chain, and Amazon has not been actively reporting on its human rights work. Reactionary measures like these seem shallow responses to consumer probes, rather than pushing for real change.

With the excitement of the growing awareness of S must also come a degree of caution. It is certainly proving difficult to draft an S taxonomy, particularly within the financial world, as it is hard to agree on quantitative measures that must be formulated, and the reliability of data is always going to be an issue. Awareness of the ‘box ticking’ culture of standardised ESG activities that rely on industry benchmarks might do some good but are they enough to create a substantial shift towards social impact? To answer this, we need to work out what the baseline is. With the evolution of reporting and embracing the way in which social issues intersect with environmental issues – the task at hand remains a big one, but at least it is starting to receive the attention it deserves.

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