For the past decade, ESG has been garnering a lot of interest from investors, organizations, consumers, etc. with climate change is frequently front and center in the conversation about environmental, social, and governance (ESG) concerns. If we look at the past 5 years’ trend, we will see that E (environment) has been the driving force for all ESG related discussion, be it a discussion about global warming or water scarcity it has been an environmental issue that has attracted the attention of every concerned party while the S “social” aspect of ESG seems to have somewhat lagged. But in the past two years, as the world has faced the pandemic, things have shifted. In the pandemic period, society as a whole becomes more socially active. We saw an increase in volunteering, social cohesion, community support, and a focus on public good vs. private freedoms. As a result, more and more people have realized the importance of social parameters in ESG.
What is “S” in ESG?
‘S’ stands for the Social element of ESG. The Social agenda customarily focuses on organizational policies and practices regarding human rights, business ethics, supply chain management, diversity and inclusion, and social impacts resulting from the corporate operation.
Social factors impact every business, every day, everywhere in the world. Typically areas such as worker’s rights, gender pay equality, and diversity are the first to be associated with the S in ESG but social responsibility goes much further than a firm’s relationship with its employees. It encompasses all corporate interactions with suppliers, politicians, customers, communities, and society as a whole. Broadly speaking, social impact refers to the positive and negative effects of a company’s operational activities on society, whether direct or indirect. The nature and scope of a company’s social impacts can vary widely depending on the industry, size, region, etc.
While the social element is a bit difficult to define and quantify as compare to E and G, it does make as much difference to trust, confidence, inclusion, and effective stakeholder engagement. Social aspects of a given company can be understood through data on human capital and labor standards.
The scope of ‘S’ has progressively widened over the past two decades, which reflects the evolving business environment of the 21st century where businesses and markets are increasingly interconnected and interdependent. Over and above human rights; labor issues; workplace health & safety; and product safety and quality, ‘S’ factors now also incorporate the impact of modern supply-chain systems and the adoption of technology across all business sectors. Investors and the public are increasingly looking for evidence showing how businesses are addressing a broad range of social issues such as whether a company provides a safe and healthy working environment for its employees, how it supports social mobility, how it addresses workforce diversity; or if it donates time, money or resources to give back to communities as well as how it ensures that its products and services don’t pose any safety risks
Benefits of incorporating social factors in an organization:
Highly motivated workforce:
Social factors of ESG include worker’s rights, gender pay equality, diversity, and inclusion amongst various other aspects. Employees and workers who work in an organization that incorporates diversity, inclusion, gender pay, and worker’s right proved to have high morale and a happy workplace environment.
Increases trust amongst shareholders:
Many studies have shown that organizations that have a positive social impact instill trust amongst their shareholders. It induces a “feel good” sense amongst investors, workers as well as customers. The post-pandemic world shows that consumers, as well as investors, are more likely to buy/invest in an organization with a good social score as they feel that investing in such firms makes a much greater impact.
Several studies show supply chains that meet human rights, operate good labor practices, and closely collaborate with their supply chain partners are more stable as these organizations witness fewer strikes and loss of skilled workforce. Recently, the covid-19 pandemic showed us that, taking social concerns into account when investing, especially as part of a comprehensive ESG investing strategy, can protect investments in the long term. As per a study conducted by Deutsche Bank, it was found that “social criteria is important for risk management, with the results emphasizing that high social standards could reduce a company’s systematic risk”
Improved brand value:
Today consumers are more likely to buy products that they believe are green while investors are more likely to invest in firms that they perceive as socially responsible. As a result today, every company wants to portray itself as environmentally friendly, socially responsible.
Various studies have shown that companies that fare well in terms of social aspects witness better performance and monetary returns. A study conducted by the Investor Responsibility Research Centre Institute (IRRCI), found positive correlations between how companies manage workplace relationships and their financial performance. While another study conducted by Accenture showed social and environmental efforts can incite a revenue increase of 5-20% for participating companies and a supply chain cost reduction of between 9-16%.
Challenges for ‘S’ in ESG
The biggest challenge in the rise of ESG is monitoring. Unlike the environmental impact, which can be easily measured/ quantified in the form of carbon footprint, water footprint, etc. Quantifying a company’s social impact is still a challenge. It is easy to identify a social aspect, but quantifying it remains a challenge to date as there is no fixed parameter against which we can measure our social impact. This makes it hard to report the positive social impact, making it somewhat less popular amongst ESG parameters. For “S” to come at par with “E” in ESG we must come up with some tool that can easily quantify Social impact.