What is the 'S' of ESG
Environmental, Social and Governance (ESG) factors have been a growing consideration for businesses, investors and shareholders. Core to discussions of ESG is the belief that business has a key role to play in society and must play a greater role in creating a more equitable and sustainable world. We can’t have a thriving economy without a healthy planet and a more equitable society.
Much of the attention on ESG has focused on the environmental pillar given the challenges of climate change. It is not that the environment is more important than people, but it is easier to measure and quantify. Research by BNP Paribas found that more than half (51%) of global institutional investors found social issues the most difficult to assess and integrate into their investment analysis. The social pillar has not always enjoyed equal consideration by all organisations. Last year, PwC’s 25th Annual Global CEO Survey found that 46% of CEO’s in Ireland considered climate change to be a major risk which they are offsetting by focusing on the ESG agenda. However, there is a growing focus on the “social” pillar, in part due to regulation coming from the EU such as the Corporate Sustainability Reporting Directive, but also driven by investors, employees and consumers. The global pandemic too has further encouraged a focus on the S pillar as it forced changes in working and living and exacerbated longstanding social issues.
What is the S in ESG
The S pillar is wide ranging and covers the impact organisations have on people, including employees, customers, suppliers, and the community in which the organisation operates. It reflects the how and why we do things the way that we do. It covers a broad range of issues including:
- inclusion and diversity,
- employee engagement,
- human rights,
- employment rights and labour relations,
- social dialogue,
- health and safety,
- data security,
- supply chain management,
- community relations.
Unfortunately, this makes the S difficult to define and there are a breadth of frameworks and measures available, making it difficult for regulators and analysts to compare the performance of companies or benchmark an organisations social impact. There is no “one-size-fits-all” consensus on what the priorities for focus should be, as different organisations will and should have a different emphasis. For example, the focus on preventing child labour for a professional services organisation is likely non-existent compared to an organisation with a complex, global supply chain who may need to be vigilant on this issue.
Social issues are complex and multi-dimensional and can intersect with other ESG elements. For example, while climate change is an environmental issue, as we focus on the global move to a lower carbon economy, that must be done in a fair and inclusive way. The focus is not just about risk mitigation but also prosocial behaviour, that is, the actions, policies and investments which promote positive developments in responsible business practices.
Why the focus on S
Stakeholders including investors are driving action in this area as they are increasingly expecting organisations to consider the impact of social matters on their business models, operations and across their value chains and they are choosing to vote ‘with their feet’. For example, Legal & General Investment Management, one of the UK’s biggest fund management groups, failed to support the re-engagement of about 100 chairs in 2018 because they failed to boost the number of women on their boards.
Regulators and governments too are looking at how they can integrate the social pillar into policy making and disclosure rules. People have realised that investing while focusing on the social aspect does not necessarily negatively impact financial returns, as we see changes in consumer and employees behaviour, and it can reduce risk. It’s not an either-or scenario as research shows that organisations with more diverse leadership teams are more likely to be resilient and more profitable . Impact investors back companies that have excellent growth and financial return potential while also meeting social and economic needs.
There is also a clear recognition of the value to business in attracting and retaining quality employees and the importance of diversity, inclusion and values to jobseekers. Randstad , for example, found that 43% of jobseekers would not join an employer whose social and environmental values did not align with theirs, while 41% said they would not join a company if the employer did not have a diverse and inclusive workplace. Similarly, it impacts retention as employees may disengage from a company or leave if they feel their values differ from their company’s. Conversely, a strong ESG focus can instil a sense of purpose and improve employee satisfaction. A focus on the S pillar differentiates an organisation from its competitors which is particularly significant as we are in a war for talent.
Customers are also interrogating the brands they buy and a focus on the S pillar is influencing purchasing decisions as it shows commitment to social issues. Where a company has poor social practices (e.g., human rights, supply chain) or a perception of unsustainable or unsafe practices or products, reputational damage can occur impacting both revenue and losing customers.
Building a strong connection with the business and society creates value and resilience in the business model, has a medium to long-term focus and satisfies the needs of employees, customers and communities while also delivering on the bottom line.
Ibec has a clear focus on ESG, both its importance to how we do business and in particular the S of ESG. Our work on the social pillar has a significant focus on employment rights, social dialogue, equality, diversity and inclusion, wellbeing, and human rights in both our proactive best practice work which is shared with employers; our policy positions and lobbying work at both national and European level on things like gender pay gap reporting; to developing a culture of ESG through a range of development programmes including our ESG Competent Boards programme.
This year Ibec will host the first “S Summit” on the social pillar of ESG in September, where we will bring together CEOs, Chairs and Sustainability leads on the key issues facing leaders in this space.
Head of Social Policy
- BNP Paribas (2021) ESG Global Survey https://securities.cib.bnpparibas/esg-global-survey-2021/
- Central Bank of Ireland (2020) https://www.centralbank.ie/news-media/press-releases/the-central-bank-will-continue-to-place-a-spotlight-on-diversity-in-the-financial-services-sector-governor-gabriel-makhlouf
- Randstad (2022) https://www.randstad.com/s3fs-media/rscom/public/2022-04/Randstad_Workmonitor_2022.pdf