Why Everyone Forgets the S in ESG
A rise in the availability of information and globalization have created a world where being oblivious to what’s going on around you is virtually impossible. The incessant global news delivery ecosystem drives people to a point of media saturation overload–leaving them anxious and overwhelmed, but informed. Being more aware of the effects of climate change, human rights abuses, and corruption, individuals have a heightened expectation for companies to mitigate these negative outcomes. As a result, consumers are choosing businesses who prioritize environmental, social, and governance (ESG) frameworks over those that don’t.
While companies ideally should be focusing on the E, S, and G pillars equally, that is frequently not the case. Decision makers who drive ESG, such as global investors, regulators, businesses and individuals, tend to prioritize the ‘E’, and even the ‘G’, over the ‘S’ for a variety of reasons. The ‘S’ has even been called “the ugly duckling” of the trio. Being more difficult to measure and create standards around as well as a general lack of understanding of what the ‘S’ actually means helps to explain why companies tend to overlook the social side of ESG. However, these are myths that can be busted with best practice and a good due diligence plan.
What is the S in ESG?
At the core of the S in ESG lies human rights and equity. This pillar aims to examine an organization’s relationship with their workforce and with the communities in which they do business. S is a proxy umbrella term that can refer to both an organization’s internal practices (including policies, diversity, equity, and inclusion initiatives (DEI), employee engagement, corporate volunteerism, etc.) and external practices (including addressing child labor, forced labor, and human trafficking in the supply chain, supporting local community initiatives, etc.).
These social issues can pose both large risks and large opportunities for companies when it comes to shaping their reputations and driving revenue. The World Economic Forum estimates more than 25% of an organization’s market value is directly attributable to its reputation. Paying more attention to social risk mitigation through more equitable business practices is therefore not only the right thing to do, it’s also good for business.
Quantification & Lack of Standardization
Many criticize the S in ESG because the perception is that it’s too hard to measure or that there’s little reliable and comparable data to understand its effectiveness. On the surface level, this assertion makes sense. It is unequivocally easier to quantify, and report in a standardized way, greenhouse gas emissions compared to human trafficking in your supply chain. Social issues also vary greatly between industry and country, which can present additional complications for measuring and reporting.
But measuring S impact is by no means impossible. Using social indicators to evaluate risk is a necessary component for any organizations seeking a realistic assessment of its ESG performance. When done appropriately, this means conducting a double materiality assessment to understand both the impact an organization has on the world around it and the impact the world has on the ability of the organization to operate. Including social factors in this process will help clarify what issues are most salient to a company.
Efforts to make reporting more harmonious and standardized will also help encourage companies to disclose on these issues. Well-known reporting mechanisms such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and the UN Global Compact (UNGC) all have already integrated social factors into their measurement and reporting frameworks. Additionally, new uses of technology (like AI and Blockchain) are increasingly making their way into social reporting and mainstreaming innovative ways to track and report accurate data. The question is more likely going to be which framework to use rather than whether you can find one framework to use.
Lack of Understanding
Perhaps the biggest misconception about the ‘S’ is thinking that ESG can be separated into three distinct categories when they are, in fact, inextricably linked and intersectional. On a micro level, individuals that face the highest levels of social inequality (S) tend to live in areas with poor environmental quality (E) and happen to have limited decision-making power (G). On macro levels, high-income countries with decision-making power (G) exacerbate effects of climate change (E) for low-income countries (S) who face the disproportionate effects of these decisions. It’s no coincidence that these three pillars interplay with each other.
Approaches that acknowledge this intersectionality are necessary to effectively address the planetary and humanity crises that are occuring. And tackling these issues with an interdisciplinary lens can be financially advantageous and more impactful.
So What?
Historically, companies have been reluctant to disclose social factors without being forced by regulatory pressures. This is, in part, because of the deterrents mentioned above, but it’s also because it is hard to acknowledge the hard truths of social inequality. But as the regulatory landscape continues to evolve, the pressure to meaningfully engage on the ‘S’ issues will only increase. Human rights laws, social reporting requirements, and mandatory disclosures - not to mention stakeholder pressure - are increasing rapidly, and companies should prepare ahead of time in order to be ready.
Focusing on an intersectional approach to ESG allows for a more streamlined and effective path towards best practices and, ultimately, success. Robust DEI policies, human rights due diligence plans, double materiality assessments, living wage analyses, and other tools should all be a part of a solid ‘S’ strategy. Paired with advanced ‘E’ and ‘G’ mechanisms, this provides a recipe for success and sustainability.
Don’t know where to start? Ask us, we can help.
The Uplift Agency
Uplift builds strategies, programs, and communication campaigns that advance ESG in workplaces, supply chains and communities.
We know how to navigate the road ahead because we’ve already been down it – 90 percent of our team has led environmental or social programs in corporations or nonprofits. Because ESG is all we do, our services are more comprehensive and integrated than most firms.
