The rise of ‘S’ in ESG reporting

 

Sam Smith, CEO of finnCap Group recently spoke to Business Leader about the importance of social responsibility as a part of Sustainability and ESG Month.

With COP26 on the horizon and the urgency around climate change following the publication of the IPCC Report, it’s no surprise that the ‘environmental’ aspect of ESG (environmental, social and governance) factors has dominated the headlines.

In many respects, the ‘S’ or ‘social’ impact can be more difficult for investors to assess. A 2019 Global ESG Survey by BNP Paribas revealed that 46% of investors found the ‘S’ to be the most challenging to analyse and integrate into investment strategies. According to the report, investors understand the ‘E’ and the ‘G’, but the ‘S’ has, for several reasons, suffered from “middle child predicament”.

The United Nations Principles for Responsible Investment (‘PRI’) pointed to the fact that social issues are less tangible. Social issues cover a wide range of topics: from consumer protection to product safety, labour law and safety at work, diversity, the fight against corruption and respect for human rights throughout the supply chain.  Furthermore, there is less established and consistent data to demonstrate companies’ social standards and the impact on their performance.

Yet, in a post COVID world, ‘S’ is now demanding attention – both from company stakeholders and society at large. In a recent survey from KPMG, 96% of CEOs said their response to the pandemic had shifted their focus to the social component of ESG, an increase from 63% in August 2020. 99% of CEOs also said they had a stronger emotional connection to company purpose since the crisis began.

During the pandemic, many businesses found themselves in the spotlight as they battled to respond to the impact of lockdown measures and economic uncertainty on their employees, customers, and communities. The pandemic also brought into sharp focus existing inequalities, prompting action to address them. Companies which were agile, which adapted and stepped up to the challenge – which, as simple as it sounds, ‘did the right thing’ – can continue to build on that positive momentum. Those that didn’t – who received criticism and suffered reputational damage for poor ‘S’ practices – have hopefully learnt a powerful lesson.

Major corporate crises are often rooted in a failure to adhere to social standards. There’s no doubt that issues such as human rights, labour standards and gender equality – and the risks and opportunities they present – will be increasingly scrutinised by investors, regulators, Government, customers, and employees. As the world slowly re-sets after a period of economic shocks and societal upheavals, it is incumbent on business leaders to find ways of ‘building back better’.

I firmly believe that by effectively managing social issues, and by taking principled, active positions, businesses can achieve a ‘sustainable advantage’ in the market.  Doing the right thing will enhance their ability to attract investment, customers, and talent.

It strikes me that ‘S’ practices are often a reflection of corporate culture.  A strong, inclusive culture is the foundation for strong social standards – and this starts at the top. I would urge business leaders to consider this as they look to meaningfully engage with the ‘S’ in ESG.

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