While social issues among ESG priorities may take a backseat to environmental issues, both are intertwined and critical for organizations to consider
Most of the attention and regulation around corporate environmental, social, and governance (ESG) objectives is focused on the E, or environmental area. Yet, the S or the social category underpins the reason why there is so much focus on the E.
The continuation of the human species to thrive with clean air, land, and water in which to produce enough oxygen and food and ways to earn a living on the Earth is the main reason, of course. Indeed, the environment is the habitat that enables the survival of all living things.
Understanding all of the various pieces of the S can boiled down to various components, from product liability factors to workforce issues, community matters, and human rights.
Clarifying human rights
The link between business and human rights — defined in a 2017 NYU Stern Center for Business white paper as “the operational effects of a company on the labor and other human rights of the people and communities it touches” — is well established. In another white paper published by an ESG Working Group (on which the Thomson Reuters Foundation was a member), this foundation was underscored.
In fact, a multilateral approach to the link between business and human rights dates back a decade with the adoption of the United Nation’s Guiding Principles on Business and Human Rights in 2011, UN member states adopting the UN Sustainability Goals in 2015; and the establishment of the Corporate Human Rights Benchmark, which is a collaboration among investors and civil society organizations to create a public and performance benchmark of corporate human rights.
Since then, many countries and states have passed “transparency regulation”, such as the UK Modern Slavery of 2015, Australia’s Modern Slavery Act of 2018, and California’s Transparency in Supply Chain Act, to ensure that companies are not engaging in labor exploitation and forced labor within their own organization and that of their suppliers and vendors.
Part of the need for increased visibility of the social side of ESG is to bust the myth that it is not quantifiable. Matt Friedman, CEO of the Mekong Club, which is private sector-based membership organization dedicated to bringing about sustainable practices in the fight against modern slavery, encourages this myth-busting, suggesting two ways to quantify the social aspect of ESG, including:
- Conducting supply chain audits — Supply chains account for up to 40% of corporate ESG impacts, according to the ESG Working Group white paper that included analysis of 1,600 MSCI World Index companies. Friedman suggests companies give questionnaires to be collected during the procurement process from suppliers and vendors. These questionnaires can be analyzed and audited in order to identify potential incidents of modern slavery.
- Establishing grievance mechanisms — One of the newest ways companies are using technology is to use an app in creating their grievance mechanisms. For example, Friedman says that Mekong uses an app that allows auditors to ask workers on the factory floor (using a mobile device and headphones in their native language) a series of questions about potential exploitation, such as if there is indebtedness associated with the job, and whether or not there’s a modern slavery violation taking place.
Knowing where to start with DEI
When it comes to diversity, equity & inclusion (DEI) issues as part of the social metric disclosure, the first step is determining what parts of the S are material to each company’s various stakeholders, including shareholders, customers, employees, and residents of communities in which the company operates.
A common area for the S for any company is the internal representation at higher levels of those individuals with underrepresented identities or backgrounds. Indeed, at the start of the social journey for any company, it is important to understand the current status of representation of each level for each underrepresented identity, based on gender, LGBTQ+ status, race or ethnicity, disability, and veteran status, among others. In addition, knowing the timing around promotion and advancement and median pay for each underrepresented identity relative to the median timing and pay of comparable professionals are important to determine fair promotion and proper pay equity.
Capturing how companies improve social mobility and progress for employees and contractors is another area that impacts the S, but it can differ quite a bit depending on what is used as key performance indicators to measure impact. Luckily, there are companies tackling this challenge. Just Capital, for example, details corporate performance on a range of social, pay, and diversity issues, offering easy-to-use data and insights, according to the ESG Working Group’s white paper.
Too often social performance considerations have been dismissed as either immaterial or a lesser priority. However, numerous research efforts over the last decade suggest the opposite, including Stanford’s Social Innovation Review, a 2014 report that shows positive correlations between good environmental and social performance and overall financial returns within its equity portfolio for private and public companies; and McKinsey & Co.’s years-long research into ethnic and gender diversity that shows an increasing correlation between being in the top quartile for diversity and financial outperformance.
Further, regulators around the world are paying attention to the interplay between social considerations and financial risks. For example, the European Union (EU) introduced the concept of double materiality, stipulating that companies disclose the financial risks posed by social and environmental issues.
Luckily, many global companies, their suppliers, and vendors are not waiting around. “Factories in Asia see the writing on the wall,” Friedman says. “I had one factory person basically say that we understand that ESG is big for large companies.” So, to gain a competitive edge, many suppliers and vendors are gathering the necessary data in anticipation that the supply chain questionnaires are coming.
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