E-S-G: Social in ESG
Last updated: 18th October 2021
In the second instalment of this series, we will examine the social component of environmental, social and governance (ESG) reporting.
Historical corporate impact on society
Throughout modern history, entrepreneurs and their businesses have contributed to society in both productive and destructive ways. During the Industrial Age, business leaders were primarily focused on profits, with little to no regard for employee welfare, such as workplace safety, fair wages, and worker health. Since then, through labor disputes, strikes and legislation, businesses finally began providing fairer working conditions for the people they employed — improving labor standards, promoting gender equality, reducing racial inequality, and increasing wages to an amount that allows employees to meet their basic needs.
According to a 2018 study, “78% of Americans believe companies must do more than just make money; they must positively impact society as well.”
Governments and companies have shifted their priorities as leaders have increasingly embraced their responsibilities to their employees and society at large.
Corporate social responsibility and impact
As the business environment continues to evolve, so must corporate policies, especially when it comes to safeguarding stakeholders. Just as the internet changed the way businesses operate, companies worldwide have had to reassess how to handle and protect their data. The General Data Protection Regulation (GDPR) is now a fundamental legal component of business. Companies that fail to appropriately manage their internal, employee, customer and partnership data are a risk for investors. They are subject to heavy fines of up to 4% of annual global revenue and security breaches will likely damage stakeholder trust.
The social responsibilities of a sustainable business include a company’s relationship with its workforce and the communities in which it operates. A growing number of investors are basing their investment decisions on ESG factors, as companies with strong ESG performance are more likely to provide better financial returns and reduced risks. Social factors investors use to assess corporate social performance can include concepts such as providing its employees with a safe and healthy working environment, how it invests resources in the communities in which it operates and general business ethics.
Social issue assessment does not stop at a business’ front doors. Companies are increasingly held accountable for their supply chain impacts. For example, stakeholders are increasingly aware of the human rights issues associated with sourcing raw materials like cotton or cocoa from suppliers or jurisdictions known for violating human rights or child labor standards. Exposure to these kinds of risks equates financial risk. Sustainable investors aim to minimize risks to their returns that societal factors might threaten.
“In most organizations, sustainability is now generally acknowledged as both a valuable risk-management tool and a long-term contributor to the bottom line… However, one strong value proposition associated with sustainability is still waiting to be consistently integrated into most corporate strategies. And that is the potential for leveraging customer engagement through sustainability.”
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