Ever since ESG metrics took the financial and corporate world by storm, many have focused their efforts on improving and avoiding environmental impacts, this is, the E. But what about the S? Is the planet more important than people?
For most companies and investors that rely on ESG metrics to guide and understand their business performance respectively, the E (environmental) has taken a much more central role than the S (social) in the last few years that these metrics took off in popularity in the corporate and financial world.
But does this mean the planet is more important than people in the eyes of businesses and investors? Well, not necessarily. The main problem seems to be how much easier it is to measure and analyze the environmental impact of business activities than the social one.
The problem with this is that both investors and companies lower their standards. Consequently, they are willing to accept little to no social responsibility or positive impact. Today we wanted to focus on how the S in ESG can actually be improved and enhanced just as much as the E.
Corporations should actively look to build a better society, to have a positive impact and a pro-social approach to business activities and practices.
What is the S in ESG?
There are many elements that can be taken in when we talk about the S in ESG, take for example human rights, equal pay, diversity in the workplace etc. But what is the premise that defines and unites all such elements together?
According to S&P, a leading ESG rating agency, there are three kinds of Social issues that help identify where the social impact of a company lies:
- Workforce requirements and composition problems that affect profitability and damage the reputation.
- Safety and political implications in the supply chain causing great volatility.
- Consumer and demographic changes that shift preferences and shrink the potential market for companies.
This however seems like too poor of a definition. It merely considers risk factors for a company’s survival and profitability, but is that all there is to social issues?
When we talk about social impact, it is not just about the risks that it poses for the company, it is about creating good for society. This is, a business’s social behavior should not be solely guided by eliminating or navigating risks. Instead, corporations should actively look to build a better society, to have a positive impact and a pro-social approach to business activities and practices.
We cannot neglect the importance of social impacts such as human rights violations on the supply chain or bad labor practices in the workplace, which negatively affect financial stability or reputation, for example. But today’s ESG metrics seem to forget about the positive impact companies can and should have on society, creating a competitive advantage and steady growth for businesses.
What does the S need to thrive?
We need to revisit the way we measure Social factors in ESG metrics. And for that we need to overcome three main challenges:
Standardization. There is no reliable measuring standard for social impact, which leaves companies to do so in their own terms. In the eyes of investors this is hardly reliable or relevant. SDG’s could be cited as an attempt to standardize social implications; nevertheless, the latter have been thought to be applied on a national level and are designed to advance very specific topics that do not apply to most companies.
Quantification. The next natural step after standardization and classification is quantification. Although having standards helps both businesses and investors have a framework for decision making and guidance, data is slightly less reliable if it is not quantified. Additionally, quantification allows for comparison, which helps investors make decisions and pushes companies towards continuous improvement.
Reporting. Traditionally, ESG reporting or disclosure focuses on material risks, even though these are not the only things companies should disclose or that investors consider important. There is in fact a growing trend to include positive material information on reports as they actually contribute to financial gains, but big changes still need to be made.
How can we overcome these challenges?
Using outcome-based data: The ESG world needs an objective standard for social reporting, and the best way to achieve that may lie on outcome-based social reporting. Done on a voluntary basis, organizations could choose which social outcomes they’d like to report on as a result of a certain program, intervention or strategy. Similarly, investors could also use such data to have a more in depth understanding of social impact, this is, whether such practices give competitive advantage, improve recruitments, enhance diversity… or to what extent do they have an impact on people.
Establishing social impact units and thresholds: Similarly to the way environmental impact is quantified, so should social issues. Standards should set specific thresholds that help understand what constitutes a ‘unit’ of impact for social concerns such as education, employment, heath, hunger etc. The results would then be verified against the standard, just like CO2 matters are.
Expanding the view of materiality: The latter has for too long been understood as the issues which negatively impact a company’s financial performance, but there is substantial evidence to suggest that this is not the only relevant matter to understand a company’s performance. Expanding the view of materiality means creating a framework for impact materiality. It would help businesses and investors understand which social impacts are more beneficial or strategic to their company or industry.
The S is about people
Investors and company’s need to step up to social demands beyond the risk that they pose for their profitability, and actually work for the improvement of society. People are not a threat to businesses, they are in fact the only thing that sustains the latter, meaning a company cannot take decisions based on how good or bad that woud affect their reputation or volatility, but rather make decisions on behalf of creating a better outcome for people.
We are talking about consumers, employees, investors, producers… and everyone in between that could be affected or benefited by the activity of a company.
Let’s start with transparency
We believe and work for transparency to be one of the key values driving the fight for climate action, social wellbeing and good governance as it is the only way to understand what we are doing wrong, what we are doing right and what it is that we are not doing yet.
Because being transparent is not only an externality to a company, or a given organization, to help build trust and reputation; it is in fact also a great learning and improvement mechanism. You cannot manage what you don’t understand. And so we advocate for transparency, integrity and precision as imperatives to the fight against climate change.
In DoGood we are convinced of the need to understand and manage efforts to achieve a sustainable transition inside an organization for the correct and efficient functioning of the business and the community it operates in. We alone cannot achieve the substantial changes necessary, but we work on the basis of collaboration, transparency and accuracy in order to bring light to sustainable actions.
In this regard, it is essential to our work to promote good corporate governance, meaning that the processes of disclosure and transparency are followed so as to provide regulators and shareholders as well as the general public with precise and accurate information about the financial, operational and other aspects of the company, including a more accurate definition of the ESG performance.
We have developed a corporate government tool that helps establish ESG impact objectives for employees in regards to the sustainability strategy of the company. Through our technology we are able to activate and track employees’ impact, creating engagement that translates into improved ESG metrics, reputational value and an overall positive impact for the environment and society.
If you want to know more about how we work to create a positive social and environmental impact, click here.