Fatihah Ramzi, DigitalCFO Asia | 26 September 2022
Understanding the “S” in ESG and its key factors.
How can a business manage its interactions with its employees, the society in which it conducts business, and the political landscape? The “S” in ESG, the social component of sustainable investing, stands for this fundamental query. The financial performance of a corporation can be impacted by a variety of social concerns, from immediate to long-term issues:
- How might the needs of a company’s personnel and its makeup cause issues for the business in the future? Due to a shortage of competent workers or a scandal that harms a company’s brand, labor strikes or customer rallies can have a direct impact on a company’s profitability.
- What dangers are associated with a product’s potential safety issues or the supply chain politics of a company? Businesses typically experience less unpredictability when they ensure that their goods and services don’t pose any safety issues and/or reduce their supply networks’ susceptibility to geopolitical crises.
- What upcoming demographic shifts can cause the market to shrink? Long-term changes in customer choices are influenced by intricate social dynamics, such as spikes in online public sentiment, protests, and mass boycotts of certain companies. These can be taken into account by decision-makers as significant predictors of the company’s potential.
Social Factors in Practice
Although the social component of ESG can be divided into numerous components, the following five are typically included.
Relationships
Although it might not seem like it, your company’s interactions with its staff, vendors, and clients can be analyzed quantitatively. Is the company’s pay, for instance, consistent with those in the sector? How much staff turnover is there, and do employees enjoy their jobs? How do customers and suppliers feel about doing business with you and will they still support the company?
Not only do you want to know if customers have positive feelings about your business for marketing or sentimental reasons. The productivity and retention of employees are impacted by how a company treats its staff. From the standpoint of profitability, contented workers are more efficient, and low turnover is less expensive than frequent new hires. Relationships a business has with its wider social network, such as its clients and suppliers, can also directly benefit its bottom line.
Community Relations and Human Rights
Community relations deal with how your business affects or helps the neighborhood. Local sourcing, philanthropy, and hiring people from within the community are measurable factors. Since corporate activities can have an impact on regional surroundings, the ESG’s environmental component also has some crossover.
Human rights are a fundamental tenet of social evaluation in general. ESG initiatives should closely examine internal procedures and scan the supplier chain for human rights violations. Investors anticipate that a company will use due diligence to prevent supporting organizations with a bad track record on human rights, even though a company cannot be held accountable for every group it partners with. A certain source, usage of a specific product, or operating in a distinct geopolitical region are just a few examples of areas to take into consideration.
Workplace Health and Safety
Management of the environment, health, and safety (EHS) is an important consideration when assessing “S.” EHS is focused in the wellbeing and security of both employees and the environment. Since the epidemic, investor and public scrutiny of EHS has increased significantly.
The public has denounced companies that seemed to put customers in danger without necessity and applauded others for their vigilance. Moving forward, inspection of EHS procedures at work is expected to stay at a high level. Workers’ compensation applications, workplace injuries, personal protective equipment (PPE) regulations, as well as other health and safety issues unique to your industry can all be measured.
Diversity and Inclusion
Diversity affects a company’s profits directly and is progressively regulated. It is not merely about taking a politically correct stance. Recently there have been a lot of debate diversity policy suggestions. Legislation that was being proposed required a level of disclosure on the leadership’s gender, color, nationality, and veteran status as well as a number of other initiatives to broaden staff diversity. Businesses should develop genuine diversity objectives and strategies and get ready to answer to the public and governmental organizations.
Enhancing company governance, luring top people, and developing human capital are all critical elements driving long-term competitiveness. Internal policies supporting gender diversity are a sign of a well-managed business that understands the importance of diversity in fostering innovation and raising production, as well as enhancing employee well-being.
Political Ties
Political allegiances and contributions rank among the social evaluation criteria’s most visible and recognisable components. Politically motivated sanctions have a longstanding history and can seriously harm a brand’s reputation. Investors will want to assess the potential political consequences the business may face in the future and understand how the company interacts with political groups, leaders, and laws.
Additionally, investors might wish to confirm that there aren’t any major disputes with their own political views. Politics cannot be performative, like all other ESG components, as they will be evaluated using quantitative metrics and contrasted with the messaging of the company.
The “S” in ESG Matters
Similar to the other ESG components, social metrics and criteria give investors more assurance that the business will not succumb to the dangers present in the sector. Additionally, building goodwill within and outside of the organization and providing investors with a business they can be proud to support have merit. Companies may prevent possible catastrophes and have a beneficial impact by keeping a close eye on how the people in their labor force, community, and industry are being handled.
