Keeping up with the “S” in the ESG

Fatihah Ramzi, DigitalCFO Asia | 11 November 2022

Wilson Ang, Partner, Head of Asia Regulatory Compliance and Investigations, Norton Rose Fulbright

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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 investing, 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 issues, from short- to long-term difficulties. The company’s strengths and limitations in coping with social trends, labor, and politics are social aspects to take into account while making sustainable investment decisions. Concentrating on these issues can boost business success and corporate responsibility.

To gain a better understanding of the “S” component in ESG, DigitalCFO Asia spoke with Wilson Ang, Partner, Head of Asia Regulatory Compliance and Investigations, Norton Rose Fulbright.

The Current Trends In Social Factors That Are Greatly Affecting Businesses

ESG is an umbrella term that was coined by the United Nations in 2005 and relates to investments that go beyond typical short-term financial considerations. The concepts are focused on long-term, responsible value investing, and they cover environmental, social and governance issues. G, for governance, has always been top-of-mind for business and the E for environment is gaining prominence in recent years. 

“However, the social factor in ESG, or the ‘S’ component, tends to be a bit more difficult to grapple with as it spans across a wide spectrum of concerns,” says Wilson Ang, Partner, Head of Asia Regulatory Compliance and Investigations, Norton Rose Fulbright.

Some of these concerns can be quite egregious and may have criminal implications. Others that are less obvious, like workplace harassment, discrimination, and lack of engagement, are also important. CFOs need to be aware of the social issues that can have an impact on the company’s bottom line or potentially help to raise the top line, as there are financial advantages to getting this right. 

The range of social factors impacting a company is dependent on the types of business it engages in. On one hand, there are very serious social concerns that threaten basic, fundamental human freedom, which we should protect. These include human rights issues, modern slavery, forced labor and debt bondage. Other social concerns, such as workplace bullying, intimidation, sexual harassment and racial or religious discrimination, undermine human dignity that should be respected. 

“The protection and preservation of human diversity are also crucial in ensuring the equality of opportunities. Related workplace social factors include talent engagement and retention, learning and development programs, and ensuring responsible data use and protection. While these are historically perceived as “softer” social issues, they are increasingly taking center stage and will have teeth when they are eventually enshrined in legislation,” says Wilson Ang, Partner, Head of Asia Regulatory Compliance and Investigations, Norton Rose Fulbright. 

For instance, Singapore’s Tripartite Alliance for Fair and Progressive Employment Practices (TAFEP) previously issued guidelines on driving fair and progressive employment practices and anti-discriminatory practices. This will soon gain the effect of law and be enshrined in legislation, thus opening doors for more quality opportunities. 

Ensuring A Safe And Equitable Workplace

The COVID-19 pandemic has exacerbated several social concerns that had already been in existence. Lockdowns, travel restrictions, vaccinations and even contact tracing have affected individuals physically, mentally, and emotionally. It also disproportionately affected migrant workers and brought several underlying social issues to light. 

People who were not able to work from home due to their existing environment and circumstances were disproportionately affected in terms of their livelihoods and income. Those who were able to work remotely also had to adjust to the new environment and faced pressures trying to prove that they are equally productive while working from home. There have also been stories of employees being intimidated or bullied online with increased remote working.

In addition, the pandemic and economic downturn have resulted in a number of retrenchment exercises; supply chain disruptions have also caused severe economic pressures. These have all contributed to a rise in anxiety and stress among employees.  

So what can companies do to ensure a safe and equitable workplace? 

“There is a clear need for companies to stay ahead of the evolving work environment and changing regulations. While a lot of the new working arrangements were implemented to meet business needs during the pandemic, there is value for companies to retain and institute those policies that help to foster greater equality opportunities. For example, work-from-home arrangements can benefit working parents, who might be able to better care for their children,” says Wilson Ang, Partner, Head of Asia Regulatory Compliance and Investigations, Norton Rose Fulbright. 

Priorities Of Socially Conscious Companies

The shift to a hybrid work environment needs to be an ongoing conversation that companies have with their employees. The majority of the workforce has become used to working from home, and most would wish to retain and continue enjoying the flexibility and benefits of remote working. At the same time, employers who see the benefits of in-person team gatherings and collaborations may hold the view that working in an office outweighs a work-from-home arrangement.  

If return-to-office policies are implemented too quickly without consultation with broader teams, this might result in a mismatch of expectations and potentially impact team morale and confidence. Moving forward, organizations are expected to adopt a calibrated hybrid approach that balances out the expectations of the workforce with flexible working arrangements.  

“The social factor in ESG is fundamentally really about caring; caring about your employees and caring about the workplace environment that they are in,” says Wilson Ang, Partner, Head of Asia Regulatory Compliance and Investigations, Norton Rose Fulbright. 

Promoting Ethical Business In Daily Internal and External Interactions

When it comes to the promotion of ethical businesses and being socially conscious, companies need to first conduct a materiality assessment. This assessment can be conducted along 2 axes and will help businesses to form a view on the issues that are material to them. The first axis focuses on the importance of the issue internally, such as to business operations and employees. The second axis focuses on the importance of the issue externally, including stakeholders, investors, local communities, and customers. 

Depending on where the issues are plotted against the axes, companies are then able to identify overlapping, material factors that are critical to both their business and stakeholders. 

The outcome of this materiality assessment will form part of a company’s strategic governance. Any company will benefit from knowing the material factors that they need to focus on and prioritize, as there are just too many things under the sun. This will help them to better develop strategies that are ethically sound and socially conscious. 

“All cases from a social perspective, such as workplace discrimination, bullying, intimidation and harassment issues, will increasingly take center stage as we gradually return to the office and bring along an increased focus on mental wellness. Organizations need to take these issues seriously and should have in place a trusted and open channel for employees to speak up, and businesses need to address them promptly and appropriately. This will help to protect the diversity of thought, expression, conscience and religion,” Wilson Ang, Partner, Head of Asia Regulatory Compliance and Investigations, Norton Rose Fulbright. 

There will also be a greater focus on supply chain diligence given the spotlight on labor violations. In other words, modern slavery, forced labor, debt bondage, and more are issues that businesses need to be increasingly aware of and have policies for. These issues are especially prevalent in Asia, fueled by widespread poverty, migration, weak governance, and the abuse of cultural practices.

“That’s something that businesses in this part of the world need to be conscious of. Not just in their immediate employment workforce, but also the individuals and the companies that they work with up and down the supply chain,” says Wilson Ang, Partner, Head of Asia Regulatory Compliance and Investigations, Norton Rose Fulbright. 

Leveraging the Social Criteria in ESG to Attract and Retain Employees

The pandemic has led to the global workforce doing a lot of rethinking and internalizing the role that they play in a company. Many are now questioning the real value and impact of their work and some have even expressed the desire to do more than just drive bottom line growth. 

“I think a certain degree of trust has broken down and employees are looking for a purpose beyond profit,” says Wilson Ang, Partner, Regulatory Compliance and Investigations, Norton Rose Fulbright. 

These issues have led to what is known as the great resignation. In the aftermath of the pandemic, the great resignation has been followed by the great regret. People who shifted or quit their jobs and moved somewhere else, felt that the grass is not always greener on the other side. 

The great resignation is much like playing musical chairs with unsatisfactory jobs, and this is where the pandemic provides a good opportunity for companies to take stock, and give their employees room to search for purpose in their work so that they do not drift from one job to another.  

For employers trying to include social criteria into their ESG strategy, there should be meaningful workforce engagement opportunities for employees to be given a voice in major decisions and be treated as an important internal stakeholder. This allows them to have some involvement in crafting their own career path in conjunction with the broader corporate strategy. There must also be some investment in employees by providing training and upskilling them. As the saying goes, train them so well that they can go anywhere they want, but treat them so well that they want to stay. These are definitely opportunities not to be missed.