The “S” in ESG

Today more than ever, companies have to take the social aspect of ESG (environmental, social and governance) into account. This is a fundamental component that focuses mainly on working conditions and respect for human rights.
In recent years, investors have concentrated their efforts on the E or environmental dimension because it is easier to measure. As noted in the Stanford Social Innovation Review:

“Planet isn’t necessarily more important than people, it’s just easier to measure. Investors like measuring things that they can put into their models, and carbon is easy to quantify.”

Giving the social aspect of ESG the attention it deserves

The social aspect of ESG is manifested through six distinct variables. All of them emphasise the importance of treating workers well, as companies cannot progress if they do not take proper care of their workforces.

1. The importance of health

Health is the foundation on which society is built. Therefore, health loss – both physical and mental – has a systemic impact, as modern success is based on interdependence. As seen with the coronavirus pandemic, the health loss of individuals on a large scale affects the performance of businesses and the economy as a whole. Valuing health enables workers to perform at their best and live their lives to the fullest.

This concern is also of great importance to investors. Too often, the “health” factor is not mentioned when talking about investments, giving priority to other high-impact factors even though its impact is significant. This leads to financial risks by failing to create workplaces that enhance wellbeing. Initiatives such as the Long-term Investors in People’s Health programme (LIPH) have been created to enable the transition to a prosperous society that prioritises wellbeing. This project classifies health as a systemic risk for investments. The main objective is to establish best practices and opportunities, with the help of experts who produce metrics and optimise data management by creating new KPIs.

In this way, investments will be channelled to the companies that design the best working environments. This includes, amongst other examples, ergonomic spaces, flexible working hours and psychological support.

2. Income inequality

The pandemic has hit the economy hard, but it is the most vulnerable groups who have been hit the hardest. To address this problem, it is essential that companies adjust their wages and make them fair.

The aim has to be to eliminate in-work poverty. This can be achieved by establishing a minimum wage which does not vary according to the activities performed so that workers have a safety net that they can rely on. However, remuneration must also be fair and related to productivity.

3. Diversity, equity and inclusion

Diversity is another factor that should be paid attention. Major multinationals in the investment sector, such as BlackRock, are clear about this. In fact, the US firm has stated that it will ask companies for certain information before investing in them. In particular, they will have to report on the racial, ethnic and gender composition of their workforce.

4. Employee skills

A workforce with the right skills is crucial, as a company’s survival depends on it. For this reason, they must strive to find the most talented profiles and to train them. To achieve this they must be inclusive: talent is not correlated to social background.

5. Improving communities

The social part of ESG also includes communities. Companies are located in communities and hire people from them. It is therefore important that their actions contribute to improving their well-being. This allows them to give back the support shown by the population when purchasing their products and services.

6. Social innovation

According to the OECD definition, social innovation is the design and implementation of new solutions that involve “conceptual, process, product, or organisational change, which ultimately aim to improve the welfare and wellbeing of individuals and communities”. Through various entrepreneurship initiatives, social innovators have improved the lives of 722 million people over the past 25 years, according to the Schwab Foundation for Social Entrepreneurship. Many initiatives undertaken by the social economy and civil society have proven to be innovative in addressing socio-economic and environmental problems while contributing to economic development. Obtaining the right conditions for this to occur depends on the policies in place: 

“To fully tap the potential of social innovation, an enabling policy framework is needed to support public, non-profit and private actors to co-construct and implement socially innovative solutions and thereby contribute to address socio-economic issues, build stronger territorial resilience and better respond to future shocks.”

OCDE, Social Innovation

The S in CSR

Along with workers’ rights, companies also have to take care of their Corporate Social Responsibility actions. Initiatives with a real positive impact should avoid socialwashing at all costs. This term refers to “aesthetic” and superficial social activities that lack real commitment.They tend to be used in marketing campaigns to enhance a brand’s image.

To prevent this, CSR actions must be relevant and honest with measurable results. A good example would be a donation to support sustainable causes within a community, which then empowers the community through a resilience-based project. In this way, the company provides real help and not just a facelift.

In short, the S represents all things social and worker-related in both ESG and CSR. Undoubtedly, employees are a key part of any company, so they must be treated and valued accordingly. In addition, actions taken by companies need to have real impact in order to prevent socialwashing. To avoid falling into bad practices, digitalisation is the solution to follow.

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