ESG Social Factors - Meaning, Examples & Improvement
What is the ‘S’ in ESG?
The ‘S’ in ESG stands for ‘social’ considerations. These social factors concern how a company manages its relationships with its staff, the communities around it, and the overarching political environment.
Experts believe that social ESG risks and opportunities are at least as common as those that fall within the spheres of ‘E’ and ‘G’, and have the potential to cause lasting damage to a company’s reputation.
See also:
Is Environmental Social Governance the same as social value?
Generally speaking, social ESG and social value are not considered to be the same thing. However, they do have considerable overlap and are, arguably, trying to achieve the same thing: a positive impact on the world. Some consider ESG to focus more on the negative – the potential risks and negative impact an organization is having in the world – whereas social value puts forward the positive value being created.
Is social ESG the same as CSR?
ESG social factors and the issues handled as part of Corporate Social Responsibility (CSR) are similar and complementary. However, CSR is a discipline determined and managed by the company, whereas ESG can be thought of as an independent set of criteria against which all companies across the world must report.
ESG social factors
The following are examples of important social ESG factors for organizations to consider:
- Social trends and dynamics
- Labor strikes
- Consumer protests
- Scarcity of employees
- Safety risks
- Geopolitical events
How are social ESG risks directly impacting companies?
ESG social factors may seem rather abstract to the time-poor business leader being pulled in multiple directions and dealing with immediate business pressures on a daily basis. But social ESG criteria pose a much bigger risk than you might think. Here are some examples:
1. Strikes and labor disputes
2021 was a plentiful year of strikes and labor disputes in the United States across multiple sectors, from farm machinery to Hollywood. An obvious ESG social threat to afflicted organizations, strikes tend to have a snowball effect: if it’s happening somewhere, it could be happening here.
AFL-CIO President Liz Shuler said in an interview with The Washington Post, “I think this wave of strikes is actually going to inspire more workers to stand up and speak out and put that line in the sand and say, ‘We deserve better.’ ”
2. War
Not only does war have an enormous impact on business within the countries immediately involved, its ripples can be felt by companies elsewhere.
The Russia-Ukraine war, for example, is having a dramatic impact on the global supply chain. The world over, the flow of goods has been disrupted, causing product shortages, cost increases, and other social ESG risks around the world.
3. Policy changes
The oil and gas industry is impacted frequently by changes to government policy, inter-governmental conflict, cyber attacks, infrastructure sabbotage, and espionage. The September 14, 2019, drone attacks on Saudi Arabia’s oil facilities are just one example that caused the temporary stalling of 5% of worldwide oil production.
4. Consumer sentiment
The United States’ gun policy is controversial not only internationally but also inside the country’s own borders. Companies that sell firearms and ammunition, like Walmart, must consider their investment palatability against a backdrop of such controversy and divisive consumer sentiment. In fact, Walmart became a more favorable choice for socially minded investors after its September 2019 announcement to restrict the types of firearm ammunition it sells. A poll of 1,471 Walmart customers found that 28% were more likely to shop at the retailer after the announcement, while 20% were less likely to shop at the retail chain.
3 ways organizations can improve their social ESG ratings
1. Hire a Chief ESG Officer
For enterprises today, it’s not uncommon to hire a Chief Sustainability Officer. However, in an increasingly ESG-aware environment, is it doing your organization justice by focusing only on sustainability?
It may come down to your definition of sustainability.
Sustainability is generally understood to relate to the avoidance of the depletion of natural resources. Does this adequately cover the breadth of responsibility contained within ESG? The likes of C.H. Robinson, Royal Caribbean, and Verizon think not, having all recently appointed Chief ESG Officers.
2. Implement workforce best practices
There are many ESG social risks that are outside an organization’s immediate control. So it’s important that, when a company can have direct influence, it takes steps to ensure that influence is in line with social ESG guidelines and best practices.
Workforce management, pay, health and safety, working conditions, and other human capital policies are an example of one such area.
3. Meaningful ESG reporting
Today’s high-pressured ESG business environment requires constant monitoring of social issues and risks, as well as high transparency of tangible data relating to ESG criteria. Vague information, unsubstantiated claims, and vanity metrics will not be tolerated.
In September 2020, the World Economic Forum and its International Business Council (IBC) published a consolidated set of standards, which organizations can now follow.