What is the S in ESG?

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Social: How companies interact with their employees and communities.

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The Social aspect of the ESG framework has taken on a renewed focus due to the COVID-19 pandemic. Companies and their People and Culture teams turned their attention to their employee’s well-being due to the drastic changes in their environments and lifestyle.

It is often perceived that social issues within companies are more difficult to assess and analyse than the Environmental and Governance pillars. Companies worldwide can deal with these issues in different ways depending on their company culture. Here are some examples of what specifically sits under the ‘Social’ umbrella term:

Internal issues affecting staff:
Health and Safety
Diversity and Inclusion (D&I)
Labour relations (Management and workers)

External issues affecting communities:
Relationship with community leaders
Whether suppliers are using forced labour
Product Safety

How do we try to measure these attributes?                                           

Companies that have clarity over how social factors tie into their corporate purpose are well placed to take advantages that they generate. The challenge is how do you evidence that this is the case.

Currently, investors assess social factors upon the financial risks and opportunities that directly relate to their handling of these topics. Some risk topics are evaluative with qualitative questions, this approach helps track some of the ‘S’ risk such as human rights abuse within its supply chain. Other risks are tracked quantitively, for example the gender pay gap between male and female employees.

Investors can usually find this information from the company in question, but it can be supplemented and cross-examined against data from other sources. Including government, non-profit, social activist, and news report databases.

What are the challenges of the ‘Social’ pillar of ESG?

Regulators require companies to disclose certain information, however this means that the investor could be relying on bias information, as they rely on managers at the company to directly provide the information. This in turn makes it difficult to verify statements made and can lead to claims of ‘Bluewashing’, in other words, overstating a company’s commitment to responsible social practices.

The variation in companies plays a part too. From their core business model to how they run their culture within their business is completely varied. Making it more difficult to benchmark one company against another.

As per the EU Environmental Taxonomy, the EU has launched its Social Taxonomy to provide a classification of economic activities that significantly contribute to social goals in the EU.

This will give a common code and standards for investors, businesses, and regulators regarding what is sustainable from a social perspective and what is not.

As regulatory standards such as the EU Social taxonomy become established, then companies will find it more challenging to not view ‘S’ factors with the importance that they should.

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