The ‘S’ in an ESG strategy: Why and how to put into action
Businesses with a robust social strategy are considered more attractive to investors and customers and more business resilient. In the current landscape, there are increasing pressures from regulators and governments for companies to report on their social impact.Ella Narain Consultant
Addressing the ‘S‘ in ESG
The ‘S’ within an ESG (Environmental, Social and Governance) framework referring to a company’s relationships with its stakeholders, including employees, customers, suppliers, and local communities is not a novel concept. It has developed from the principles of Corporate Social Responsibility (CSR), where the emphasis was traditionally placed on the social aspect. The social pillar is often perceived as complex, broad, and challenging due to its breadth and continuous evolution. The ‘S’ encompasses a wide range of topics, such as diversity and inclusion, health and safety, human rights, and employee wellbeing. This complexity might explain why businesses often focus on addressing the Environmental and Governance pillars within their ESG strategy. However, the ‘S’ has become pivotal for companies in recent years, as well as pressure from new European legislation (The Corporate Sustainability Due Diligence Directive (CSDDD)) currently being negotiated for 2025, which will address business social values.
Why the ‘S‘ has become so important
In the 21st century, significant social movements, a global pandemic, and political movements have increased the importance of companies addressing the ‘S‘ pillar more seriously. In 2017, the #MeTooMovement helped workforces put greater pressure on their companies to address gender inequality and sexual harassment.1 COVID-19 increased customers‘, investors’, and employees’ attention to the inequalities existing in the world and the important role businesses can play. Furthermore, the Black Lives Movement accelerated in support in 2020 after the unjust shooting of African American George Floyd. The movement placed greater emphasis on the historic discrimination existing against Black people and the under-representation prevalent in the workplace.2
The ‘S‘ is a critical driver of stakeholder satisfaction and success
Customers have long since been a significant stakeholder group that has driven the importance of companies addressing the social pillar. In recent years, consumers have become more socially conscious of a company’s social impacts. Customers are requesting more transparency from businesses, particularly around labour practices, employee health and safety, diversity and inclusion, and the company’s external social impact.3
Investors are a further critical stakeholder with increased concern regarding companies addressing their social issues. BNP Paribas surveyed 96 investors and found that 70 percent said social factors are now a focal point for their investment, compared to 50 percent before COVID-19.4 In turn, impact-oriented investors are looking more closely at companies’ published objectives and tracking mechanisms around social impact. Published objectives and tracking mechanisms ensure that they protect their investments by investing in business resilience in this topical area.
The changing regulatory landscape also puts social value factors on the radar for many stakeholders. The increasing awareness and scrutiny of social impact within workplaces have heightened the responsibility of governments and businesses to critically examine and enhance their practices. In Europe, the Women on Boards Directive stands as a key component of the 2020-2025 EU Gender Equality Strategy stating that by 2026, companies will need to have 40% of the underrepresented sex among non-executive directors or 33% among all directors. This Directive not only aims to secure a gender-balanced composition within corporate boards but also strives to narrow the gender pay gap. The initiative seeks to create more equitable and inclusive work environments by implementing such measures, ultimately contributing to a broader societal shift towards gender parity. Europe’s directive is now seen as the gold standard for gender equality within the workplace, with investors now expecting 33% achievement or target for the underrepresented sex.
The social regulatory landscape also extends beyond the business itself. The Corporate Sustainability Due Diligence Directive (CSDDD) is a newly proposed European legislative framework currently being negotiated.5 If the CSDDD is passed, it will likely come into force in 2025. The legislation will require companies to identify their potential and actual environmental and human rights impacts within their operations. Preventive action plans will need to be developed to demonstrate progression has been made by businesses. If CSDDD is enforced, stakeholders will look more closely at how companies plan to scope and address their value chains.
Putting the ‘S‘ into Action
There are numerous ways a company can strengthen its social impact strategy. Below are key approaches to address and improve a company’s social impact.
- Prioritisation of social impact factors
Businesses often find it tricky to know which social impact factors to prioritise due to the broadness of the area. A materiality assessment is a valuable tool used by companies that can support the prioritisation of social topics. Complimentary of this, aligning to the Global Reporting Initiative (GRI) can help to understand data points and reporting on the social aspect. GRI can also make tracking and measuring targets in these areas easier and more specific to your industry. In addition, being selective in a few topic areas to prioritise determined by the importance of stakeholders and any upcoming legislation on a topic area is also considered an efficient approach rather than attempting to set numerous short and long-term targets across all social impact areas.
- Engage with your stakeholders
To understand how to prioritise social impact, you must first understand where the business is currently at with its social impact by gathering existing data. Social impact is a people-orientated topic, making stakeholders your best asset in collecting this data. The Corporate Sustainability Reporting Directive (CSRD) double materiality assessment also advises that stakeholder mapping is necessary for companies to understand how the organisation may impact people.6 Investors, customers, employees, and local communities hold valuable insight into revealing the gaps in a company’s social impact strategy. Furthermore, a company initiating an open dialogue with its stakeholders can also help maintain a positive relationship as the stakeholders feel heard and know their opinions are important. This insight can help shape what a company needs to prioritise and the key issues to address first.
- Having clear social objectives
Businesses with clear social objectives and a strategy can communicate to their stakeholders about how they plan to address and improve their social impact. This can be difficult to implement for most companies due to the complexities associated with the ‘S’ pillar. The objectives can start small and straightforward, such as implementing initiatives and running pilots within an organisation. If the initiatives and pilots appear to be successful, they can help provide a business case to move forward with those social objectives. For example, implementing an employee volunteering programme can allow employees to use their skill set for a positive purpose, such as helping at a charity or a school in the local area. Not only does this help strengthen community relationships, but studies suggest it helps improve employee wellbeing as it gives them a greater sense of purpose than just their day-to-day role.7 This can be trialled on a small cohort of employees. If well-received with positive feedback, it can be rolled out on a much larger scale with a target of volunteering hours or monitoring employee wellbeing.
Addressing the ‘S’ is a blueprint for future success and business resilience
Companies placing equal importance on the ‘S’ pillar within their ESG strategy experience positive brand reputations and higher employee wellbeing and maintain positive stakeholder relationships. Businesses with a robust social strategy are considered more attractive to investors and customers and more business resilient. In the current landscape, there are increasing pressures from regulators and governments for companies to report on their social impact and the risks this poses to their businesses.8 In the future, we can expect greater legislation around this topical issue and companies already analysing, addressing and improving their social impact will continue to have a competitive advantage.
Author: Ella Narain, Consultant, Simply Sustainable
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