Increasing demand from customers, employees, investors and government mean that organizations are putting ESG at the top of their agendas. In the second of our series, we look at the social aspects of E, S and G.
Historical corporate impact on society
Throughout modern history, entrepreneurs and their businesses have contributed to society in both productive and destructive ways. During the Industrial Age, business leaders were primarily focused on profits, with little to no regard for employee welfare, such as workplace safety, fair wages, and worker health. Since then, through labor disputes, strikes and legislation, businesses finally began providing fairer working conditions for the people they employed — improving labor standards, promoting gender equality, reducing racial inequality, and increasing wages to an amount that allows employees to meet their basic needs.
According to a 2018 study, “78% of Americans believe companies must do more than just make money; they must positively impact society as well.”
Governments and companies have shifted their priorities as leaders have increasingly embraced their responsibilities to their employees and society at large.
Corporate social responsibility and impact
As the business environment continues to evolve, so must corporate policies, especially when it comes to safeguarding stakeholders. Just as the internet changed the way businesses operate, companies worldwide have had to reassess how to handle and protect their data. The General Data Protection Regulation (GDPR) is now a fundamental legal component of business. Companies that fail to appropriately manage their internal, employee, customer and partnership data are a risk for investors. They are subject to heavy fines of up to 4% of annual global revenue and security breaches will likely damage stakeholder trust.
The social responsibilities of a sustainable business include a company’s relationship with its workforce and the communities in which it operates. A growing number of investors are basing their investment decisions on ESG factors, as companies with strong ESG performance are more likely to provide better financial returns and reduced risks. Social factors investors use to assess corporate social performance can include concepts such as providing its employees with a safe and healthy working environment, how it invests resources in the communities in which it operates and general business ethics.
Social issue assessment does not stop at a business’ front doors. Companies are increasingly held accountable for their supply chain impacts. For example, stakeholders are increasingly aware of the human rights issues associated with sourcing raw materials like cotton or cocoa from suppliers or jurisdictions known for violating human rights or child labor standards. Exposure to these kinds of risks equates financial risk. Sustainable investors aim to minimize risks to their returns that societal factors might threaten.
“In most organizations, sustainability is now generally acknowledged as both a valuable risk-management tool and a long-term contributor to the bottom line… However, one strong value proposition associated with sustainability is still waiting to be consistently integrated into most corporate strategies. And that is the potential for leveraging customer engagement through sustainability."
According to the World Bank, institutional investors are adopting various methods for applying ESG standards. These include:
- Purchasing labeled (green, social or sustainable) bonds
- Setting up or investing in ESG funds
- Following ESG indices
- Hiring ESG managers
- Embedding ESG across the whole investment process
Companies that drive positive social impact are more attractive to investors. Such actions can include hiring a local workforce, offering competitive employee benefits, or helping communities tackle challenging social issues, such as sustainable farming or affordable housing. Furthermore, companies that are inclusive in their hiring culture tend to have a more positive outlook on society, and people tend to see them more positively.
"Investors, for their part, are driving the demand. Many prominent money managers — from banks and pension funds to family offices — have all made sustainable investing a priority, one that many plan to build on. Some investors are shifting dollars to socially responsible strategies to help contain the climate crisis, while others want to use the investment as a hedge."
The three components of ESG are deeply interrelated and demand a cohesive methodology to amplify overall benefits and synergies. Environmental and social concerns are intimately interconnected, and good corporate governance is the structure that links them together.
The future of social impact
Companies that maintain a solid social pillar tend to build more trust and develop a better brand image. Yet highlighting and communicating such efforts and activities can be a challenge at the corporate brand level. This added complexity when it comes to the “S” factor in ESG reporting should not be discouraging or an excuse for a company’s inaction.
Research by the Harvard Business Review confirms that, “the adoption of strategic ESG practices is significantly and positively associated with both return on capital and market valuation.”
ESG initiatives are synonymous with corporate strategy, and companies with long-term objectives are adopting ESG practices. Larry Fink, CEO of BlackRock, the world’s largest asset management firm, wrote in a 2020 letter that, “a company cannot achieve long-term profits without embracing purpose ... a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society.”
Addressing and implementing ESG frameworks can be challenging, despite their numerous benefits. At UL, we help you set goals and develop the right strategies to help your organization take action. With UL’s 360 Sustainability Essentials software, you can learn how to implement sustainability frameworks for your business and take part in this worldwide effort. Gain the insight you need to dynamize your business operations, give back to the community, share your goals, improve your partnerships, and gain support from the stakeholders you value.
Environmental in ESG
In this first article of a three-part series, UL’s 360 ESG and sustainability team will analyze and break down the foundations of Environmental, Social and Governance (ESG) reporting.
360 Sustainability Essentials software
Rated #1 by Verdantix, our award-winning investment-grade sustainability data management system is available as an out-of-the-box solution. 360 Sustainability Essentials includes everything you need to report to leading frameworks while allowing you to focus on performance improvements.