Why social is no longer the forgotten part of ESG
06 August 2020
As companies have increased their focus on environmental, social and governance (ESG) issues over the past few years, they have tended to concentrate on the E and the G – with the S being rather left behind and even described as the the ‘ugly duckling’ of ESG. It’s not helped that social issues are harder to measure than environmental and governance factors.
But the last few years have seen a focus on the relationship between businesses and society, which has been accelerated even further by the coronavirus (COVID-19) pandemic and the Black Lives Matter movement (as we discuss in more detail in our recent blog). There’s now unprecedented pressure on businesses from stakeholders, matched by potential commercial upside if they get it right, to meaningfully engage with the ‘S’ in ESG.
So what do we mean by social factors, and what are the implications of an increased focus on these issues for financial services firms? ‘Social’ in ESG is very broad, encompassing how companies treat their staff, their approach to diversity and inclusion, their responsibilities to their customers, how they engage with key communities, the human impact of supply chain, and the extent to which they deliver on a purpose in society beyond simply making a profit.
The pandemic has brought a much sharper focus on businesses’ social responsibility, and many have taken significant action to serve their people and communities in response. We’ve seen companies adapt their business models (clothing manufacturers shifting to the production of personal protective equipment, for example), and we’ve seen a really positive reaction to companies that get it right, and that put people at the centre of their response, which can help to build trust.
Authenticity is key. Where companies make grandstanding comments without the action to back it up, they get called out for it. We’re also now seeing much higher standards being applied by a broader range of stakeholders – companies are no longer reporting to just their shareholders or investors, they are being held to account by a broader stakeholder community including their employees and the communities they operate in. Employees and customers will protest, increasingly loudly, if a company’s words are not supported by actions. For the companies which do it well, purpose is embedded in the psyche and the culture of the organisation, and it is those companies that see benefits in employee engagement, customer loyalty and stakeholder relationships - whereas those who are less authentic are called out on it pretty quickly.
Likewise, the COVID-19 pandemic has shown that for companies to realise the benefits of engaging with ‘purpose’, it cannot just be skin deep. I’ve been impressed by how some banks have really thought about their purpose, for instance through mortgage holidays and flexibility in how they support businesses, as well as continuing to take action on issues like financial literacy. Some self-declared purpose-led businesses have doubled down on their purpose in the context of the pandemic, and a number of very high profile companies have set out their Net Zero ambition even under the current challenging conditions.
Regulators are also playing their part in bringing the ‘social’ element of ESG to the core - with the FCA for example highlighting the importance of a purposeful culture earlier this year. Investors too are driving change and increasingly holding companies to account - in a recent conversation with a FTSE100 Chair, he noted that ESG had come up in all of the firm’s shareholder roadshows. Firms therefore are under pressure to think about this from a number of critical angles: it’s a response to a sea-change in expectations from every angle: consumers, employees, regulators and investors.
The commercial and reputational incentives for firms to get on the front foot with the ESG agenda are increasingly clear. And it is the ‘S’ which can make such a difference to trust, inclusion, reputation, and engagement - which is why it should be just as high on firms’ agendas as the ‘E’ and the ‘G’.
To find out more about the ESG agenda and the increasing focus on purpose in FS, listen to the latest episode of our Risk & Regulation Rundown podcast series.