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How does the 'social' in ESG work from an organisation POV?

Organisations are encouraged to use the environmental, social and governance (ESG) framework as a holistic approach to plan and measure their corporate performance. Beyond just a financial outlook, the ESG framework helps organisations understand how they are measuring up to environmental, social and governance pillars.

According to research, organisations that practice ESG demonstrated better operational performance, had stronger stock price performance and lowered the cost of capital.

What does the S in ESG stand for?

The S stands for social and focuses on the organisation’s relationships with people and how their policies and activities impact these groups - individuals, teams and society.

For example, we can observe and infer an organisation’s commitment to the social component by their treatment of employees, vendors and partners they work with. We can see whether the organisation’s policies have an impact on sustainability, diversity, income equality, workplace injury rates, supply chains, and even whether there is involvement and participation with the local communities where they have offices in.

Organisations that implement the social pillar recognise that their business operates in an inequitable environment, where their employees, and the people they interact with might be subject to system inequalities. These organisations are able to address these inequities and have a responsibility to do so, thereby creating value for that society.

How can we measure the social component of ESG?

The social pillar and framework might be harder to define (and measure) compared to issues and activities from the environmental pillar.

Many of the topics associated with the social pillar come in the form of diversity, inclusion, and identity markers (such as age, gender, orientation, race, religion etc). They can also be seen in the choice of supply chains and supplier diversity that the organisation participates in and promotes, whether there is mobility within a company for promotion and specialisation, how employees welfare is executed, and what internal/external impact the workforce has on the communities they have access to in the geography they belong to.

Sybil Dixon, Governance & Sustainability Manager at UniSuper, in a UNSW Sydney article on ESG shared that the social component of ESG is made up of four categories:

  1. Staff: diversity, retention, training
  2. Safety: managing safe workplaces, measurement, tracking – both of employees, but also of customers
  3. Supply chain: modern slavery assessments, occupational health and safety management of suppliers, fair pay
  4. Community: managing relationships with the communities that the company operates in, including human rights and traditional landowners/First nations, keeping work practices aligned with evolving community standards
Korn Ferry ESG and Sustainability Maturity Model
Korn Ferry ESG and Sustainability Maturity Model

One way organisations measure the social pillar is to align their plans and execution with the UN Sustainable Development Goals (SDGs). Aligning an ESG plan or programme to the UN SDGs can show a foundation, and progress as to how the organisation is contributing to an equitable and sustainable world.

For example, Australian Ethical, an ethical managed funds and superannuation investment manager shares Sustainability Reports on a regular basis. Their report “...highlights metrics beyond employee engagement scores and gender diversity to include advocacy work, capital funding towards social initiatives (grants and foundation) and alignment with the UN Sustainable Development Goals (SDGs)”.

Wrapping it up

According to EY, “...the push to prioritise sustainability has proven challenging for corporate strategists as ESG considerations are wide-ranging and require trade-offs that may be hard to quantify”.

Unlocking long-term value requires organisations to adopt a strategic perspective on how they can create, execute and deliver value to their stakeholders, as well as the communities, geographies and the planet we live in.

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