What does the "S" in ESG actually mean?

written by

Emma Annies

Second blog post from the three-part series "What does ESG actually mean?". This post is about the "S" for "Social".

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What does the "S" in ESG actually mean?

What does the "S" in ESG actually stand for?

ESG - the acronym for Environmental, Social and Governance - has established itself as a megatriver in companies and the economy worldwide, at the latest since Covid-19. The focus has long since shifted from economic growth to sustainable business practices that conserve resources and protect the environment. Stakeholders and regulations are increasingly driving companies to develop in the direction of sustainability.

The "S" in ESG stands for Social. Unlike the other aspects, Environmental and Governance, the Social aspect is much more difficult to define. While the other ESG aspects - environmental and governance - are primarily concerned with a company's impact on the planet or on its internal and political functions, social factors focus on the relationships between a company and the people inside and outside a company. The social component of ESG encompasses all types of people-related aspects of companies with their employees and the society in which they operate.

Issues affecting employees include, for example, the company's health and safety record, its diversity, equality and inclusion policies, and labor relations between management and employees. External issues include the company's relationship with local community leaders and whether suppliers use forced or child labor, as well as product safety.

In business, the social dimension is still perceived as playing a secondary role, although it is one of the essential factors for productivity as well as the profitability of a company. One reason for this is a lack of frameworks for the "S" in ESG. Driven by climate change, E has long been the most significant factor in ESG. However, at least since the Covid 19 pandemic, the social aspect has gained significant attention. Although social factors are much more complex to grasp than E and G, it is becoming apparent that companies that, for example, pay their employees poorly are facing significant difficulties. For example, Uber lost its driver license in London in 2019 due to employee exploitation. This makes it clear that companies that comply with social standards can operate more stably and are less likely to face negative repercussions.

Of course, social risks and their potential financial impact vary from industry to industry. For example, workplace safety standards are much more important to an oil drilling company than to a software company, while protecting customer data may be a higher risk for a software company than for the oil company. If a company focuses particularly strongly on the social factor in ESG, this can strengthen a company's reputation, preserve value, and also attract new investors. If companies have a proven track record of improving the well-being of employees and other stakeholders, this makes the company more attractive than competitors who do not focus on social aspects.

In the future, investors will seek to minimize the risk that social factors pose to returns. Particularly complex social dynamics, ranging from the rise of public opinion on the Internet to strikes and corporate boycotts by various groups, influence long-term changes in consumer preferences. Stakeholders may view social factors as important indicators of the company's potential. As with ESG investing as a whole, favoring companies that take social issues into account can be a way for investors to reflect their values in investing while generating higher and more reliable returns over the long term.

The human factor in business relationships is a factor that should not be neglected in the context of ESG. Therefore, especially in the social aspect of ESG, it is important to communicate openly and transparently and to be in constant dialogue with all stakeholders in order not to damage the company's image. Effective engagement not only strengthens the company, but also reinforces the community by creating a common set of values. Thus, companies can gain support and ensure a good standing within society and the community, as community support has a significant impact on local politics.

The social aspect is also particularly evident in the 17 Sustainable Development Goals (SDGs), where social aspects are particularly strongly anchored. 11 of the 17 Sustainable Development Goals refer to social factors, as the promotion of social justice is at the heart of the SDGs alongside the protection of the environment.

These are the eleven SDGs that feed into the Social of ESG.

One of the key challenges for companies looking to improve their social performance is considering which components to include and how to measure and communicate their progress.

At cubemos , we have divided the social area into six fields of action in the ESG factors:

  • Employees, training & workers' rights
  • Consumer safety, data protection & product quality
  • Equality, Diversity & Inclusion
  • Impact on community & dialogue
  • Health, Safety & Wellbeing
  • Value Chain & Supplier Management

Employees, training & workers' rights

The treatment of employees, their working conditions and respect for labor-related rights is a critical aspect of a company's sustainability management. Companies should disclose strategies, measures and targets that they use to reduce negative impacts, but also to promote positive impacts and manage risks and opportunities in relation to their employees. Information on how companies handle labor-related rights, conduct collective bargaining, and organize grievance channels is an important part of this disclosure, as is information on how they communicate with employees. Data on training and an overview of the composition of their workforce are other items that ensure comprehensive disclosure on this topic.

Core contents of the "Employees, training & workers' rights" field of action

  • Dialog with employees
  • Labor-related rights, grievance procedures & collective bargaining.
  • Data from employees & non-employees

Examples of relevant key figures for the "Employees, training & workers' rights" field of action

  • Total number of serious human rights violations
  • Average training hours per employee

Consumer safety, data protection & product quality

Responsible marketing practices, ensuring the health and safety of customers throughout the lifecycle of a product or service, and maintaining a high level of data protection can help consumers make informed purchasing decisions. Companies should identify relevant strategies, action plans and targets to reduce negative impacts on consumers, as well as describe how to promote positive impacts and manage risks and opportunities. This includes collecting data on non-compliance related to product information and labeling, health and safety impacts of products or services, and complaints about data breaches and data loss from customers and end users. Procedures should be described for communicating with these stakeholders about potential impacts.

Core contents of the "Consumer Safety, Data Protection & Product Quality" field of action

  • Dialog with consumers
  • Impact of products on health & safety
  • Product Information & Labeling
  • Customer data protection

Examples of relevant key figures for the "Consumer safety, data protection & product quality" field of action

  • Number of data breach cases per month
  • Number of customer complaints about customer service
  • Number of data privacy breaches reported

Equality, Diversity & Inclusion

Actively promoting diversity, equal opportunity and inclusion in the workplace can bring significant benefits to both the company and its employees. Companies should describe measures to ensure equal treatment of employees and inclusion, such as monitoring incidents of discrimination, corrective action taken, and also ensuring the employment of a diverse workforce. Other components of this field of action include information on fair pay (e.g. "gender pay gap").

Core contents of the "Equality, Diversity & Inclusion" field of action

  • Fair pay & employee benefits
  • Equality & Inclusion

Examples of relevant key figures for the "Equality, Diversity & Inclusion" field of action

  • Total number of incidents of discrimination
  • Various employees at the top management level
  • Wage difference between women and men

Impact on community & dialogue

Responsible marketing practices, ensuring customer health and safety throughout the lifecycle of a product or service, and maintaining a high level of data protection can help consumers make informed purchasing decisions. Your company should identify relevant strategies, action plans and targets to reduce negative impacts on consumers, as well as describe how to promote positive impacts and manage risks and opportunities. This includes collecting data on non-compliance related to product information and labeling, health and safety impacts of products or services, and complaints about data breaches and data loss from customers and end users. Procedures should be described for communicating with these stakeholders about potential impacts.

Core contents of the field of action "Impact on community & dialogue

  • Dialogue with communities
  • Incidents & Impact on Communities

Examples of relevant key figures for the "Impact on community & dialog" field of action

  • Number of community engagement activities
  • Percentage of communities giving the company a positive rating
  • Number of partnerships established with community organizations

Health, Safety & Wellbeing

Healthy and safe working conditions include both the prevention of damage to health and the promotion of the health of employees. Disclosure for this topic area includes both the scope and performance of companies' occupational health and safety management system. It should also describe the processes used to engage employees, the training provided, and the promotion of workplace health and safety. Other data points include the reporting of work-related injuries and illnesses, and indicators of work-life balance.

Core contents of the "Health, Safety & Well-being" field of action

  • Operational management for health & safety
  • Work-life balance

Examples of relevant key figures for the "Health, safety & well-being" field of action

  • Total number of reportable occupational accidents
  • Total percentage of employees entitled to leave for family reasons

Value Chain & Supplier Management

The commitment to value chain and supplier management that eliminates child and forced labor is a core human rights principle and the subject of national legislation in almost all countries. Companies should describe policies, action plans and targets to prevent, mitigate or remedy actual or potential negative impacts on workers in the value chain, including suppliers. This includes working conditions, equal opportunities, health and safety, and other human rights (e.g., access to collective bargaining). Information about your due diligence on suppliers, including social criteria reviews, is an essential part of this topic, as is information about how companies communicate with workers within the value chain.

Core contents of the "Value chain & supplier management" field of action

  • Dialog with employees in the value chain
  • Compatibility testing & screening of suppliers
  • Health & safety in the value chain
  • Human rights in the value chain

Examples of relevant key figures for the "Value chain & supplier management" field of action

  • Percentage of deliveries that are on time and complete
  • Proportion of deliveries that are delivered to the customer on time
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