Investors are increasingly paying attention to social performance – how companies treat their employees, customers, and the society around them. Stefan Bojanic explains why measuring the ‘S’ in ESG is more than just a ‘nice-to-have’ as we emerge from the pandemic.
Environmental, social, and governance (ESG) continues to be a critical consideration for investors, and therefore for businesses – and the ‘S’ is becoming a more significant pillar to focus on.
Social performance evaluates the relations a company has with its workers, customers, suppliers, and its local community. This covers social capital and human capital, with the most important factors including human rights, diversity and inclusion, health and safety, and training and development.
Unlike some other straightforward KPIs used to monitor sustainability performance, such as reduction of CO2 emissions, social aspects are not as easy to measure due to their intangible nature, making them difficult to quantify. For example, how do we appropriately measure inclusion? How can we best measure the performance of training and development initiatives?
The complexity means that measuring social data change and translating them into meaningful KPIs for investors is difficult. The simplicity of the Sustainability Accounting Standards Board (SASB) framework for ESG (including social topics) explains the rapid adoption of the standard as a means of measuring social impact – 28% surveyed had SASB integrated in 2020, an increase of 7% from 2017 when the original framework was published.
Coronavirus was a game-changer
We are just beginning to see the impacts of the pandemic emerging in today’s culture and Berenberg’s UK Exploring Investor Sentiment 2021 survey labelled the pandemic the biggest driver for the shift in focus on social issues. Some 47% of investors considered the ‘S’ aspect of ESG the most important when making decisions, overtaking ‘E’ at 35%.
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The pandemic has also interestingly increased awareness in the nexus between workforce wellbeing and business performance, operational resiliency and sustainability.
New aspects such as job uncertainty, unusual working styles and employee burnout (which would traditionally fall in the domain of occupational health and safety) are helping develop the concept of health and safety further to reflect the changes in society.
We started off with safety functions, progressed to health and safety, and now when we speak about this area we are talking about safety, health and wellbeing in tandem.
Health and safety has however, always been a crucial topic and historically, one of the first key non-financial performance indicators to have surfaced for the heavy industries. For obvious reasons, indicators such as lost time injuries and fatalities are essential metrics of performance. GlobalData’s ESG in Construction 2021 survey showcases this still, as health and safety was selected as the most significant ESG concern, with 51% of respondents marking improving health and safety on sites as top focus.
It might have taken a pandemic for companies to consider wellbeing a core social and sustainability topic, but the connection between employee wellbeing and business resilience is clear.
Consequences of inaction
Failing to address social impacts can decrease investor confidence, damage reputation, and bring legal and regulatory fines. Deliveroo for example saw a 26% drop in share price when it floated in March this year – after investors expressed concerns over the treatment of its workers.
Failing to address social impacts can decrease investor confidence, damage reputation, and bring legal and regulatory fines”
Amazon was included in the National Council for Occupational Safety and Health’s “Dirty Dozen” list of most dangerous employers in the US earlier this year, reporting six fatalities and hundreds of injuries due to the popularity of next-day delivery.
Commentators have said that worker safety is one of Amazon’s biggest and hardest to solve issues in the US, with injury rates for delivery drivers being 50% higher than UPS drivers, and regular workers being twice as likely to be injured on the job as Walmart workers, according to reports.
Managing social impact
Businesses that manage their social and human capital can help create long-term value for investors by highlighting dependencies and risks, improving decision-making, and promoting meaningful communication and engagement with a broader range of stakeholders.
Social topics are becoming more pertinent as sustainability continues to significantly shape our culture. What was previously accepted socially may no longer be accepted now. Therefore, the way we conduct business is also changing, with performance now explainable through financial, environmental, and social metrics.
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Companies must give appropriate attention to the ‘S’ if they wish to evolve with the changing world. Technology platforms like Emex have a huge role to play in allowing companies to measure this, enabling them to perform materiality assessments, determine metrics, effectively collect quality data from social and human capital surveys, track social initiatives, and develop dashboards to report social progress.
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