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Six Reasons Why Your Organization Needs to Focus on the “S” of ESG

by Swetha Venkataramani, FiscalNote

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While Environment, Social, and Governance (ESG) is now a ubiquitous term around the world, it can seem like the “E” in ESG is the first among equals. Every day, more global organizations double down on their decarbonization efforts, make net-zero commitments, talk about carbon offsets and nature loss. Governance or the “G” has been foundational to organizations for many years, often embedded into the legal, risk, and compliance departments. While both of these focus areas are more critical today than ever before, it can often seem like the social aspect or the “S” of ESG has taken the backseat.

“Despite leading global organizations highlighting several initiatives that focus on societal factors, there is no denying that the ‘S’ of ESG has been shortchanged for the most part,” states Frank Meehan, CEO of Equilibrium. “There isn’t always the same level of systematic tracking, measuring, reporting, and improvement of performance.” This is further compounded by the fact that it is hard to quantify the “S” and put a dollar amount against the impact.

Save for a few global organizations and niche players focusing on robust initiatives and reporting, most companies rely on anecdotal examples. These have often taken the shape of diversity statements and stories seen in the careers section of websites or details about employee benefits and well-being and community welfare. “It is clearly still of a Corporate Social Responsibility (CSR) approach, as opposed to ESG when it comes to social initiatives,” says Elizabeth Tutino, ESG Specialist Advisor at Equilibrium.

However, in 2022, post-pandemic societal considerations, combined with global geopolitical unrest, weigh heavily on organizations that can no longer afford to share anecdotal examples and feel-good quotes. Here are six reasons for driving a bigger focus on the “S” of ESG.

1. Talent retention
The Great Resignation showing no signs of a slowdown is a clear indicator that power balance has shifted toward employees and as their relationship to work has changed, so have their expectations from their employers. As organizations scramble to reduce turnover and retain their talent, several have tuned up their ESG initiatives.

“ESG has quickly become a workforce strategy as a company’s ESG performance directly impacts employee sentiments,” says Tutino. “There is definitely bigger stress on the societal aspects here.”

Some of the initiatives help retain the spotlight on societal issues such as immigration, unemployment, LGBTQ+ representation and advancement, more women in leadership positions, pay equity, parental leave, and childcare support.

2. Increased employee and customer activism
According to global law firm Herbert Smith Freehill, more than 80 percent of employers expect a rise in activism among their employees by 2024. There was more than enough proof in October 2021, dubbed “Striketober,” as record numbers of U.S. workers walked out on their jobs with demands over better pay, working conditions, and corporate policies.

“Most recently, we are seeing a record amount of both employee and customer activism triggered by the war on Ukraine. Global brands such as Netflix, Toyota, Prada, TikTok, WWE, Starbucks, and many more suspended their Russia operations. There is clearly a need for organizations to take a sociopolitical stance on global affairs,” stresses Meehan. While it may be hard to predict crisis-induced activism, one way that organizations can get ahead is to ensure a stronger ongoing focus on societal aspects, while adopting a more proactive stance by measuring the market perception of their ESG performance.

3. Build on investor confidence
ESG essentially started as a way for conscious investors to gauge their potential investments. Here again, an argument could be made that the “E” and the “G” overshadowed the “S” in many ways. Climate change is often front and center in investments conversations, however, more investors are pushing for social responsibility as well.

BlackRock’s 2021 proxy voting guidelines and stewardship publications emphasize that U.S. companies disclose the racial, ethnic, and gender makeup of their employees. Furthermore, it is also requiring companies to report the measures to improve diversity, equity, and inclusion.

4. Regulations, legislation, and mandates
There are several initiatives, especially in the U.S., to introduce diversity mandates on boards in 2022. And there could be a wave of government-managed “social” reporting coming globally too. It is widely speculated that the SEC’s ESG rulemaking will potentially include modernized rules governing the disclosure of human capital management, including DEI initiatives.

The European Commission has also proposed mandatory human rights and environmental due diligence direction. A substantial part of this proposal focused on reducing and prohibiting adverse human rights impacts covering factors such as the prohibition of unequal treatment in employment, human trafficking, all forms of slavery and oppression in the workplace, and much more.

5. Supply Chain Woes
Supply chain transparency is a major part of any ESG initiative. While there is typically a lot of overlap among the environmental, social, and governance criteria when it comes to supply chain, we can expect societal considerations to take the spotlight,” says Tutino.

Because many of the supply chain woes facing organizations relate to labor shortage, it can become tempting for players to cut corners by extending worker hours, sourcing of materials, and more. Creating and enforcing a supplier code of conduct is a great way for organizations to ensure high standards of ESG compliance.

“Especially in times of crisis and change, it is imperative that organizations demand transparency from both their upstream and downstream vendors on all issues concerning labor practices, incident risk management, and other critical societal factors apart from environmental factors,” adds Tutino.

6. Shift to green energy comes with social implications
While the shift to greener energy sources has been afoot for a while now, the war on Ukraine has further accelerated it. U.S. President Biden’s ban on oil imports from Russia, or the UK’s plan to phase out Russian oil imports by the end of 2022, act as further catalysts.

More counties, cities, and countries around the world are moving toward energy independence and, as a result, more organizations are rising to this challenge. While this move has positive environmental implications, it brings a mixed bag of societal implications to also consider, such as job creation and job displacement and losses.

Organizations and governing bodies alike will need to come together to think through reskilling and upskilling, reemployment, and return-to-work programs in order to ensure that the shift to green energy is as inclusive as possible and takes into consideration socioeconomic factors.

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