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The “S” in ESG and how businesses can improve their social performance 

October 7, 2022
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This article was written by Sara Do, Cultural Infusion’s Research and Project Coordinator Intern. Sara has a Bachelor of Fine Arts in Studio Art and is currently doing a Master of Arts in Cultural Heritage and Sustainability at Uppsala University. She is writing her Master’s thesis on the definition of sustainability in sustainable art. 

Every business considers environmental, social and governance (ESG) framework. Investors are now using ESG measurements to determine whether they are funding responsible and ethical businesses. With the recent increase in expectations for businesses to be socially responsible and ethical, businesses are increasingly interested in what positively influences their ESG performance.  

What is ESG? 

The ESG framework began as a non-financial concept but has developed significantly and has come to influence investors’ decision-making. ESG is a set of standards that measures a company’s behaviour and is used by investors to screen potential investments for sustainability. The three criteria are (Peterdy, 2022):  

Environmental: how an organisation manages its environmental impact, stewards natural resources and shows its awareness of climate change. For example, what is the organisation’s relationship to greenhouse gas emissions, waste, pollution and resource depletion? 

Social: how an organisation manages its relationship with its stakeholders. For example, how does it position itself in relation to fair wages, employee engagement, supply chain partners and impact on local communities? 

Governance: an organisation’s leadership and management. For example, how do the leadership’s incentives align with stakeholder expectations, shareholder rights and types of internal controls that promote leadership transparency? 

Who created the ESG framework? 

In 2004, the joint initiative of the United Nations (UN) Global Compact, the International Finance Corporation (IFC) and the Swiss Government introduced the concept of Environmental, Social and Governance (ESG) as a factor in investing. Its goal was to integrate ESG into the capital market. A year later, financial analyst Ivo Knoepfel’s report Who cares wins stated that embedding the ESG framework in capital markets helps businesses to succeed and leads to more sustainable practices and better outcomes for societies. In 2006, the New York Stock Exchange launched the Principles for Responsible Investment (PRI) followed in 2007 by the Sustainable Stock Exchange Initiative (SSEI). 

Environmental 

Initially, the customers’ and investors’ focuses were mainly on the environmental factor. Their attention followed the rise of environmental sustainability concerns in the general public as evidenced in consumer actions including protests, lawsuits and social media campaigns. In response, to improve public opinion and avoid losing customers or becoming a target of activism, businesses have been shifting towards more sustainable practices, such as releasing eco-product lines. What’s more, by taking pollution preventive actions, businesses can reduce production costs. 

Governance 

Governance is also important for businesses to consider by measuring the management of a company’s structure, code, values, transparency and systems (What is the “G” in ESG?, 2022). Being transparent on leadership, production processes and management can assure investors risk-free investment. Governance and social factors are interconnected because diversity and equity are essential in governance. Stakeholders have demanded more women and people of colour on corporate boards and in leadership positions. Well-managed structures and values can result in a well-supported working environment. 

Why is the “S” in ESG important? 

Social criteria can include diversity, employee and work environment safety, fair pay, human rights and practices aligned with the community’s standards (Roberts, 2022). Stakeholders in the past have pushed aside social factors. However, with the recent rise of human rights movements, stakeholders’ desire for higher diversity in the workforce and better human resource management has increased significantly (Mandell, 2022). In some cases, poor diversity and human resource management have even brought about profit loss, lawsuits and investment loss to businesses. For example, Activision Blizzard’s trades fell as much as 9% amid the fallout from a discrimination lawsuit filed against the company by the State of California. Since the lawsuit, Activision Blizzard has lost as much as $7.7 billion in market value (Fox, 2022). 

What are the potential benefits of good social performance? 

Out of all the social factors mentioned above, diversity has the greatest significance. A company with a diverse workforce that is managing it well accrues multiple benefits. Diversity brings a competitive advantage by improving corporate culture, employee morale, employee retention and easier recruitment of new employees. A workforce that reflects diversity in gender, race and age results in better productivity, profits and shareholder value. According to sociologist Cedric Herring’s study, organisations with the lowest gender diversity rates had $45.2 million in average revenues as compared to $644.3 million for those with the highest gender diversity rates, and those with the lowest racial diversity rates resulted in 22,700 average customers as compared to 35,000 for those with the highest racial diversity rates. 

What can businesses do to improve their social performance? 

Managing social factors can be difficult, and managing a diverse workforce can be challenging. If they don’t already have sufficient diversity in the first place, how do businesses change that? Policy and practice need to change. In a study on leading a diverse workforce, the research participants emphasised how important it is to have more active responses from the leadership to improve workplace inclusion and management. There first needs to be inclusion policies with a more top-down approach rather than just encouragement to the employees (McCuiston et al, 2004). After implementing inclusion policies, company leadership should encourage collaboration, shared culture and open communication between employees and larger participation (Saxena, 2014). 

The Diversity Atlas platform lets organisations measure and analyse the diversity of their workforce. Real-time access to insights enables internal analysis across teams. The platform can also create comparisons between organisations and other groups using third-party data such as community census and customer data. Organisations are then fully equipped to manage Diversity, Equity and Inclusion in their workforce. 

Bibliography 

  1. Peterdy, K., 2022. ESG (Environmental, Social and Governance). [online] Corporate Finance Institute. Available at: <https://corporatefinanceinstitute.com/resources/knowledge/other/esg-environmental-social-governance/>.  
  1. 2022. What is the “G” in ESG?. [online] Available at: <https://www.spglobal.com/en/research-insights/articles/what-is-the-g-in-esg#:~:text=The%20%E2%80%9CG%E2%80%9D%20in%20ESG%20refers,managers%2C%20shareholders%2C%20and%20stakeholders>. 
  1. Roberts, M., 2022. The ‘S’ in ESG and what it truly means for corporate sustainability – UNSW BusinessThink. [online] Businessthink.unsw.edu.au. Available at: <https://www.businessthink.unsw.edu.au/articles/social-esg-truly-means-corporate-sustainability>. 
  1. Mandell, M., 2022. Placing an Emphasis on the ‘S’ in ESG. New York State Bar Association, [online] 94(2), pp. 24 –27. Available at: <https://nysba.org/app/uploads/2022/03/Journal_MarchApril_2022_WEB.pdf#page=26>. 
  1. Fox, M., 2022. Activision Blizzard has lost nearly $8 billion in market value amid the growing fallout from a workplace discrimination lawsuit. [online] Markets Insider. Available at: <https://markets.businessinsider.com/news/stocks/activision-blizzard-stock-lost-8-billion-market-value-discrimination-lawsuit-2021-7>. 
  1. Herring, C., 2009. Does Diversity Pay?: Race, Gender, and the Business Case for Diversity. American Sociological Review, 74(2), pp.208 –224. 
  1. McCuiston, V., Ross Wooldridge, B. and Pierce, C., 2004. Leading the diverse workforce. Leadership &amp; Organization Development Journal, 25(1), pp.73 –92. 
  1. Saxena, A., 2014. Workforce Diversity: A Key to Improve Productivity. Procedia Economics and Finance, 11, pp.76 –85. 

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