David McMillan & Max Leopold - May 04 2021
Is S the new E? Why Organisations Need to Focus on the ‘Social’ of ESG

Credit: Clay Leconey

In recent decades, organisations across the world have become more cognisant of incorporating sustainability into their operations. The evidence is clear; companies that commit to sustainability see better financial performance, improvements in their risk profile, and a better record of innovation.

The most common way of categorising sustainability efforts is captured by ESG – environment, socio-economic, and governance—areas. And although we have seen greater ambition on environmental issues (e.g., carbon neutrality by 2030) and a heightened focus on governance concerns (e.g., disclosing information on executive compensation), there has been generally less ambition on social matters (e.g., ending the racial disparity in maternal and infant health).

There are many reasons why organisations may be less ambitious in their social commitments. One study of investor-focused measurement frameworks for social-based indicators found that 84 per cent were "vague" or "limiting". Metrics such as carbon emissions and waste diversion are much easier to measure, track, and predict than nuanced factors such as a population’s housing and food security. One tonne of carbon in one country is the same as it is in another. But the ways to effectively improve healthcare access requires a vastly different approach from one country to the next. Social sustainability targets are therefore often imprecise, causing organisations to struggle to effectively measure their contribution to social goals.

Further, it’s often far easier to disentangle an organisation’s negative impact on the environment than to understand the addressable root causes of social issues and solving for social problems is more likely to require both public and private partnerships and contributions to achieve meaningful, sustainable results.

The Importance of the ‘S’

This past year we have seen the rise of several prominent movements, such as Black Lives Matter, the Black Executive call to fight restrictive voting laws, and the stop Asian hate movements in the United States. As attention on social issues increases, so will the expectations for organisations to address them.

Our economy is becoming increasingly interconnected and the number of stakeholders an organisation needs to consider is growing. Both in their own supply chain and beyond it, organisations must examine their broader impact and how their actions affect those stakeholders. As markets move forward and recover from the pandemic, the need for ambitious social goals will be paramount for organisations to not only maintain a competitive advantage but to truly build back better.

When organisations don’t address social issues in their business ecosystem, they run the risk of damaging the economic performance of the marketplaces in which they operate. The impact of income inequality on overall economic stagnation from a macroeconomic perspective has long been documented and researched.

Building environmental considerations into strategic visions has already shown how organisations can mitigate risk. The same is true for social problems. A recent study looked at the effects that the three ESG pillars had on idiosyncratic risk, systemic risk, and total risk for an organisation. While they found that each of the three pillars helped reduce all three types of risk, the social pillar was by far the strongest for mitigating systemic risk for an organisation.

Companies that are more ambitious in dealing with social issues today may bear less risk tomorrow. For example, after De Beers’ attention was brought to conflict diamonds, the company created a certification system to track and charge premiums on diamonds mined in conflict zones. As the issue became more prevalent across the industry, the company was well-positioned to stop the sale of conflict diamonds altogether. They not only weathered the systemic risk brought about by these social issues but became an industry leader for others to follow.

Fewer Silos, More Action

It is important to mention how inextricably linked the three ESG categories are; one issue can be both an environmental and a social problem. For instance, pollution can be categorised through its contribution to carbon and environmental degradation, but it can also be a hazard in communities and lead to potential social problems like disease. This means the siloed sustainability efforts addressing E, S, and G are often less effective than strategies that work to incorporate a systems-level approach. Moving forward, organisations willing to make more ambitious social goals must consider the need to integrate them into the organisation’s core strategy.

Working towards a more integrated ESG plan can be challenging, but for organisations who want to make contributions towards environmental and social issues, it is necessary. An organisation should first consider what social issues are most material to their overall value creation and which they are best positioned to address, only then can they create effective and lasting social impact and a more sustainable organisation overall.

Learn more about how Palladium can help you create a strategy that meaningfully integrates ESG considerations, and contact info@thepalladiumgroup.com for more information.