Getting strategic about the ‘S’ in ESG
By Paul Ioannou; Strategic Consultant on Social Value
ESG in context
Environmental, Social, and Governance (ESG) criteria have emerged as vital benchmarks for assessing corporate performance and investments. It includes factors that extend beyond traditional financial metrics, focusing on a company's impact on the environment, its relationships with stakeholders, and its governance practices. ESG has gained traction in recent years, but the general level of understanding is still very low.
Attention has been disproportionately directed towards the environmental and governance aspects - inevitably driven by the uptake of ESG by regulators and the investment community. This means that most ESG conversations focus on internal risks (and their mitigations) rather than opportunities.
This narrow lens through which ESG is viewed, overlooks the importance and value that ESG generally, and the ‘S’ in ESG specifically, can have for companies and their relationships with employees, customers, suppliers, and communities.
Even when the 'S' conversation is had, many businesses either misinterpret what it means or dismiss its importance. There's a common misconception that the 'S' stands for 'Sustainability' or relates to carbon measurement and accounting – important topics, but ones that fall under the Environment component.
The 'S' specifically refers to 'Social' impact. Others will say that they have been 'giving back' for many years and that they don't need a formal framework or the buzz-term of ESG to do good. Indeed, some argue that the formal frameworks surrounding ESG act as an inhibitor to their business 'doing good'.
In most ESG reporting frameworks, the Social component primarily includes issues such as corporate diversity and inclusion, and supply chain human rights and labour practices. These are important to address, but can be limiting, with little or no attention given to some of the broader and ubiquitous global issues we face, such as systemic inequality, poverty, hunger, access to education, and health and wellbeing.
In fact, it is within this social dimension that companies can truly change the world for the better – for themselves, for their employees, for their clients and their communities.
The value of investing in the 'S'
Being strategic about social impact can yield significant value for stakeholders:
How to get strategic about the 'S' in ESG
To maximise the benefits of the Social component of ESG, companies need to adopt a structured and logical approach.
First, it begins with identifying key social issues relevant to their specific business. Explore which social challenges resonate most with stakeholders and align with the company's core competencies, industry and location.
We often use the UN Sustainable Development Goals as a starting point, and then drill down to create specific goals for a company. This allows the business to understand the impact they are trying to make in the world, and to ensure that all their social impact investments are geared towards this goal.
Once key social issues are identified, companies should explore the ways they can use their unique resources to address these challenges. This could include: changes to their business model, in-kind donations (e.g. pro bono), the giving of time (e.g. volunteering), financial contributions, influencing suppliers, leveraging their hiring power, or maximising their network.
Collaborating with partners - such as nonprofits, community organisations, or other businesses – is crucial to better understand social need, access beneficiaries and amplify reach and impact.
The last step is to build the necessary enablers to support these initiatives. Cultivating a culture that prioritises social impact is key. Empowered employees drive impact, but having the right teams, roles and employee experience is equally important.
Clear policies, processes, governance and reporting allows social impact to be embedded into business operations and makes it easy for staff to get involved. Finally, using technology can help staff access impact opportunities (e.g. volunteering) and allows the firm to measure, track, and optimise social impact.
One thing to be conscious of is that these actions are often subject to global nuances – priority social issues vary by geography, countries have different cultural appetite for ‘doing good’ and some places have a lack of 3rd sector infrastructure to work in partnership with.
Conclusion
The social dimension of ESG presents a positive and valuable opportunity for companies seeking to create long-term stakeholder value while making a positive impact on society. By strategically addressing social issues through thoughtful engagement with stakeholders, businesses can enhance relationships, drive innovation, and contribute to a more sustainable future.
As we navigate an evolving business landscape increasingly shaped by social consciousness, companies that embrace the 'S' in ESG will be better equipped to face challenges while seizing opportunities for growth. By aligning social initiatives with core business strategies and leveraging unique organisational strengths, companies can unlock the full potential of ESG—driving meaningful change not only for their business but for society as a whole.
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