Environmental, social and governance criteria stem from critical issues within our current political and social climate. Still, socially minded ESG investing is primarily about risk management. Which companies match the highest possible return with the lowest potential risk? Companies that implement sustainable and ethical practices with significant economic value added perform the best in ESG ratings. Still, doing so is not as easy as it may sound, as many factors influence each aspect of ESG criteria. This article explains the social factors in ESG criteria.
What Is the “Social” in ESG?
Social criteria in ESG measure a company’s performance when dealing with trends, labor issues and politics. Environmental standards focus on planetary impact, and governance criteria involve internal and political corporate functions. In contrast, social measures focus on the relationships between a company and the people outside it — customers, employees, suppliers and the surrounding community. To be specific, ESG social criteria evaluate how companies:
- Manage relationships with their employees.
- Interact with the societies in which they operate.
- Navigate the political environment.
Many variables influence how well a company does in those evaluations. For example:
- Labor strikes or consumer protests can create a scarcity of skilled employees or damage a company’s reputation.
- Social media makes social dynamics increasingly complex, with public opinion constantly shifting, often in new or different directions. Companies that skillfully navigate these fluctuations and complex dynamics show investors they have potential.
- Geopolitical conflicts in supply chains can cause interruptions in production and distribution chains, signaling increased volatility for investors.
How Do You Choose the Right ESG Performance Metrics?
Successful engagement with ESG metrics requires expert analysis and strategizing. A good ESG strategy involves closely concentrating on pertinent metrics rather than spreading that focus thin over each possible metric. Otherwise, it’s easy to fall into a box-checking mindset — going through the motions instead of actively engaging with ESG strategy. To choose the right ESG performance metrics, companies should first identify the most pertinent ESG KPIs for their direct and indirect operations.
After considering those pertinent KPIs and deciding which performance metrics to focus on, companies should plan how to respond to them in ways that give them a competitive edge. That is, their ESG strategy should be hard to copy. If other businesses can easily mimic a company’s ESG strategy, that approach may reduce risks, but will provide minimal return potential for investors.
Guide to Possible ESG Social KPIs
Here are some social KPIs that companies commonly encounter when considering how to strategize in ways that provide a competitive edge.
Treatment of Employees
How a company manages and respects its employees makes the difference between a growth-minded, supportive environment and a toxic culture. Thus, employee treatment can either damage or solidify a company’s reputation. As it impacts retention and productivity, employee management also affects a company’s profit. These matters directly influence an investor’s ESG risk-benefit analysis.
Here are some specific KPIs that involve the treatment of employees.
- Staff turnover: How often is the company hiring for replacement positions? Does it primarily offer seasonal or temporary assignments?
- Training: How supportive and extensive are the company’s employee training and onboarding? Do new employees feel sufficiently educated and ready to perform their responsibilities?
- Absenteeism: Do people enjoy working there, or do they find reasons to stay away or work as little as possible?
- Wage gaps: Are wages comparable and competitive with industry standards? Does the company spread wages out evenly and fairly among employees, regardless of race, gender or sexual orientation?
- Human rights: Does the company have any history of human rights violations? These may include allegations of racism, sexism, sexual harassment claims and others. Companies need to have strong policies in place to safeguard against such violations. Investors will want to see that a company has a clean track record and takes proactive steps to maintain it.
Championing diversity may feel performative at times, but it has measurable benefits for your company’s profits, success and image. ESG investors will also take note of businesses with diverse personnel as a reflection of an exemplary management structure that recognizes each employee’s value. Here are some critical areas of diversity ESG and the advantages they can provide.
- Supplier diversity: Part of operating an ethical supply chain involves supporting businesses led by people of color, members of the LGBTQ+ community or people from other marginalized groups.
- Board diversity: The board is one of the most critical areas for diversity. Since a board of directors ratifies or repeals many critical company decisions, it’s essential to have a diverse group of people with different backgrounds sharing their expertise and intuition on specific business moves. To investors, a diverse board reflects an adaptable company open to new and creative ideas.
- Employee engagement, equity, inclusion and diversity: A diverse workplace is valuable for stimulating creativity, productivity and employee well-being. These factors increase workplace efficiency, maximizing productivity and profit.
Health and Safety
The social aspect of ESG also considers the health and safety of every person involved with a company’s operations, whether they provide products or services. Thus, a company’s environment, health and safety management is a critical factor in evaluating the social facet of ESG. These matters include the quality of their personal protective equipment and workers’ compensation policies, among other health and safety concerns.
- Product quality and safety: Ensuring products and services are safe for customers and employees safeguards company morale and protects against potential lawsuits. In this way, product quality and safety measure the relative volatility of a company’s operations for investors. Workplace conditions should also reflect a high regard for employee safety and well-being.
- Supplier management: Besides supplier diversity, companies must take steps to protect workers involved in their supply chain from hazards and injury risks.
Besides treatment of employees, diversity and workplace health and safety, other considerations include corporate social responsibility, political affiliations and the presence or absence of human rights violations within supply chains.
Get Support With Your ESG Strategy From TRC
As the many factors that go into the social aspect of ESG criteria show, developing an ESG strategy takes significant care and consideration. Because CFOs and other executive leaders involved in developing ESG strategies already have heavy responsibility loads, it pays to seek expert assistance. At TRC, our global consulting firm has provided expert professional services to companies from various industries for the past half-century. If you’d like support for developing a robust ESG strategy, contact one of our ESG experts today!