The S in ESG – How social factors are material to companies

The S in ESG – How social factors are material to companies

The ESG, or “Environmental”, “Social”, and “Governance” conversations we observe these days are often centred around environmental topics: Climate change, fueled by carbon emissions, is leading to increased climate risks. We learn how corporations make net zero pledges to do their share to avoid or mitigate climate change. The loss of biodiversity, the need to conserve scarce resources, reducing effluents and waste and transitioning into a circular economy are related topics of the “E” domain of ESG. But are we missing out on the S in ESG?

To be clear: The climate catastrophe we are accelerating into is an enormous challenge, and every contribution to preventing it is more than welcome. But even if climate change affects all of us, some will be much more vulnerable to its impact. That is one aspect where the S in ESG enters the stage, with S representing the social topics that are equally important and sometimes interlinked to environmental matters.

This blog post explores how social issues can be material to corporations. Furthermore, we explore how companies can utilise tools like double materiality to identify and better understand social issues that are material to them.

By Jayden Yoon and Sebastian Dürr

What is the S in ESG?

Businesses have an impact on people and the planet. While the E in ESG covers the latter, the effect on people, local communities they operate in and society as a whole falls into the domain of the S in ESG.

How companies manage this multitude of relationships with different stakeholders or stakeholder groups is the central question behind the S in ESG.

Talking of stakeholders: Social aspects are not limited to “internal stakeholders” like the own workforce, but rather extend to “external stakeholders” too.

All that translates into a wide range of topics to consider ranging from issues like equal opportunity, health & safety, impact on local communities, grievance mechanisms, human rights, the social impact of products, services, or company operations, gender-based violence (GBV) and harassment. Recent developments added topics like DE&I – short for Diversity, Equity & Inclusion – or training and education opportunities for the own workforce.

Zooming out a bit and focusing on the supply chain, minimising social impacts by monitoring working conditions and health, safety and economic well-being of employees, ensuring equal treatment and avoiding gender, ethnic other discrimination is essential. But there is more: The risk of child or compulsory labour and the rights of indigenous people.

On the other end of the spectrum, customers and clients represent other essential stakeholder groups. Zooming in and questions like customer health and safety, as well as customer privacy, are in focus.

All this might sound familiar to those who already report under the GRI reporting standard. However, other reporting frameworks, like the European Sustainability Reporting Standard (ESRS), cover social topics too.

How is the S in ESG relevant to a company?

There are several aspects relevant to answer this question. First and foremost, the S in ESG is about corporate responsibility. Understanding stakeholder needs and working together to solve future challenges. Then there is reputation. Social issues can significantly impact reputational risk; reputational damage comes with a long half-life.

Finally, there is compliance. From an investor’s perspective, social problems are considered risks that can harm the value of investments. Another example is insurance companies that may refuse to underwrite projects undertaken by insureds on indigenous lands that do not respect and observe Free, Prior and Informed Consent (FPIC) under the UN Declaration on the Right of Peoples (UNDRIP). Social aspects can also harm the ability of a company to access young talent looking for a purpose-driven employer.

How to identify social issues that are material to your company?

We established above that the social aspects to be considered are manifold. So obviously, the next task at hand is to identify those that are material to your company.

While there are individual processes, e.g. supply chain due diligence, taking into consideration the broad spectrum of S in ESG, another option may be conducting a double materiality assessment to identify what is material to your company. Taking this route comes with the advantage that a materiality assessment will cover the E and G, too, hence, providing a holistic view and deeper insights into interlinked topics that stem from all three domains of ESG.

We have covered the concept of double materiality in several blog posts. We have linked the blog posts for your reference here, here and here. From our perspective, a double materiality assessment has the advantage of combining the financial and the impact perspective, which is essential to understand what is material to your company. In any case, a materiality assessment will help to evaluate ESG-related issues that have an impact on the ability of long-term value creation. In addition, the results can help to build awareness for risk mitigation and leveraging opportunities.

Conclusion

Understanding the S in ESG and how it is interlinked with the other domains of ESG is the first step towards risk management. Risks from the social domain of ESG are often associated with reputational and compliance risk that has a long half-life. Therefore, conducting a double materiality assessment can be a good starting point to gain deeper insights, mitigate risks and leverage opportunities.