Few would disagree with the fact that ESG concerns have rarely garnered more attention than right now, yet the ‘social’ aspect of risk remains the least referenced and measured aspect of the ESG discipline. Surprising given that levels of reputational scrutiny are at their highest in history, with organizations being evaluated by a wider and ever more important range of stakeholders. In this blog, we examine the social aspect of ESG in more detail and talk about why, at ESG Risk Guard, we are urging our clients to pay far more attention to the ’S’ word and to demystifying the ‘Social’ aspect of ESG to create future-proof and robust ESG frameworks for their organizations.
Growing importance of social responsibility
Discussions about the role companies should play in society and ‘corporate purpose’ are certainly not new. In fact, the British philanthropist and Chocolate manufacturer, Joseph Rowntree, was campaigning for a better living wage and shorter working days for workers as far back as the 1860’s. In practice though, many believed social issues should be state led; an attitude that pervaded for well over a century.
The stark contrast between the past and current perspectives of the importance of corporate purpose is perhaps best illustrated by referring to economist Milton Friedman, whose doctrine entitled “The social responsibility of business is to increase its profits” was published in the New York Times in 1970. In this piece Friedman argues vehemently against companies taking on wider societal obligations, “…businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends; that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact, they are – or would be if anyone took them seriously – preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of free society these past decades.”
To show just how far the pendulum has swung we have included below the recent commitment from the Business Roundtable, an association of chief executive officers of America’s leading companies.
Statement on the Purpose of a Corporation
Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation, and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all our stakeholders. We commit to:
- Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
- Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity, and respect.
- Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
- Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
- Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.
(Source: Business roundtable www.businessroundtable.org)
Clearly there has been a paradigm shift in the importance companies place on their relationships with employees, the societies in which they operate and the importance they attribute to each and every stakeholder. This shift has been taking place slowly over the last twenty years – and in tandem with shifting consumer and investor preferences, new mandatory disclosure and regulatory requirements, the 24-hour news cycle, globalization and of course, increased levels of employee activism.
Companies are right to be paying more attention to the facets that make up their corporate reputation. The World Economic Forum estimates that more than 25% of a company’s market value is directly attributable to its reputation, and recent history shows us the enormous impact that poor decision making can have on an organization’s financial performance. Equally, the Covid pandemic created an opportunity for some of the most enlightened companies to really shine – from the employers who reacted quickly to the virus by implementing immediate home working to the manufacturers who pivoted from making cars and clothing textiles to producing ventilators and masks. Today there is increasing pressure on organizations to demonstrate and display their social credentials, underscored over the past two years with the pandemic highlighting both known and unknown social inequalities.
Environmental, Social and Governance (ESG) factors are being used increasingly by the investor community to assess the sustainability and risk and opportunity profile of companies.
Social risk - Inequalities
Inequality – the state of not being equal, especially in status, rights, and opportunities (source – Oxford Dictionary).
A lack of equality can create significant instability and heightened risk for organizations and is an area investors are placing more focus on than ever before. Companies are certainly stepping up their efforts to address inequality throughout their own organizations, and in their supply chains and distribution networks. Similarly, many Governments around the world are developing programs to reduce societal inequality.
Despite this, there is still a very long way to go. The International Labour Organisation estimates there are up to 40 million people in forced labour and over 150 million in child labour around the world. Meanwhile newspapers everyday carry stories of corporate excess with CEOs allocating huge bonuses at a time when many of their workers are furloughed or laid-off.
While many social activists have railed against corporate excess for years, increasingly organizations are coming under fire from their own investors to cut down on the senior payroll. In 2017, Standard Chartered faced mounting criticism from investors for awarding their top executives more favorable pension arrangements than the rest of their employees. Following significant investor pressure Standard Chartered revisited this decision and later announced that their CEO and CFO had been switched to the same policy as the rest of their workforce in Britain.
Social Risk - Diversity & Inclusion
Diversity & Inclusion (D&I) has certainly risen up the boardroom agenda. Companies far and wide are cognizant of the business benefits of having, not only an employee base that reflects the society in which you live and work, but also the undoubted benefits that having a diverse workforce has on productivity, innovation and profitability. Nonetheless the pandemic has brought D&I issues under the spotlight. While the pandemic impacted everyone, the severity of the impact has varied across society with women and black and ethnic minorities suffering most from the economic fallout. According to the Institute of Fiscal Studies, women (who represent the overwhelming majority of part time workers) were 47% more likely to lose their jobs than men. But most concerning was a British Medical Journal report which noted that “ethnoracialised differences in health outcomes have become the new normal across the world” as a result of ethnic and racial disparities in COVID-19 healthcare, determined by social factors. In the US, African Americans experienced the second-highest current COVID-19 mortality and morbidity rates in the country – more than twice the rate of white and Asian Americans, who have the lowest current rates.
George Floyd and the aftermath
The tragic murder of George Floyd in Minneapolis in May 2020 created a catalyst for change like no other. Corporations far and wide rushed to condemn the treatment of George Floyd, and implemented far and wide-reaching programs to address issues of systemic racism in corporate America and overseas. For years companies have shied away from implementing quotas but there has been a sea change in response to the swell of public opinion. In December 2020, Nasdaq CEO Adena Friedman proposed a new rule requiring companies listed on any NASDAQ-owned stock exchange in the US to disclose “consistent, transparent” diversity statistics regarding their board of directors. The proposed rule would also require most NASDAQ companies to have, or explain why they do not have, at least two “diverse” directors – which may include one woman and one member of an “underrepresented” minority group – on their board.
Social Risk - Employee Relations
Having a well thought out and comprehensive employee relations program is inextricably linked to an organization’s ability to attract and retain employees. Investors are sharply focused on the employer brand as well they might be given the war on talent and the ever-growing change, both demographic and attitudinal, taking place amongst today’s global workforce. Employees are also focused on broader ESG issues, especially millennials and Gen Z which will make up the vast majority of the workforce in the next decade. Like all ESG components, having a good employee relations program also has a demonstrable and undisputed impact on the bottom line. Yet every day the news is full of stories of companies that fail their most important stakeholders: employees.
Case Study - Sports Direct
UK Sports retailer Sports Direct came under significant fire during the pandemic. Already no stranger to controversy, the retailer had been already subject to an investigation by British newspaper The Guardian in 2016, which alleged that the company sought to increase its profit margins by engaging workers on zero-hour contracts to avoid many of the legal obligations of employing staff. Then during the pandemic, Sports Direct reignited scrutiny of their workplace practices when they defied the lockdown order of the UK government by remaining open, requiring staff to continue working throughout the pandemic, using the argument that the need to exercise during lockdown made it an “essential” business, an astonishing decision that drew criticism far and wide.
Social Risk - Health & Safety
Historically Health and Safety policies and procedures were set in place to comply with various regulatory requirements and of course with the aim of preventing injuries and accidents. Over the last decade there has been an increased focus on ‘health and well-being’. A trend that has been accelerated of course through the Covid pandemic with employers and companies taking on more responsibility and oversight for the health and well-being of their employees and customers.
Insurers have also stepped into bridge the void of healthcare advice during the pandemic with many allocating significant resources to promoting healthy living.
Pulse, a health and wellbeing super-app has been developed for 17 countries in Asia and Africa by insurer Prudential. “Using AI-powered tools and personalized services, Pulse, which is free to download, empowers people to take control of their personal health, anytime and anywhere. Pulse is part of Prudential’s strategy to expand from its traditional role of providing financial protection against sickness to becoming a partner in people’s wellness, helping them to prevent and postpone future ill-health. Our teams have delivered swift progress, overcoming challenges created by Covid-19, by embracing new ways of working and creating new partnerships with leading tech providers, clinicians and governments across the region.” Mike Wells, CEO Prudential.
Social Risk - Working conditions
Working Conditions could in many ways be seen as one of the first shoots of the social aspect of ESG and has been an area of focus for centuries. While legislation dictated a lot of the early corporate adherence to practices protecting employees, the humanitarian aspect looms large particularly amongst the world’s richest economies.
However, these days investors and company stakeholders expect enterprise working conditions to meet standards throughout the supply chain and this still remains an achilles heel for many clothing manufacturers and retailers.
Fast fashion brand BooHoo was subject to an undercover investigation from The Times in the UK which revealed that a supplier was effectively paying workers below the statutory minimum wage in a Leicestershire factory.
While BooHoo responded by overhauling their supply chain and launched an “Agenda for Change” programme, significant reputational damage was caused, leading to an exit from investor, Standard Life Aberdeen (SLA). According to a Reuters report, Standard Life Aberdeen described the company’s response to allegations of worker abuse at supplier factories as “inadequate”.
As mentioned in the opening, this piece was developed to help build an understanding and appreciation of the social risks that organizations face and to highlight the growing attention being placed by stakeholders on this critical area of corporate reputation. As with all areas of ESG, the companies that allocate resources and the right level of attention and transparency to this area early on will be best placed for the future.