Nowadays, companies worldwide are pressed by their stakeholders to be upfront and ambitious about their engagement on the social front of ESG performance. And so, barely a day goes by without news linking economic performance to ESG criteria hitting the headlines. It can be for an acquisition in the U.S., a stock market assessment for global companies, a strategic development plan in Africa or the sustainability performance of a Japanese firm… all underline the growing impact of ESG considerations.
Now, while the Environmental (E) and Governance (G) performances feature regularly, the social (S) engagement remains largely neglected or ignored by business leaders. A capital mistake. Social movements like New York’s Occupy Wall St., France’s Yellow Vest campaigns and those provoked by the COVID-19 pandemic, are putting the ‘S’ side of business in stark perspective.
It’s not that companies are willfully ignoring them: one study in the U.S. finds that the number of social proposals by shareholders linked to the Securities and Exchange Commission rose by 37% from 2020. That’s over twice as many as those to answer the environmental crisis – while, in the same study, governance proposals showed a zero increase in 2021.
Faulty Frameworks For ESG?
At the heart of business policy towards ESG are the frameworks which measure these three dimensions in a way that matters for businesses and the people/communities they impact. Frameworks are developed by organizations, often university-based research teams, that propose systematic approaches to measure ESG performance and impact at the company level. They often provide guidance on the construction of relevant metrics and selection of adequate comparison groups. They also help create the monetization pathways–– that is, methodologies that can be used to convert measurement of social indicators into monetary value, such as jobs created in a community, or reduction in gender pay gap.
But, just how much do we know about these corporate ESG frameworks and how do they cover the social dimension of ESG? And what role do business leaders have in improving their firms’ engagement in social guarantees to their employees? For the past year, we are three HEC academics and a Standard & Poor’s Global Ratings’ specialist in ESG, working together to analyze 17 ESG frameworks, in order to better understand what gets measured. We consider the company’s entire value chain by not only looking inside the firm – for instance, the working conditions, the human rights of its own employees and equal opportunities inside the firm – but also studying the rights and justice for workers in the supply chain, the impact that companies have in the communities where they operate, how they influence their environment, and so on. And, of course, we analyze the roles of stakeholders like consumers and the company’s wider impact on society when complying to social issues.
And Business Leadership In All This?
To better integrate this “S” factor, company bosses and managers have a pivotal role. They need to experiment and innovate, proactively test and refine gradual, new approaches or ways in which to promote diversity and equal opportunities. These innovations can’t be resolved in a silo, they require open collaboration and a leadership centered on humility, transparency, determination and ambition to succeed and transform society for the better. Given the complexity of the social factors, leaders with a vision require a form of openness and good information coordination across multiple units within their company. T
And they need to regain the confidence of their employees. Why do we say “regain”? Because companies worldwide are experiencing issues around the disengagement of their workers. Staff report feeling less committed to their jobs, less fulfilled, and issues of mental health are prevalent. More generally, the Edelman Trust Barometer clearly shows that a growing sense of inequity is undermining public confidence in institutions. Inclusive business initiatives can help businesses regain trust. That trust will be essential. If we’re asking companies to innovate and think about global problems in an ambitious way, we need customers and stakeholders at large to give them the space to be able to do that.
Involvement in social projects and the inclusion agenda can be a powerful antidote. Leaders must develop competencies to accelerate this process. And they could be assisted in Europe by new laws and standards. The EU Corporate Social Responsibility Directive (CSRD) which is to be set in motion by June 2023. By 2024 all large and listed companies (except micro-undertakings) will be required by law to report on inclusion and more generally social standards, so leaders will have the impetus to rethink their approach. The CSRD introduces more detailed reporting requirements on companies’ impact on environment, human rights and social standards. The challenge is what kind of competencies you can build in-house, and how you are going to step up.
Do Not Underestimate The Challenges
We are part of the taskforce that’s preparing the standards on which business will be required to report. There are already indicators and targets out there; in France, for example, all large companies must ensure 6% of their employee base is disabled and many countries require assurances that child labor is not involved in the supply chain. And then there are existing, implicit norms. We will be modernizing these and finding ways that they can be related to intangibles like wellbeing rather than strictly measurable criteria.
We’re not saying this is a simple task, by any means. Traditionally, we’ve been quite focused on employees only and the social dimension has been neglected, often outright ignored. Yes, it’s a more complicated, more political, more conflictual topic. It’s hard to put metrics on things like subjective well-being of employees. How do you actually go about measuring this? For many companies it is less standardized and so it is covered in a too superficial way, if at all. We are not underestimating the challenges ahead as many companies want to get their CO² emissions down and will do everything necessary to do so, sometimes to the detriment of basic human rights. But ignoring the social imperatives can backfire.
At the same time, a growing number of firms are convinced that inequality matters. They admit the need to respect human rights. So, now is a time to understand and take stock of a firm’s responsibility and the role it plays in a more holistic way, comprehensive way. We believe that scholars must be involved in this reflection and we need leaders to engage in transparency policies to assist us in mobilizing their resources and articulating the levers for change. With this approach, we can help formulate new strategies and work hand-in-hand with private enterprises, the government and NGOs to ensure that we create together a future that is inclusive for all.
Professor Marieke Huysentruyt is Academic Director of the Center for Inclusive and Social Business at the S&O Institute, HEC Paris.
Daniel Brown is Chief Editor at HEC Paris.