The importance of embracing the ‘Social’ in ESG
With consumers becoming more conscious of company values and employee well-being a priority after the pandemic, investors want to invest in more socially aware businesses. Companies that neglect social risks are in danger of falling behind, writes Timur Tillyaev.
Towards the end of last year, Kellogg’s 11-week strike made headlines. Almost 1,400 workers went on strike to try and negotiate better labour contracts. This in turn saw many consumers call for a boycott of companies owned by the food manufacturing group.
The success of the Kellogg’s strike is symptomatic of how awareness of social issues in the corporate world has soared in recent years, especially after the pandemic. For many companies, the Social, or ‘S’, aspect of ESG will now be as much of a priority as Environment and Governance in 2022.
Social factors considered in sustainable investing assess how well a company can manage its relations with its workforce, the communities in which it operates and the political environment. Different industries face different types of social risks which span attracting and retaining talent, diversity and inclusion, employee well-being and safety, cyber security, community engagement, stakeholder management and geopolitical stability.
What is certain is that values are increasingly defining consumer behaviour. People have never been readier to boycott brands that don’t align with their moral standards. Bruce Simpson, a senior advisor to McKinsey on ESG, says 38 per cent of consumers today are boycotting products or services due to a mismatch in values.
And consumers are just likely to form positive preferences based on the ethics of a company. A 2021 study by Edelman, which surveyed 14,000 consumers in 14 countries, revealed that consumers are 4.5 times more likely to buy if a brand addresses human rights, 4x more likely if it speaks out on systemic racism and 3.5x more likely if it takes on economic inequality.
Consumer behaviour affects how investors perceive social risks. According to Schroder’s 2021 Global Investor Study, more than 57% of investors globally said that social issues had become more important to them since the pandemic. Investor consciousness affects the bottom line. British company Deliveroo, for example, saw a 26% drop in share price when it floated in March 2021 after investors expressed concerns over the treatment of its workers.
‘S’ has received less attention than ‘E’ and ‘G’ because it has been harder to define, measure, and report on. In 2017, the United Nations Principles for Responsible Investment stated that “the social element of ESG issues can be the most difficult for investors to assess. Unlike environmental and governance issues … social issues are less tangible, with less mature data to show how they can impact a company’s performance.”
But this is changing. According to S&P Global, one potential trend for 2022 is “increasing convergence on the data, metrics, and reporting requirements most relevant to social issues.”
The European Union’s Social Taxonomy, expected to launch in mid-2022, is one example of a potential global standard for reporting on social impact and risks which would enhance transparency for investors. As the push for more clarity and standardisation in measuring social issues gathers force, companies have another reason to assess the social risks and report on them to stakeholders.
But mitigating these social risks does not have to be just about ticking boxes for investors and consumers. Companies that take a proactive approach, creating effective mitigation strategies and building structures for continuous improvement, may well be more profitable in the long run.
Improving employee well-being, for example, has been shown to lead to higher retention rates and productivity. In short, companies benefit financially from having a happier and better-supported workforce.
Similarly, evidence suggests that ensuring diversity and inclusion at every level of a company creates an environment where innovation and creativity are fostered, leading to positive financial results.
With consciousness among investors and consumers growing, and regulation on standardisation of reporting imminent, mitigating social risks won’t just impact a company’s image, it will ensure they remain competitive and profitable in today’s business climate.
Timur Tillyaev is an entrepreneur, humanitarian and co-founder of the You Are Not Alone Foundation with Lola Tillyaeva (Lola Till)
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