Beyond Environmental Impact: The Case of Social in ESG

As organisations strive to demonstrate their commitment to sustainability and meet stakeholder demands, the focus has predominantly been on the environmental impact, or the E in ESG. This encompasses reducing carbon emissions, waste, and the use of scarce resources, while promoting circularity through recycled and regenerated materials. However, it’s crucial not to overlook the social aspect of ESG because a company’s impact on people can create risks and opportunities that affect its reputation and long-term success and sustainability. In the most recent and expected EU regulations, the social aspects of running businesses are also much more apparent and required to pay attention to¹.

Social sustainability refers to an organization’s ability to meet the needs of its stakeholders, including employees, customers, suppliers, and local communities, while also ensuring that social justice, equity, and fundamental rights are upheld. Social issues such as human rights, community impact, and diversity, equity and inclusion can have a significant impact on a company’s commercial success, as they can affect customer trust and loyalty, investor confidence, and employee satisfaction. Therefore, it is essential for organizations to prioritize social sustainability alongside environmental sustainability in their ESG efforts to contribute to a more sustainable future.

In this article, we focus predominantly on the external impacts an organisation has on society, and in a subsequent article, Sustainable Work, we will focus more on the steps leaders can take to build social equity within their organisations, including Diversity, Equity & Inclusion and Employee Wellbeing. Of course, this is not as clear a distinction as some would like it to be, as employees take a keen interest in the external impact their employer organisation has on society and communities.

Prioritizing social sustainability is essential for businesses that aim to make a positive impact on the world. By recognizing their responsibility to meet the needs of all stakeholders, companies can take meaningful steps towards creating a more equitable and sustainable future. There are many ways in which businesses can contribute to social sustainability, and through our observations, we have identified several key areas where companies are taking positive steps. By highlighting these efforts, we aim to inspire more companies to prioritize social sustainability and make a real difference in the lives of all:

1. Helping to ease financial hardship, promote financial inclusion, and address the issues arising from the cost-of-living crisis, by making financial products accessible and affordable to all who need them. Organisations are also feeling the strain, but are responding to current pressures by talking to those affected – both within and beyond their organisations.
2. Increasing social mobility towards a more equal society, by looking for opportunities to access the broadest pool of talent. This also helps to address skills shortages, and improve representation at all levels.
3. Identifying and responding to human rights and modern-slavery-related risks across the supply chain. The need here goes beyond worker protection in terms of job security and safety, and extends to consider the wider impact that sourcing and manufacturing operations may have on whole communities. Leading companies are starting to collaborate with their suppliers, to move beyond human rights audits and towards improving the way supply chain management affects peoples’ lives.
4. Committing to ‘a just transition’ to sustainability. The Deloitte Economics Institute calculated that a quarter of global workforce positions – more than 800 million jobs – are highly vulnerable to climate extremes and economic transition impacts². Companies can adopt policies that promote a fair, inclusive and equitable transition towards a global economy in balance with its environment, recognising that people are at the heart of the transition, and respecting workers’ rights. The Deloitte framework on ‘Just Transition’ considers this from four perspectives: Citizens & Communities; Employment; Environment; and Local Economic Diversification & Growth.
5. Improving social and community engagement and trust, by making a net-positive contribution to local communities and economies, and generating opportunity and equity for everyone – both within the company and in the societies they operate in. This approach means that the outcome of an organisation’s involvement with a community, society, or economy should be measurably positive in terms of financial and non-financial benefits. This is a paradigm shift from the previous stance of simply ‘do no harm’.
6. Committing to identifying and removing barriers to diversity, equity and inclusion as well as prioritizing health and well-being in the workplace, by implementing policies and initiatives that promote physical, mental, and emotional well-being of employees. This includes promoting work-life balance and addressing issues related to workplace stress and burnout. In our upcoming article, Sustainable Work, we will explore this point in more detail and provide examples of companies that have successfully prioritized employee health and well-being to promote social sustainability.

From 2024 onwards, the Corporate Sustainability Reporting Directive (CSRD) will require companies to report on a wider range of ESG impacts in the short, medium, and long term, including a comprehensive analysis of the environmental and social effects of their activities throughout their value chain. Notably, the emphasis on social factors, such as working conditions and community impacts, is significant in these new regulations. However, compliance alone should not the only objective of the CSRD journey. Companies can use this as a means to become responsible businesses, benefit society, and drive real transformation.

Measuring the social impact of business activities presents a significant challenge. Unlike environmental impact, many social impacts cannot be easily measured in financial terms. Additionally, it can be challenging to compare social impact data both for an individual company year-on-year, and between companies in the same sector. Having said that, efforts are underway to standardize reporting frameworks and metrics, which would enable more meaningful comparisons. The EFRAG Sustainability Reporting Board (SRB) is leading the work to develop a consistent approach to sustainability reporting in the EU based on the CSRD, which largely covers reporting standards in these areas.

The task ahead for leaders is to turn outputs of EFRAG SRB into a framework suitable for their own disclosure practices, and to ensure that their ESG reporting is consistent, clear and comparable across the entirety of its messaging and promises made. The additional disclosure requirement for social performance within the new standards will not only enable better comparison of behaviour between companies – particularly within sectors – but can also be an impetus for companies to conduct improved due diligence and improve their social impacts along the entirety of their value chain – both upstream and downstream.

The above mentioned sections are just some of the steps we see in action. At the heart of what businesses can do to improve their social impact is an understanding of how to measure that impact. How to take stock of the S in ESG requires leaders to come to terms with the impact their organisation has on society, and how it can act as a positive force for the future. When it comes to measuring the impacts, both positive and negative, of business activity on social sustainability, the challenge is to turn the principles of respecting human dignity and rights, reducing inequalities, and improving community relations into actions – and outcomes that can be assessed and monitored, in order to make continual progress and improvement³.

The work requires a close collaboration between business and government at all levels, to enable companies to use their assets and influence in levelling up societies, narrowing social and economic divides, overcoming bias, and creating opportunities for as diverse a population as possible. It makes sense to have measures that work both inside the company and between companies, to show how the company’s values are turning into action, and how those actions compare to peer businesses. By implication, few of those measures will be directly financial, and most involve evaluating intangibles – but with some science and art; a blend of qualitative and quantitative indicators can tell the story of how seriously the company takes its impact on society. Examples include:

• Stakeholder Engagement: Taking stock of how engaged the company is with different categories of stakeholder is essential to directing communication effort to where it matters most, and contributes to overall risk management. Engagement should lead to a far deeper understanding about the impact a company has on communities and societies, and provide data to identify areas for improvement.
• Value Chain Social Sustainability: Evaluating a company’s commitment to responsible sourcing and ethical supply chain management is a complex demand. It involves looking well beyond the boundaries of the business, and assessing supplier diversity, the fairness of employment policies and practices, and responsible materials sourcing.
• Compliance and Ethics: Measuring the extent to which a company complies with relevant ethical and legal standards, adheres to extant regulations, and does so in a transparent and accountable way, is increasingly the subject of scrutiny.
• Social Impact Metrics: Businesses can develop and track social impact metrics that align with the agreed values and strategic objectives. Typically, a business can set output measures in the areas of community development, social equity, and societal impact for instance by tracking the number of people whose lives have improved by using the company’s products– or simply look at input measures in the form of investment spend in these areas year on year.

As mentioned earlier, measuring the social impact of business activities is not easy. Measuring intangible outcomes can be difficult and subjective, and it may be challenging to collect data on certain social impacts. Additionally, there may be different views on what constitutes social impact and how it should be measured, which can create disagreements and challenges in implementing social impact measurement practices.

There is a growing portfolio of companies that are demonstrating best practice when it comes to making positive social impacts. Amongst the most pertinent examples are:

• Patagonia, which has implemented fair labour practices within its supply chain, and works closely with suppliers to improve working conditions along that chain. Beyond the immediate contribution to social improvement, it also donates 1% of its sales to environmental causes, and has launched circular economic initiatives such as the Worn Wear programme, which encourages customers to repair and reuse their clothing⁴.
• Nestlé, which has implemented initiatives to improve the lives of workers and communities within its supply chain. Of the many initiatives it has launched, the Nescafe Plan aims to improve the livelihoods of coffee farmers through training and resources, to improve crop yields and quality. Nestlé also works with suppliers to improve working conditions, and has implemented a human rights due diligence process⁵.
• Microsoft, which has implemented a programme called AI for Humanitarian Action, using artificial intelligence to address humanitarian issues such as disaster response, refugee resettlement, and human rights. Microsoft also works with suppliers to ensure that they meet labour and human rights standards, and has implemented a human rights impact assessment process⁶.
• Johnson & Johnson, which has implemented many initiatives to improve the lives of workers and communities within its supply chain. Of the many examples, the launch of its Health Worker Training Program, which provides training and resources to health workers in developing countries, stands out⁷.

As the ESG landscape continues to evolve, the social element – the S within ESG – attracts more attention, and companies are increasingly recognising the importance of attending to the social impact along their value chains. Some organisations are well into this journey, but whatever your progress, now is the time to be proactive and establish strong due diligence mechanisms to manage risks and impacts. By doing so, you can not only protect your company’s reputation and avoid legal and financial repercussions, but, more importantly, also drive positive social outcomes for your employees and communities.

The starting point for this is for you to engage in ongoing dialogue with your stakeholders, and commit to taking a comprehensive approach to addressing social issues, from worker safety and fair labour practices, to community development and human rights. Through these efforts, companies can both ensure compliance with regulatory standards and also build trust and foster long-term sustainability.