In the context of ESG, the focus of investors and companies is usually only on the areas of environment and governance. The social aspect of sustainability is often perceived as less important. No surprise: diversity and inclusion, for example, are more difficult to measure than CO2 emissions. So what is behind the ‘S’ in ESG and why is it so important?
Hidden behind the ‘S’ in ESG are the social criteria that are important for a company’s performance. Both the treatment of employees and the value chain fall into the category of “social”. The main emphasis is on the relationship between the company and people within and external to the company.
What Lies Behind the “S” in ESG?
Social factors include the weaknesses and strengths of a company in its dealings with society and communities, workers, and suppliers. The following are some of the criteria used to assess a company’s social impact:
- Employee training hours and expenses:
The training of employees and the provision of financial resources for training contribute to the improvement of work. Therefore, investing in training or setting specific targets for expenditure are useful.
- Employee satisfaction:
Employee satisfaction can be measured through internal surveys. The resulting Employee Net Promoter Score reflects the results and potential for improvement is made visible.
- Employee health and safety:
Low accident rates and preventive measures such as safety training are indicators of high safety standards. Safety is often measured by the Lost Time Injury Rate, where the accident rate is compared to the working time. It provides an internationally comparable accident frequency rate.
- Social supply chains:
Not only the production in the company and the working conditions at the company’s headquarters are important. At every stage of production, attention must be paid to the protection of human rights. A precise and binding code of conduct for suppliers and regular audits of suppliers can contribute to a social supply chain.
Challenges in Reporting Social Issues
What constitutes a socially sustainable company is difficult to define. The first challenge for corporate reporting is to define and record the indicators. The range of social indicators is large – and: each topic is prioritised differently depending on the industry. There are also no comparable special standards for social indicators as there are in the environmental sector with the EU taxonomy or the environmental framework of TCFD.
Why Do Companies and Investors Care about Social Criteria?
If employees are better trained, fewer mistakes are made and accidents are prevented. In addition, a good corporate climate with satisfied and healthy employees ensures better results. The result: overall high social standards can reduce corporate risks, which increases the attractiveness of the company for investors.
In addition, upholding certain values can make a company more popular with customers. An example of this is the decision of the US supermarket chain Walmart to restrict the sale of firearms and ammunition. By doing so, the company took a stand on a social issue – even at the risk of scaring away a significant number of customers. But only through such courageous (but probably also hard-calculated) decisions can companies contribute to making positive social change possible – and perhaps, quite incidentally, gain a small competitive advantage with applicants, customers and investors …
You don’t want to neglect social issues in your company and are looking for competent advice? Please contact us – we will support you efficiently and pragmatically in taking the next steps!