“ESG” and the increasing prominence and expansion of “S”

Welcome to this 2-part blog in which Punter Southall Law Partner, Claire Thorogood, takes a closer look at the “S” in ESG. In this first piece, she explores how the ‘Social’ has become a mainstream and pervasive issue.  

It is noticeable how the ‘Social’ in ESG has become increasingly prominent and critical for investors, consumers and employees alike. One might have expected the “E” – with the existential threat of the climate emergency made ever clearer - to have eclipsed the “S” in significance but the opposite seems to be the case. An organisation’s core values and purpose and, how these manifest, are very much in the foreground.    

The global pandemic has undoubtedly played a part in this - as the lines between the personal and professional, between home and work-life blurred. Perhaps the prolonged and enforced isolation and separation made us value our connectedness more. Yet, the critical significance and meaning of ‘S’ had already begun to be recognised and expanded.    

"S" for Stakeholder

In 2019, the World Economic Forum set out its manifesto for “stakeholder capitalism”. Its founder and Executive Chairman, Klaus Schwab, called on business to “actively contribute to a more cohesive and sustainable world”. This call was not confined to the environmental sphere; business was tasked with addressing income inequality and societal division:

“A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility”[1].

Interestingly, the movement towards a company being regarded as a social as well as a legal entity seems to have happened rapidly when compared with the time it took to judge a company’s environmental impact. Catastrophic environmental disasters such as the 1989 Exxon Valdex oil spill in Alaska and BP’s Deepwater Horizon Oil Spill in 2010 did not, despite their impact on corporate reputations, lead to immediate demands from investors for environmental accountability.  

‘S’ issues as a guide to a company’s financial sustainability have, since then, rapidly gained traction. In 2020, the murder of George Floyd and the global Black Lives Matter movement and protests brought companies’ EDI programmes and diversity metrics into sharper focus. And other examples of companies failing in their ‘social’ responsibilities abound – in March, the Sackler family (owners of Purdue Pharma) agreed to pay $6bn settlement over the company’s contribution to the States’ opium addiction crisis[2].    

One report concluded that in a post-Covid world, “the risks associated with the ‘S’ have been magnified”[3].  

Increasing Prominence of Social Responsibility

These factors have led to an ideology emerging between consumers, employees and investors: a company’s purpose (and the methods it uses to enact it) must align with values that go beyond profit maximisation.  

Increasingly, consumers have an expectation of ethical and social responsibility from retailers.   Fashion retailers, for example, are increasingly judged not just on their environmental impact (air miles and sustainable materials) but on ethical considerations, for example, workers’ pay and conditions in the supply chain. When cheap fashion retailer Boohoo was exposed for poor and unsafe working practices in 2020, subsequent changes included providing global supply chain transparency as well as director bonuses linked to supply chain improvements.  

Likewise, investors demand “S” metrics as well as standard financial metrics as a way of meeting their priority of long-term success - and for good reason:

““S” practices are the “barometer for corporate culture [and] where companies have a strong and shared culture across the organisation, ‘S’ practices tend to be strong. Where a culture is poor, or considered ‘toxic’, ‘S’ tends to follow the same pattern”[4].  

And for investors, this is a clear business risk.  

Measuring & Evaluating the Social

However, despite the apparent consensus that the practices and impact of companies on their employees, consumers, suppliers and further, on civil society, are critical considerations, there is a lack of bench-marking, consistency and independent auditing to measure and evaluate them.  

Academic, corporate and governmental research and consultation are engaged with this issue. The Enacting Purpose Initiative[5] (“EPI”) - a multi-institution partnership between the University of Oxford, the University of California Berkeley, BCG BrightHouse, EOS at Federated Hermes and the British Academy – reported in July 2021, on the “growing body of research [that] points to a correlation between purpose-driven companies and strong financial performance”.    

But the premise for its report (and recommendations) was that in place of any kind of objective framework for “S” data, there was instead, “an overabundance of initiatives….[where] simplicity has been sacrificed for complexity, making dissemination and discussion beyond expert groups almost impossible”.      

So, with hearts and minds seemingly won over on the significance of “S” – whether that be Social, Stakeholder, Sustainable, Stewardship and/or Supply-Chain – the real question is: how close are we to having agreed reporting standards?

In our next blog, we look at the direction of travel and the likely (and necessary) intervention of Government and regulators in this area.  

[1] Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution | World Economic Forum (weforum.org)

[2] Sackler family to pay $6bn for role in US opioid crisis - BBC News

[3] Harvard Law School Forum on Corporate Governance, Time to Rethink the S in ESG, June 2020 (“Harvard Report”)

[4] Harvard Report