A study by First Insight Inc. found that approximately 73% of shoppers aged 22 or younger are willing to pay more for sustainable brands compared to other demographics and the majority of that 73% are willing to pay up to 10% more.
Besides consumers’ increasing awareness about sustainability, recent events have also focused investors’ attention on ESG, with sustainable investing becoming the norm, not the exception.
And, while environmental awareness is relatively high and many boards are already turning to solutions like Boardclic to help them constantly improve their governance efforts, recent events have prompted investors and customers alike to look more closely at the middle letter in ESG.
Events such as the pandemic and the assassination of George Floyd have raised questions like:
‘What is this company doing to protect the wellbeing of its employees?’
‘Is this company working actively on diversity and inclusion?’
So, today, it is essential for businesses to place emphasis on the social aspects of their company policies, recording, reporting and improving the various ESG social metrics.
What is the ‘S’ in ESG?
The ‘S’ refers to the social aspect of ESG or, in other words, to a company’s relationship with its workforce, the communities in which it operates and the political issues that may be raised by its employees.
Social ESG factors mean different things to different organisations. They can be objective goals like the number of people trained in safety measures at an oil exploration company or the number of sustainable housing units built for communities by a housing company. Or, they can be more subjective goals like ensuring employees get the desired opportunities to grow and have access to the necessary resources. And, they can be completely abstract goals like employee satisfaction and boosting morale.
Regardless of the goals you set, the key to success is selecting the right ESG criteria and measuring your performance against them.
Objective and subjective goals can be measured by using designated metrics or by getting feedback from employees and customers. Abstract goals can be measured via indirect factors like increased productivity, employee morale or customer enthusiasm for your brand.
How to choose the right metrics
Naturally, evaluating ESG performance requires you to set concrete metrics to track it. This is not only to understand the effectiveness of your ESG programs but also to report accurately to your investors and other stakeholders. Now, the question here is,
‘Which ESG metrics should we track?’
A good starting point is to follow the recommendations of the World Economic Forum which were developed in collaboration with the current standard-setters such as the Global Reporting Initiative (GRI) and the Task Force on Climate‐related Financial Disclosures (TCFD).
WEF suggests the following core metrics:
- Gender pay equality
- Diversity and inclusion
- Wage level
- Risk of incidents of child and forced labour
- Health and safety
- Training provided (#, $)
You can find more information on the above metrics and an extended set of ESG social metrics under the “People” pillar in WEF’s paper titled Measuring Stakeholder Capitalism.
In addition to these, there are several other areas in which you might want to collect ESG data:
- Focusing on labour laws in businesses with labour-intensive operations
- Controversial working conditions to be monitored
- Unionisation issues to be dealt with sensitively
- Safety of customer data and protection against breaches
It’s also worth exploring how your metrics tie in with the Sustainable Development Goals (SDGs) that the United Nations have come up with. This helps you ensure that you’re working towards goals that matter to society as a whole.
Finally, you can create your own custom metrics to suit your needs. For example, if you are trying to encourage women into senior management roles, you can measure the number of women employees opting into coaching and training and those being promoted to the positions.
Don’t forget to ask
Tracking the above common metrics or ‘stakeholder capitalism metrics’, as they are called, is great. But, sometimes, it’s also worth asking your customers, employees and shareholders for feedback.
For example, you can design an employee satisfaction survey to get more insights into the impact and success of your ESG social initiatives.
You can also conduct third-party surveys to effectively gauge employee, customer and investor perception towards the company and its social policies. One such solution is Great Place to Work who organise an annual survey to measure employee satisfaction. The companies that make the list can wear their logo as a badge of honour to help attract better job applicants and more Investors.
You should also examine the skill set of your board with regard to social factors. This is where the social and governance aspects of ESG overlap. Identifying missing skills and competencies is key to good governance and helps you craft the best team possible to guide the business through all challenges, including those social initiatives.
Carefully thought out social metrics will allow you to understand where you can improve and integrate good practices into your company value chain. Here are a few examples of actions that companies have taken based on their social metrics.
- Closing the wage gap: A hot topic of debate, companies whose workforce operates in a general skill-based environment can ensure that men and women are paid equally for equal work. For example, retailer GAP has introduced equal pay for equal work policy for the men and women working in its stores.
- Creating a culture of innovation: People thrive when you give them the freedom to experiment and do what they enjoy. And the business thrives as well. For example, 3M set the goal to develop a culture of innovation by encouraging its workforce to devote 15% of their time to projects outside the normal scope of their jobs. The company now files about 3000 patents every year.
- Giving back to the community: Nowadays, companies should focus on community engagement and embed it in their operations as many have already done. One of the examples is the “Moment of Silence” program launched by FedEx. It encouraged teens and parents to be more careful and put down their devices when crossing the street. This message has reached 241 cities, 907 schools and 580,000 students around the world.
Clarifying strategic objectives is a real governance challenge. Using Boardclic’s wealth of benchmark data during your board evaluations, you can gain an edge on your competition. Our tool allows you to pinpoint critical social challenges and turn them into action points.
Improving the quality of employee lives has always benefited businesses and, by extension, their shareholders. It has been proved back in 1914 when Henry Ford offered $5 a day for only 8 working hours in a factory at a time when work used to go on for 12-14 hours and pay was half the amount he offered. This proved to be a morale booster and people lined up outside the factory for the job. It also improved productivity and the factory began churning out up to 9,000 Ford Model T’s in a single day. Happier employees meant more profit for Ford and its shareholders.
History is as good a place as any to learn a lesson but there are also many present-day cases to look at. Walmart for example became more accepted by some investors when they declared that they would restrict the type of firearms they sell. This goes to show that focusing on your social impact can have a positive effect on your shareholder base, too.
Companies with happy employees will, on average, deliver far more value, boost profit and, in turn, increase dividends. Companies that give back to their communities will attract more of the growing number of investors who believe in sustainability. So, if you dedicate the time and effort to track your social metrics, you can expect to grow your business.
Disclosure & Regulation
The growing awareness amongst investors and the clamour for sustainable products amongst customers has caused regulators to take notice. The UK recently became the first country in the world to make climate-related disclosures mandatory by 2025. Soon after, the EU proposed its Corporate Sustainability Directive (CSRD) and the USA began thinking about frameworks to regulate the disclosure of ESG information.
But there is no use waiting for the laws to come into effect before taking the necessary steps. Developing goals and working to achieve them will lead to significant benefits for your business, employees and shareholders.
And it’s not difficult to begin working on proper disclosure. There are many organisations out there such as the Sustainability Accounting Standards Board (SASB) that provide complete ESG frameworks with guidelines and metrics to start tracking and measuring your performance. These can be integrated into your normal compliance program and can even be made part of Enterprise Resource Planning tools for easy and thorough management. So, once ESG disclosure is a legal requirement, you will already have a basis to work from.
The ‘S’ in ESG needs to be measured and monitored. But, because of the vast scope of human nature and behaviour, the metrics required range from objective to completely abstract and there is no one size fits all. This is where you also need to align the ‘G’, too. Building your strongest board, with the skills required to take on social challenges and with real accountability to each other provides the basis to set tangible, valuable objectives.
Staying focused on your employee engagement and overall level of happiness will translate into long-term value, despite the initial upfront expense. Measuring and disclosing your ESG social performance may not be mandatory yet but it will attract customers and investors. In the end, when you take care of the social impact of your company, you will improve your bottom line, too.