Social factors
At its core, the social aspect of ESG is about human rights and equity i.e an organization’s relationship with people, as well as its policies and actions that impact individuals, groups, and society. It examines all people interactions against principles of ethics, justice, and care for well being in a company. This ranges from how business treat their employees to their impact on customers, partners, and other stakeholders. It considers topics like inequality, working conditions, human rights, product safety, community relations, supply chain transparency, etc.
The goal of the social aspect is to measure how well the organisation is meeting its human obligations in operations, global supply chains, and local communities. Some of these factors include:
1) Human capital management
This represents the people who contribute to the products and services a company offers, including employees, suppliers, etc.
a) Employee relations and DE&I
Factors that fall in this category include:
Characteristics of the workforce (size, location, etc).
How the workforce is managed.
Practices, policies, benefits, protection and employee activities that the company has put in place to ensure positive, equitable and fair employee relations.
Policies and programs put in place that support diversity, equity, and inclusion, and prevent harassment.
b) Working conditions
How is workplace safety managed?
What standards have been put in place to prevent conditions that are detrimental to worker health and safety?
c) Employee development
How is talent acquired, retained, and developed?
Is there any investment in employee development and training?
d) Third party / supply chain labor standards
What do the working conditions look like across the supply chain and with third-party vendors?
Are there policies in place to ensure compliance with fair labor standards?
Are human rights respected, factories safe, and local communities treated fairly and respectfully?
2) Product liability
Product liability is about the impact of a company’s products and services on society, quality of life, safety, and equitable outcomes. The factors that fall in this category include:
a) Product safety and quality
Have there been any product recalls or safety concerns?
What standards are in place to ensure responsible sourcing, manufacturing, and marketing practices?
Is user health and well being prioritized?
b) Chemical safety
Are there any hazardous chemicals in the product portfolio, and, if so, what efforts are underway to develop less harmful alternatives?
What is the potential exposure to current or future chemical regulations?
Are chemicals handled and disposed of responsibly?
c) Financial products safety
How are financial products and services managed and sold?
Are there any reputational or regulatory risks associated with unethical lending or marketing practices?
d) Privacy and data security
How much personal data is collected and what systems are in place to protect it?
What is the potential exposure to data breaches and evolving privacy regulations?
e) Responsible investment
How are ESG considerations integrated into managed assets?
3) Stakeholder opposition
Stakeholder opposition deals with increasing demands for transparency and ethics in business practices.
a) Controversial sourcing
What is the dependence on and purchasing volume of materials and services from conflict areas?
Are there due diligence processes in place to assess and manage the risk of slavery and human trafficking?
b) Supply chain transparency
Are there any efforts to improve supply chain traceability and certification around ESG principles?
c) Community relations
How are local community relations managed?
What initiatives are in place to provide benefits to local communities?
Are there any policies addressing conflict and human rights?
4) Social opportunities
Companies have many ways to be a force for good and contribute positively to equitable access to resources, health, and growth. This can be through philanthropy or by providing access to products and services to underprivileged social groups.
a) Access to communication/s
What efforts have been made to expand connectivity and access to information in underserved markets such as developing countries, rural, or elderly communities?
b) Access to finance
Are financial services being extended to under-served markets through mechanisms like small business lending or innovative distribution channels for developing countries?
c) Access to healthcare
Is there any expansion of health care products and services to underprivileged areas such as developing countries or communities with low physician concentration? Examples could include things like equitable pricing mechanisms, new innovations, capacity advancement, donations, skill sharing, volunteering, and more.
d) Opportunities in nutrition and health
What is the nutritional content of food products and what efforts are underway to develop products with improved nutritional or health benefits?
The ESG social factor can have a significant impact on businesses.
Firstly, social considerations are increasingly influencing capital availability. A firm that is oblivious to, or uninformed of the social consequences of its commercial actions will not earn the ESG ratings required to attract investors or move forward with an IPO.
Additionally, a company that does not take into account the social needs of its employees may find it challenging to attract and retain top talent. Moreover, a business that ignores the social impact of its actions might face expensive lawsuits.
Also, if a company’s products are harmful to consumers or the environment, the company may be liable for damages.
Lastly, customers may be reluctant to purchase products from a company that does not consider the social consequences of its actions, affecting sales and market share.
Sources:
ESG 101: What does social in ESG mean?
Social factors in ESG
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