Environmental, social, and governance, or ESG, is becoming a top priority for investors, stakeholders and consumers as a tool to evaluate a company’s practices and risks. Though issues like climate change have been popular in the past, today, social issues are becoming increasingly prominent.
Several social factors can impact a company’s financial performance and reputation, ranging from short- to long-term challenges. Showing a preference for companies that pay attention to these social issues—both from consumers and investors—can increase profits and corporate responsibility.
Understanding the “S” in ESG
The S in ESG is determined by a company’s strengths and weaknesses in dealing with social trends, labor, and politics, but also how a company interacts with people around them (consumers, suppliers, employees, communities).
The following five areas are commonly addressed by the S:
The people that impact your business should be treated well. For example, the way a business treats employees impacts retention and productivity. A company’s relationships with customers and suppliers can also have a direct financial benefit.
Community Relations and Human Rights
Community relations pertain to how your company benefits or harms the surrounding community, including environmental factors, but also putting money back into the community by hiring within surrounding areas, philanthropy, and local sourcing. Human rights is essential, and ESG strategies should look for human rights violations throughout the supply chain.
Workplace Health and Safety
Environment, Health and Safety (EHS) management is crucial in evaluating the “S.” EHS is concerned with the health and safety of workers and their surroundings and failing to do so can damage a company’s reputation with the public. Measurements can include workers’ compensation claims, workplace accidents, policies around Personal Protective Equipment (PPE), and other health and safety concerns specific to your industry.
Diversity, Equity, and Inclusion
Diversity, equity, and inclusion directly impact the profitability of a business and its employees wellbeing. Diversity stimulates creativity and can increase productivity while also appeasing to many in the public who wish to see a more diverse workforce. Businesses should implement meaningful diversity goals and strategies throughout their organization.
Both investors and consumers will want to understand where your company intersects with political parties, leaders, and legislation, and evaluate the political risks your company may face in the future. Consumers also tend to put their money in companies with similar political values.
Why the S matters
Just as with the other letters in ESG, the “S” serves as criteria for investors and gives them greater confidence that your company won’t fall prey to risks. Investors and consumers what to support a company they feel good about and that makes a positive impact.
Additionally, the market tends to reward companies that minimize their exposure to social issues—selling controversial products, relying upon materials from geopolitical hot spots, using an inhumane labor force, or even backing certain political agendas can hurt profits and increase volatility.