Understanding the ‘S’ in ESG

First things first, what is ESG and what does it stand for? Environmental, Social, and Governance. It is a set of criteria used to evaluate a company’s operations and its potential impact on society and the environment. Environmental criteria assess how a company performs as a steward of nature. Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. The ‘S‘ or social aspect of ESG encompasses the intricate interplay between a business and its internal and external stakeholders, seeking to recognise and confront the social issues that impact the business. These issues can influence the organisation’s relationship with its community, as well as its policies and practices. By identifying and integrating these concerns into the company’s strategy, it becomes possible to establish a responsible and ethical approach to conducting business, thereby creating value for all stakeholders involved. So the ‘S’ in ESG can also involve initiatives such as promoting diversity and inclusion, ensuring fair labour practices, and contributing positively to the communities in which the business operates.

What does the S component of ESG cover in terms of businesses?

The social element of ESG includes a diverse set of factors, opportunities, and risks that may have an impact on internal and external stakeholders, which may affect the business’ value and image. Sustainability-related firms (such as the reporting standards organisation GRI and the sustainability rating organisation MSCI) break down ESG elements through their ESG frameworks and standards. However, in general, they serve the same purpose which is to act as a guideline that gives an overview of how the various ESG elements have to be taken into consideration in the business context. Some social issues cover a wide range of topics, including:

  • Human rights
  • Customer satisfaction
  • Wage equality
  • Labour standards
  • Employee satisfaction and engagement
  • Inclusion, Diversity, and Equity (IDE)
  • Health and Safety at workplace
  • Ethical supply chain practices
  • Training & workforce development
  • Data protection & privacy

Why should we consider implementing the social criteria and how can the ‘S’ criterion of ESG add value?

Implementing the social aspects and addressing the issues in your community could potentially lead you to transform your business into a more purpose-driven one. Purpose-driven brands make conscious efforts throughout all of their actions and decisions to adhere to their core mission. Defining your business purpose can be critical to maintaining a long-term competitive advantage and increasing the level of trust between all stakeholders and investors. According to a study done by a global communications firm across 8 countries including Malaysia and Singapore, when consumers think a brand has a strong purpose, they are 4.1 times more likely to trust the company and 4 times more likely to purchase from the company. The purpose may not be directly linked to profitability but, in many cases, drives outperformance.

In addition to the transformative potential of a purpose-driven approach, integrating the social aspect of ESG into business practices fosters a positive work environment, leading to enhanced employee productivity and financial performance. Studies, such as those conducted by PwC, consistently show that ESG considerations contribute to long-term financial value by enabling cost reduction, creating new revenue streams, facilitating access to finance, and boosting overall productivity. Moreover, a socially conscious approach enhances employee engagement, leading to improved morale, heightened trust, and a more cohesive work culture. 

Furthermore, businesses that demonstrate a positive social impact are often more appealing to investors. With the rise of socially responsible investing (SRI), investors are increasingly drawn to companies that prioritise social responsibility, recognizing the significance of social issues in business operations and value propositions. Additionally, global regulatory bodies and governments are progressively integrating social concerns into policymaking and disclosure regulations, emphasising the growing importance of social criteria within the broader business landscape. These factors underscore the compelling reasons for considering the integration of social criteria into business practices.

By having a positive social impact, your business could also attract investors. Socially responsible investing (SRI), also known as social investment, is an investment that is considered socially responsible due to the nature of the business the company conducts. Stakeholders, in this case, investors, expect businesses to consider the impact of social issues on their business practices, operations, and value propositions. Regulators and governments around the world, too, have started incorporating social issues into policymaking and disclosure rules. These are some of the reasons why you should consider implementing social criteria into your business practices.

How to incorporate the ‘S’ in ESG into your business function?

  • Ensuring the minimum wage is paid

    The purpose of minimum wages is to protect your employees from unfairly low pay. Knowing your regional minimum wage and making sure that your employees get paid fairly, improve the welfare of workers at the low end of the ladder, while also reducing inequality and promoting social inclusiveness.

  • Ensuring equal pay between your male and female employees

    Men and women performing the same work or performing different work of equal or comparable value should be paid the same amount. This may happen because of conscious and unconscious discrimination and bias in hiring and pay decisions. Businesses can make a big difference by understanding the size of the gender pay gap and taking action to increase the number of women in leadership positions for instance.

  • Identify the social issues that are relevant to your business

    Consider examining the current social issues that resonate with both your business and the local community. By aligning your support with social causes that closely match the core values of your business and the preferences of your customers, you can effectively contribute to meaningful change. This approach ensures that your engagement with social issues is not only relevant but also enhances the connection between your business and the community it serves, fostering a shared commitment to positive impact.

    For example, L’Oréal, a global cosmetics brand based in France, answered a question they asked themselves, “Why doesn’t makeup match every skin tone?” by integrating it into their mission, “Beauty for All.” This is reflected in the skincare, makeup, and hair products they carry, which cater to all skin types, skin colours, and hair types. This was done by incorporating Inclusion, Diversity, and Equity considerations into their company strategy and core values.

  • Invest in your employees’ future by conducting training & development

    Training and development could help your business gain and retain top talent, increase job satisfaction and morale, improve productivity and eventually, create more profit. Providing opportunities for employees to explore new topics, refine their skills and expand their knowledge can also help your business to keep pace with changes in the industry.

 

At Funding Societies | Modalku, we aim to implement the social aspects of ESG by adhering to internationally recognized standards and integrating it into our organisation, where we protect the interests of our stakeholders. Some of our initiatives include:

  • Adhering to the UN Global Compact’s Ten Principles, which covers the topics of labour and human rights. We make an effort to include the principles and practices recommended by UNGC within our organisation.
  • We have an Inclusion, Diversity, and Equity (IDE) department that, among other topics, also promotes women empowerment programs for our female employees, through campaigns such as the  #MakingHERstory series and #IamRemarkable initiatives.
  • We have pledged to the One Global Women Empowerment (OGWE) platform, an initiative by the B20 Women in Business Action Council (WiBAC) during the 2022 G20 Indonesian presidency, which promotes inclusive, resilient, and sustainable global economic growth through empowering women entrepreneurs and women in the workforce.

What’s next? Stay tuned for our third series on ESG soon – #3 Understanding the ‘G’ piece in ESG!