Why the Social in ESG is the New Economy.

Introduction.

ESG, or environmental, social, and governance, refers to a set of standards used to evaluate the sustainability and ethical impact of businesses and investments. As the world becomes increasingly aware of the need to address environmental and social issues, ESG has become an increasingly important factor in investing and business decision-making.

In recent years, there has been a particular focus on the social aspect of ESG. This includes issues related to labor practices, human rights, and community impact, as well as diversity and inclusion within the workplace. This focus reflects a shift towards a new economy in which businesses are expected to not only be financially successful, but also to prioritize the well-being of their employees, communities, and the environment.

This shift towards a more socially responsible economy is driven by a variety of factors, including consumer demand, investor pressure, and regulatory requirements. Companies that prioritise social ESG are increasingly seen as better long-term investments, as they are more likely to be sustainable and able to adapt to changing market and societal conditions.

In this blog, we will explore the importance of the social aspect of ESG in the new economy, including what it covers and the economic case for prioritising it. We will also provide examples of companies leading the way in this area and discuss the future of social ESG. So, the social in ESG is the new economy that is driven by consumer demand, diversity and inclusion, investor pressure, and regulatory requirements.

The social aspect of ESG covers a wide range of issues that impact the well-being of people and communities. Some key areas include:

1. Labour practices and workplace diversity: This includes issues such as fair wages, safe working conditions, and equal treatment and opportunities for all employees, regardless of their race, gender, age, or other characteristics. Companies that prioritize diversity and inclusion in the workplace are often seen as more innovative and better able to attract and retain top talent.
2. Human rights and social justice issues: Businesses have a significant impact on the communities in which they operate, and it is important that they respect and promote human rights and social justice. This includes issues such as discrimination, corruption, and exploitation, as well as efforts to address inequality and social exclusion.
3. Community engagement and impact: Companies that are socially responsible also strive to be good neighbors and contribute positively to the communities in which they operate. This can include initiatives such as supporting local schools and charities, engaging in environmental conservation efforts, and working with local governments and organizations to address social and environmental issues.

By addressing these and other issues related to the social aspect of ESG, companies can demonstrate their commitment to being responsible corporate citizens and contributing to the well-being of people and communities.

There is a growing body of evidence suggesting that companies with strong ESG performance tend to have better financial performance. Studies have shown that such companies often have higher returns on investment, lower costs of capital, and are less likely to experience financial crises.

One reason for this may be that consumers, investors, and employees are increasingly prioritizing social responsibility. Consumers are more likely to purchase from companies that align with their values, while investors are increasingly seeking out companies that demonstrate strong ESG performance as a way to mitigate risk and enhance returns. Similarly, employees are more likely to be motivated and loyal to companies that prioritize social responsibility.

Government and regulatory pressure is also playing a role in promoting social ESG practices. Governments around the world are increasingly adopting policies and regulations that incentivise or require businesses to prioritize social and environmental concerns. This can include tax breaks or other financial incentives, as well as penalties for companies that fail to meet certain standards.

Overall, the economic case for prioritising the social aspect of ESG is strong. Companies that demonstrate a commitment to social responsibility are likely to be more financially successful in the long run, as they are better able to attract and retain customers, investors, and employees. Additionally, government and regulatory pressure is increasingly supporting the adoption of socially responsible practices, further strengthening the economic case for ESG.

There are many companies that are leading the way in terms of social ESG performance. Here are a few examples:

1. Patagonia: This outdoor clothing company is well-known for its commitment to environmental sustainability, but it also has a strong focus on social issues. For example, the company has implemented a number of initiatives to improve labor practices, including fair labor standards, safe working conditions, and equal pay for all employees. Patagonia has also been recognized for its commitment to diversity and inclusion, with a focus on hiring and promoting women and people of colour. These efforts have helped the company build a loyal customer base and attract top talent.
2. Unilever: This consumer goods company has made significant progress in addressing social issues through its “Sustainable Living Plan,” which aims to improve the lives of over a billion people while reducing the company’s environmental impact. Unilever has made commitments in areas such as gender equality, human rights, and community development, and has been recognized for its efforts through numerous awards and accolades.
3. Salesforce: This technology company has a strong focus on social responsibility and has implemented a number of initiatives to address social issues. For example, the company has committed to achieving gender equality in the workplace and has implemented policies to promote diversity and inclusion. Salesforce has also made significant investments in education and training programs, as well as initiatives to address homelessness and other social issues in the communities where it operates.

ESG ratings and rankings can also be helpful in measuring and comparing social performance. Organisations such as MSCI and Sustainalytics provide ratings and rankings that evaluate companies based on their ESG performance, including their social performance. These ratings and rankings can be helpful for investors and consumers looking to make more informed decisions about which companies to support.

Overall, these examples demonstrate the wide range of ways in which companies are addressing social issues and the positive impact that this can have on their business and reputation.

The focus on the social aspect of ESG is likely to continue to evolve in the coming years. One prediction is that companies will increasingly be held accountable for their social impact, with stakeholders such as consumers, investors, and employees demanding more transparency and action on social issues. This could include a greater emphasis on issues such as diversity and inclusion, human rights, and community engagement.

Governments and regulatory bodies are also likely to play a role in driving change towards a more socially responsible economy. As mentioned earlier, many governments are already adopting policies and regulations that incentivise or require businesses to prioritise social and environmental concerns. This trend is likely to continue as the importance of ESG becomes more widely recognized.

Stakeholders such as consumers, investors, and employees will also play a crucial role in driving change towards a more socially responsible economy. As mentioned earlier, these groups are increasingly seeking out companies that demonstrate strong ESG performance and are willing to vote with their dollars or invest in companies that align with their values. This trend is likely to continue as people become more aware of the impact of their purchases and investments on social and environmental issues.

In conclusion, the social aspect of ESG is an increasingly important factor in the new economy. Companies that prioritise social responsibility are likely to be more financially successful and better able to adapt to changing market and societal conditions. By prioritising the social aspect of ESG, businesses can not only enhance their own success but also contribute to the well-being of people and communities and drive progress toward a more sustainable and equitable society.

Gibran Registe-Charles is the ESG Director and CEO / Founder of Urban Edge Capital a ESG D&I hedge fund.