Intense climate-related disasters and variable weather patterns, tighter regulations surrounding greenhouse gas emissions, and rising demand for renewable & sustainable energy have all contributed to ESG (Environmental, Social, Governance) investors‘ increased attention to environmental issues over the past decade, and therefore ESG investing.

But the COVID-19 pandemic represented a turning point in the conversation over ESG’s societal implications. The global pandemic highlighted the problems in our society, such as income inequality, the lack of affordable housing, the significance of maintaining connections to nature, the gender and diversity gap, and the rise in the prevalence of mental illness.

Therefore, businesses are making an effort to be more open and considerate in how they treat their employees, interact with their supply chains, and give back to the neighbourhoods where they have operations.

The importance  of the social dimension in ESG investing

How should a business deal with its employees, the communities in which it works, and the government? This is the fundamental question driving the ESG and sustainable investment movement.

The social scope has gradually widened as the integrated and interdependent nature of organizations and marketplaces brought about by globalization has matured in the business climate of the 21st century. The ability of an organization to avoid harming its relationships and reputation is crucial to retaining a long-term competitive edge, as all stakeholders are impacted by social concerns.

Case in point

To give just one example, a Sustainable Brands survey indicated that millennial investors are more likely to consider environmental and social considerations when making investment decisions. As millennials enter the workforce, consumer market, and investment scene, they are taking note of and rewarding companies that demonstrate ethical behaviour. Sixty percent of millennials throughout the world, according to the BoF & McKinsey State of Fashion study, are willing to spend more on sustainable companies.

What elements constitute the ESG social pillar in ESG investing?

Employee treatment, boycotts, labour infractions, and product recalls are all examples of social variables. These problems are varied and qualitative, and they frequently affect all of a company’s stakeholders at once, including employees, customers, vendors, and communities. Keeping these groups happy is essential for every business, but especially so for those that depend on consumer confidence in their products or services.

Social pillars of ESG investing

• Egalitarianism, diversity, and inclusion
• Gratification of buyers
• Privacy and data security
• Community relations and employee involvement
• Pay parity
• Workplace regulations
• Humanitarian principles
• Occupational health and safety standards
• Workforce development and training

Ethical social practices in the supply chain

The impact on a company’s reputation and the financial line can be substantial, and these social elements are not as difficult and abstract as they may initially seem.

Taking a closer look

The bank has produced a statement claiming that in order to meet inflated sales goals, Wells Fargo employees illegally established 3.5 million deposit and credit accounts. The situation was made worse by the fact that employees were transferring funds from legitimate accounts to their own personal, unauthorized accounts, so accruing unnecessary account maintenance fees. The bank had to fire over 5,000 people, including CEO John Stumpf, and pay a $2 billion punishment.

Volkswagen has long maintained that its diesel engines are cleaner than gasoline ones and that its diesel vehicles reduce nitrogen oxide emissions (NOx) by 90%. But it turned out that Volkswagen had secretly installed software that masked the true levels of NOx in roughly half a million vehicles. In 2015, the FTC filed a complaint against Volkswagen when it was discovered that these ostensibly “clean cars” really emit up to 4,000% more NOx than is allowed. Although the corporation paid a $1.45 billion fine after pleading guilty, its reputation was irreparably damaged.

In ESG investing, social factors include things like geopolitical unrest and labour disputes, both of which can stymie a company’s ability to manufacture and distribute its wares. The recent drone strike on a Saudi oil facility, for instance, momentarily shut down almost 5% of global oil production.

Significant social problems

Trust, confidence, inclusion, and productive stakeholder involvement are all positively affected by social responsibility, despite the fact that these factors are more nebulous and harder to pin down. Further, stakeholders’ expectations are evolving toward a broader concept of value that goes beyond maximizing short-term profits. This shift has increased the need for the disclosure of non-financial data, such as social factors, that is deemed material. Companies today are concerned about the following three social issues.

Strengthened DE&I

There is more to diversity, equality, and inclusion (DE&I) than just numbers. Diversity refers to the existence of variety within a particular context. Equity refers to the process of making sure that everyone benefits equally from a system or a program. Inclusion refers to the process of making everyone feel welcome at work.

Why does diversity, equity, and inclusion (DE&I) matter so much?

Everyone in the workplace should feel like they have a voice and are being heard and encouraged no matter what their background or experiences are. These actions are more than just a feel-good gesture; they also provide real value to employers and workers alike.

Pay parity

The disparity between the well-off and the destitute in terms of income and wealth is what economists refer to as economic inequality. While there are several facets to this problem, the gender pay gap is where attention has been focused recently. For instance, after years of fighting for equal pay, the U.S. Women’s National Soccer Team recently won a landmark $24 million discrimination settlement with the U.S. Soccer Federation and an agreement to equalize salary and incentives for both the men’s and women’s teams.

The gender wage gap in the United States has been relatively stable over the past 15 years, as shown by the Pew Research Center. A 2020 study of full-time and part-time workers’ median hourly salaries found that women earned 84% of what males did. This indicates that women need an extra 42 working days to make the same amount of money that men do in a year.

There has been a marked increase in the number of women holding influential positions in the recent several decades. Studies demonstrate that women are still having a hard time over two years into the coronavirus outbreak. Nearly 4 million women dropped out of the labour force during the epidemic, despite having higher responsibility, stress, and tiredness than men. How does that compare to the employment rate for women overall? After hovering around 50% since the 1980s, it finally dipped below that mark in 2021.

In many ways, the situation is much direr for women of colour. In 2020, Hispanic women will earn 57 cents for every dollar earned by white, non-Hispanic men, the largest wage gap among racial and ethnic groups with full-time, year-round workers. When compared to white, non-Hispanic men, Black women have one of the highest rates of labor force participation, yet in 2020, they earned only 64 cents on the dollar. Include statistics on multiracial Black women, which are those who identify as Black as well as another racial category, and the amount reduces to 63 cents, indicating a little bigger income gap.

If the gender wage gap is not prioritized and addressed, companies risk losing the very leaders they need right now, and it is impossible to see organizations navigating the pandemic-induced “Great Resignation” and developing inclusive workplaces.

Reliable and open supply networks

Decisions in the areas of procurement and supply chains are increasingly taking into account social considerations. Global firms are expected to take the lead in solving this integrated ESG challenge, and it is no longer acceptable for them to focus solely on their own operations to reduce ESG risks.

Conclusion

After the global epidemic wreaked havoc on supply chains, it became clear that more transparency was needed in the Social factor of ESG investing. Investors will look on companies to be more forthcoming about their labour practices, health and safety policies, and respect for human rights, while businesses will need to assess the threat of disruption from climate change and other extreme occurrences.

Many businesses have responded to the pandemic’s disruption by working to strengthen their supply Evaluation of the Significance of Environmental, Social, and Governance Factors. Meanwhile, investors are more interested in knowing how a firm approaches ESG Social issues like responsible investing, employee and vendor treatment, and sustainability initiatives.