In our previous article about environmental investment, we talked about why it’s getting important to invest in an environmentally responsible future. It is an area that currently receives a great deal of attention, as concerns about climate change are becoming an ever-growing emergency. Even though there’s a lot more to be done on the environmental part, questions regarding how companies should deal with the social part can be exactly just as essential. The social criteria of ESG covers how companies deal with their employees and the communities in which they operate. In its broad definition, social (S) means how a company relates to its stakeholders -including shareholders, employees, customers, and community. Also favored by the push of the millennials, the growth in demand to “S” is unstoppable. Therefore, it should become an integral part of corporate strategy.
The Social criteria of the ESG can be difficult to identify because it is an area with a much wider focus than E and G. But just like in Environmental and Governance, there are many reasons for investors to take S (Social) seriously. Social criteria are also part of a company’s business relationships: Do companies work with vendors that have the same values they say they have? Do they donate a percentage of their profits to the local community, or do they encourage them to volunteer there? Is the workplace of the business highly respectful of the health and safety of its employees? Are other stakeholders’ interests considered?
With the amount of %40 annual energy consumption globally, it is not surprising that environmental action has traditionally been at the forefront of the ESG debate in the built environment. On the contrary, the social component is lagging behind due to the challenges of defining, scoping, and measuring these types of ‘more flexible’ factors. Only a few years ago, much of what came under the “S” in ESG factors was considered too blurred for many investors and boards of directors. The “E” and the “G” appeared to represent the actual data and risks. Company reports assumed that “S” content was for employees and communities and did not require a full strategy and data.
Regarding environmental, social and governance (ESG) issues, a growing number of investors are looking at corporate human rights performance. Protecting long-term investments from potential social grievance spillovers has become part of their fiduciary duty. However, the complexity of global supply chains makes it difficult for many ordinary investors to address social issues such as day-to-day labor relations.
Lately, thousands of firms have underlined their improved safety and health measures in response to COVID-19. We have followed employee and community engagement topics for more than 15 years, and we see it has become more of a mainstream corporate and social topic than ever before. According to a study by Oxford Academic, the COVID-19 pandemic has resulted in aggravated stock market crash. The crisis, concurrently, offers a unique opportunity to check environmental and social (ES) policy theories. The study also demonstrates that stocks with higher ES ratings have remarkably higher returns, lower return volatility, and higher operation gain margins during the first quarter of 2020. ES firms with higher advertising expenses show higher returns, and shares held by more ES-focused investors show lower return volatility during the crisis. This underscores the prominence of customer and investor trustiness to the resilience of ES assets.
On the other hand, while many businesses and industries have achieved considerable performance without adhering to any fundamental principles of S, this may not be true for all in the future. In a world where the public has a greater interest in social issues, positions are changing and governments and regulators are under pressure to intervene, social criteria deficiencies could pose a long-term existential threat to some sectors.
In our projects, we have continuously observed how well-functioning employee and community relations prevent reputational and financing crises. While strengthening the relations between employees and managers with the engagement programs we have created, we have contributed to the community and companies with socially sensitive and sustainable projects with our social management programs. We experience that creating a holistic environment including social assets contributes to a company’s reputation and long-term success through transparency, diversity, inclusion. That is to say, managing social relations with employees and society may be perceived as less important issue by companies, but at the end of the day they become an ever-growing emergency.
All in all, disruptive technologies generate new products and new markets every day and organizations respond to constant changes in their structures. Businesses reviewed the strategies on an annual basis. At the moment, the strategy is constantly on the table. M&A’s have reached unprecedented heights, bringing companies together and tearing them apart at an alarming rate. It is almost inevitable that social and environmental issues will become the main agenda items. Of course, not every sector can experience these trends at the same time, but there seems to be no escaping it. ESG, which was seen as fashionable a few years ago, is rapidly moving towards “must-have”.
Learn more about how CORPERA advises companies on ESG (Environmental, Social, and Governance).