The Three Pillars of ESG
Environmental, Social, and (Corporate) Governance (ESG) are the three broad categories, or areas of interest, for what are known as "socially responsible investors."
These investors believe it is important to incorporate their values and concerns (such as environmental concerns) into their investment selection rather than merely assessing an investment opportunity’s possible profitability or risk.
Environmental criteria assess how a corporation protects the environment, such as corporate policy addressing climate change.
Social factors consider how the organization maintains relationships with its employees, suppliers, customers, and the communities in which it operates.
Governance concerns a corporation's leadership, executive compensation, audits, internal controls, and shareholder rights.
What Is the Social Factor?
One of the three pillars of ESG (environmental, social, and governance) is the social factor.
Social aspects often concern how a firm treats its employees, such as employee safety, gender equality, and livable wages.
At the national level, they address whether human rights are being infringed, workers' rights, and, once again, gender equality.
However, they also include the consequences of a company's products and services on society.
Areas of Interests
The social factor can encompass various topics, from human rights to workplace safety to diversity and inclusion. When it comes to social aspects, the following are some important topics of interest:
Relationships
This area looks at how a company treats its employees, suppliers, and customers. It also includes the company's relationships with the communities in which it operates.
The social factor examines the company’s relationship with workers, suppliers, and consumers.
For example, are the salaries offered by the organization competitive in its industry? Do workers enjoy working there, and how high is staff turnover? How do suppliers and customers feel about working with the company, and will they continue to support it?
Community Relations and Human Rights
This area assesses whether a company is adhering to human rights standards in its workplace and beyond. It also looks at the company's impact on the communities in which it operates.
This is an important pillar of social assessment. Internal policies must be scrutinized, and human rights abuses must be addressed throughout the supply chain as part of the ESG strategy.
Though a company cannot be held accountable for every group it collaborates with, investors demand due diligence to protect them from backing companies with bad human rights histories.
Workplace Health and Safety
Many companies’ key concerns are environmental, health, and safety (EHS). This area examines whether a company provides a safe and healthy workplace for its employees.
The public has chastised corporations that appear to put individuals in unnecessary danger while applauding others for their attentiveness. Scrutiny of workplace EHS procedures is likely to increase in the future continuously.
Workers' compensation claims, workplace accidents, Personal Protective Equipment (PPE) rules, and other health and safety problems relevant to a business can all be measured.
Diversity and Inclusion
This area assesses whether a company promotes diversity and inclusion in its workforce. It also looks at the company's policies and practices around recruitment, retention, and advancement of employees from diverse backgrounds.
Gender diversity improves corporate governance, talent acquisition, and human capital development, which are essential drivers of long-term competitiveness.
Corporate policies that promote gender diversity represent a well-managed organization that recognizes the significance of variety in inspiring innovation and enhancing production in parallel with employee well-being.
Political Ties
Many companies have political ties through political action committees (PACs) or donations to political candidates. This area examines whether a company's political ties align with its stated values.
Investors may also want to ensure there are no major conflicts with their political views. Like all parts of ESG, politics cannot be performative; they will be evaluated and compared to the company's rhetoric.
Impacts of Social Factors on Business
The social factor can have a significant impact on businesses.
Raising Capital
Social considerations are increasingly influencing capital availability. A firm that is oblivious to (or uninformed of) the social consequences of its commercial actions will not earn the ESG ratings required to attract investors or move forward with an IPO.
Human Resources
The social factor also affects businesses in terms of their human resources. A company that is not taking into account the social needs of its employees may find it challenging to attract and retain top talent.
Furthermore, a business that is not conscious of the social consequences of its actions may find itself embroiled in costly litigation.
Product Liability
The social factor can also come into play regarding product liability. If a company's products are harmful to consumers or the environment, the company may be liable for damages.
Sales and Market Share
The social factor can also affect a company's sales and market share. Customers may be reluctant to purchase products from a company that does not consider the social consequences of its actions.
Issues To Consider in Handling Social Relationships
When managing social interactions, there are numerous aspects to consider:
- How will the company's actions impact employees, customers, suppliers, and other stakeholders?
- What are the company's obligations to these groups?
- What are the company's values, and how do they align with the actions taken?
- How can the company ensure that its activities are not causing harm to any of these groups?
Challenges of Incorporating Social Factors
When incorporating social considerations into commercial choices, corporations confront many challenges:
- Ensure all employees, customers, suppliers, and other stakeholders are treated fairly and respectfully.
- Address past harms that have been inflicted on any of these groups.
- Implement policies and procedures that protect the rights of all employees, customers, suppliers, and other stakeholders.
- Monitor the company's progress in meeting its social obligations
The Future of Social Factors
The social factor is likely to become increasingly important in business decision-making and holding them accountable for their actions.
This is due to some factors, including the increasing focus on corporate social responsibility, the rise of the millennial generation (which puts a premium on social responsibility), and the growth of the impact investing movement.
Investors will continue to demand transparency and due diligence to protect their interests. Companies that fail to address social issues adequately will find themselves at a competitive disadvantage.
Final Thoughts
The social factor is an important part of ESG and should be considered when making business decisions. This aspect ensures that all employees, customers, suppliers, and other stakeholders are treated fairly and respectfully.
A company that fails to do so may find itself at a competitive disadvantage. Investors increasingly demand transparency and due diligence to protect their interests.
FAQs
1. What is the social factor?
The social factor is the portion of ESG that focuses on ensuring that all employees, customers, suppliers, and other stakeholders are treated fairly and respectfully.
2. What are the company's obligations to these groups?
The company's obligations vary depending on the group in question. Still, they may include ensuring that their rights are protected, that they are treated with fairness and respect, and that any past harms are addressed.
3. How can the company ensure that its actions are not causing harm to any of these groups?
The company can ensure its actions are not causing harm by conducting due diligence and impact assessments to identify and mitigate potential risks.
4. What is the future of social factors?
The future of social factors is likely to be increasingly important as investors demand transparency and due diligence to protect their interests.
