Measuring the “S” in ESG through the investors’ lens of people well-being

Persistent social inequalities and the urgent need for a fair transition to a more sustainable economy bolster the argument for measuring and reporting social risks and impacts as part of any environmental, social & governance (ESG) initiatives.

The intersection of climate change and inequality is reshaping the world, and the social contributions of private sector companies are increasingly part of the expectations and solutions to a just transition for investors, members of communities in which companies operate, and members of civil society. However, myths around the lack of measurement of social impact persist, despite well-known ways of doing so.

Tackling the “S” through investors’ eyes

Investors and the financial sector have been tackling how to account for, measure, and communicate companies’ social impact for a while, according to Bettina Reinboth, Director of Human Rights & Social Issues at Principles for Responsible Investment (PRI), a UN-supported network of institutional investors that promotes responsible investment through the use of sustainability practices. In a recent article, PRI clarified how the UN Guiding Principles on Business & Human Rights set expectations for investors to act on human rights.

Institutional investors, particularly those considered universal owners, maintain a long-term investment horizon. This takes a multi-decade view of how the transition to a sustainable global economy impacts people internally and externally, the main component of the social part of ESG.

Likewise, corporate directors are focusing on holistic employee well-being now in large part because of investors’ demands and the upcoming regulatory requirements to meet their fiduciary and oversight obligations. “Talent is a part of everything an organization does, and we see boards leaning into talent matters with management more than ever,” says Carey Oven, National Managing Partner at Deloitte’s Center for Board Effectiveness. “They are requesting more data around engagement and sentiment and exploring enriching ways to get feedback from the workforce in a much bigger way than they had before.”

Up until a few years ago, companies could get away with having a human rights policy with the expectation of adherence from the top of the organization to the bottom, including board oversight, as important foundational elements. More recently, however, investors’ savvy is increasingly on the rise, and investors are looking for more detailed information about measurement. Some of the more pointed questions on investors’ minds include: i) how actual and potential negative outcomes for people are identified; ii) what due diligence and verification of the adherence to policy and practices are performed; and iii) what is the process for dealing with effective grievance mechanisms.

In part, this is the reason for the spike in investors noting publicly when there is a gap between what a company says it does and what it actually does within ESG.

Culture & well-being as a key measurement of the “S”

The well-being of people is central to the social performance of firms. Investors and now corporate directors are looking for ways to capture social indicators as part of companies ESG strategies. Yet, in order to measure an organization’s social impact, a company must first define its stakeholders, which include employees, consumers, and local communities, including those that may be part of the company’s supply chain.

Because employee well-being is central to that of society, for companies to understand the full scope of how their actions and policies contribute to well-being is important. Critical elements of a comprehensive corporate approach to well-being include: i) aspects about the work itself, and the social interactions that employees have at work; ii) the skills each employee gains through employment; and iii) the sense of purpose from the job experienced by each employee.

In addition, measures of employee inequality, representation, pay, promotion, and overall working conditions are equally important. More specifically, there are many people well-being indicators organizations can use to measure their social impact, according to the Organisation for Economic Co-operation and Development (OECD). These indicators include:

• • • • Employment — such as hiring, turnover, and promotion.
      • Earnings — wages, benefits, executive pay gap, and financial insecurity.
      • Learning & skills — skills obtained on the job and the intersection of work and personal development.
      • Health —absenteeism, mental health, and health & safety in working conditions.
      • Social support — manager effectiveness and trust between workers.
      • Work/life balance — annual leave, parental leave, and average working hours per employee.
      • Employees’ voices & feedback — trust in management, upward feedback of managers, and mechanisms to give employees a voice.

Further, to address the impact on the well-being of local communities and society as a whole, the OECD highlights the following indicators:

• • • • Economic — Taxes paid and revenue generated in each locality.
      • Human — strategic community investment, such as when a company brings its banking relationships to assist in small business funding for local entrepreneurs.
      • Social — board composition and compensation, political contributions, and fines paid.

Analyzing the social risks and impact through lens of well-being of employees and society is one of many ways to measure the “S,” but also a simple and logical one. The interplay between the social impacts during the climate transition will only grow.

Many assume that the expected global economic slow-down will stall sustainability efforts, but PRI’s Reinboth argues the opposite — that progress on sustainability will accelerate based on recent evidence of momentum because of the simultaneous, negative multiple shocks to the well-being of people and society during the global pandemic as the crisis shined a spotlight on the global vulnerabilities and how the social part of ESG intersects with the “E” and the “G” as well.