How important is the S and G in ESG? A discussion about more than just carbon.
Sustainability is often associated with being an environmental concept, but in actuality, it requires the harmony of multiple parts. For an organisation to be deemed sustainable, it must consider more than just the environment. An organisation could be offsetting its carbon emissions and planting trees, but if its supply chain supports modern slavery and its board is composed of members who have an interest in the continuation of burning fossil fuels, then would you really consider it sustainable? Though an extreme example, it highlights the importance of considering the full picture, a concept known as ESG - Environmental, Social, Governance.
ESG is a framework which was originally devised to assess risk when making investment decisions. Now commonly recognised outside of the financial sector, it is a well-rounded way of assessing the wider impact of an organisation’s actions. Within each environmental, social, and governance pillar, there are numerous sub-factors and key indicators that help to communicate an organisation’s commitment.
The S pillar of ESG relates to the social impact an organisation has on its people and customers. The aim of social reporting is to ensure that every human touchpoint is accounted for to minimise direct or indirect harm to people. Employee relations and supply chain labour practices are an important piece of the puzzle. No one wants to be unknowingly investing in or supporting a company that underpays, discriminates, or exploits its workforce. Without sound worker rights, environmental commitment is arguably meaningless. The employee aspect covers the health and safety, training and education, and equal opportunities of its workers. The social pillar also covers the impact on local communities and indigenous people as a result of an organisation’s activities and aims to promote leaving a positive legacy. Where applicable, the health and wellbeing of the consumers are also covered here to ensure that products are fit for human consumption or promote overall wellbeing. Social responsibility is an important consideration within the ESG framework, which ensures people are prioritised.
To compare the S to G, governance covers the running of the organisation by way of board structure, stakeholders, and transparent and ethical corporate practices. It often hides in the shadow of its environmental and social siblings, but its importance should not be overlooked. In fact, governance could actually be considered the guiding older sibling of the trio. Governance helps to instil the ethics and implement the practices of the environmental and social commitments held by an organisation. It is therefore a reflection of poor governance when these other commitments fall short of their promises. Several factors sit within the governance pillar and influence an organisation’s overall operation. Anti-corruption, fair competitive practices, and political responsibility indicate an organisation’s stance on ethical business practices. At a leadership level, transparency around the board composition and management structure, incentives, and stakeholder priorities are also reported. It is important to understand where potential bias or allegiance may exist within an organisation and if this aligns with values of your own. Governance is the foundation on which systemic change can be built. Without good governance, change is an uphill battle.
When you consider the three pillars of ESG equally, the true picture of an organisation’s sustainability commitment becomes clearer. Without the S and the G, you are missing crucial information about how an organisation operates and what else it might be silently standing for.
Millie Taylor for Sustainability Marketing Group.