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Understanding the 'S' in ESG

January 17, 2023

ESG refers to the environmental, social, and governance aspects of a business. In this article, we explore the 'S' in ESG and why it's an important consideration for businesses and investors.

What is the 'S' in ESG? 

The 'S' in ESG stands for 'social', referring to the people-related impacts of a business's operations. Under the social sphere, companies measure and report employee and community risks and opportunities against a set of criteria. 

What are the ESG social criteria? 

Social criteria deal with the human aspects of a business. Understanding these impacts help companies manage the potential risks and opportunities that are material to their human capital and the community in which it operates. 

Below is a non-exhaustive overview of social criteria that are common material to many businesses.

Occupational Health and Safety (OHS) / Environment, Health and Safety (EHS)
Description The well-being of employees is crucial for everyday operations. Workplaces with appropriate hazard controls create a safe and conducive environment for employees to carry out their work.
Indicators Companies should comply with workplace safety standards and industry best practices. Indicators include accident rates, safety protocols, certifications, etc. Investors also want to see an OHS management system that includes prevention measures, risk assessments, emergency response plans, and corrective measures.
Risks Poor labour standards put a company's reputation and liabilities at risk since injuries and fatalities may occur. Workplace incidents can put a stop to operations or delay productivity. Unsafe working conditions may give employees a cause to go on strike or resign, resulting in business disruption.
Opportunities Good OHS practices attract and retain employees while optimizing productivity. Meeting safety standards or having the appropriate certifications can be a competitive advantage.

Labour Standards
Description Labour standards concern not only the safety of employees but also the employment terms and conditions that guarantee fair pay and decent work. This topic is also concerned with modern slavery and human rights, especially in tiered supply chains. Industries in manufacturing, agribusiness, mining, and construction are at higher risk of poor labour standards.
Indicators Policies, related to non-discrimination, equal opportunity, and anti-harassment. Investors pay attention to working conditions and employment terms, specifically compensation and benefits, overtime hours, and family policies. Compliance with local laws is the minimum. Companies should also demonstrate their approach to freedom of association and collective bargaining, as well as policies and practices against child labour and forced labour.
Risks Companies could lose valuable human capital over poor labour practices. Failure to comply with labour standards will result in fines, penalties, and loss of support from investors.
Opportunities Ensuring decent working conditions and fair treatment to employees can improve productivity, employee morale, and loyalty. Furthermore, it avoids potential reputational damage from modern slavery, whether intentional or not.

Diversity and Inclusion
Description Discrimination in all forms including gender, age, ethnicity, religion, etc. creates inequalities in the workplace, violates laws, and affects the public image of a company.
Indicators Diversity and inclusion indicators are found in hiring policies and practices regarding discrimination, minority representation, strategies to conduct sensitivity training, diversity targets, and maternity policies. Existing wage gaps and the use of a grievance mechanism are also important indicators of a company's attitude towards discrimination and diversity.
Risks Besides the reputational damage from being known as a discriminatory employer, a lack of diversity can create an echo chamber in the workplace.
Opportunities Diverse teams are known to be more resilient and innovative. An inclusive environment allows for creativity and collaboration, both linked to better financial performance.

Community Development
Description Business operations often have external impacts on the surrounding community, such as exposure to hazardous materials and pollution, competition for natural resources, landscape change, land rights, etc. Companies with a local presence are expected to be responsible corporate citizens and give back to the community through employment opportunities and socio-economic development. Material impacts should be managed in consultation with the community.
Indicators Impacts on the community can be assessed through the method and frequency of stakeholder engagement, its outcomes, the use of a community grievance mechanism, social impact assessments, emergency response plans for high-risk communities, etc.
Risks Companies may face community opposition to their activities or expansion. Significant resources have to be diverted to addressing objections from the community, not to mention the reputational damage and operational delays from obtaining permission to operate.
Opportunities Communities that benefit from a project or business operation are more likely to support it. Ensuring that benefits trickle down to the community and active stewardship of shared resources improves the likelihood of business longevity. Contributions to community development can return to benefit companies through access to human capital and a wider consumer base.

Why is the 'S' important? 

The social part of the ESG equation is frequently mistaken for CSR. While corporate social responsibility can be a part of a company's social management plan, it does not directly address the various risks and opportunities that could significantly impact business. The human factor in business relationships can be highly volatile, requiring systematic management and effective engagement. By minimizing the risks to the community, businesses can gain support and build goodwill - a valuable asset to have especially where community support has a strong bearing on local politics. At the same time, positive community engagement is an opportunity to create value for stakeholders. 

ESG and Daato

The Daato software is a powerful ESG data management system that enables mid- to enterprise-level companies to collect, organize, and understand data on the various social criteria relevant to their business. Our customers use Daato to exchange data with stakeholders, keep track of changes to their data repository, and even auto-generate framework-compliant reports. 

Having a handle on your data is key in managing social risks and opportunities. The Daato software helps you to make sense of social criteria and the associated indicators that are relevant to your business and supply chain. The ability to allow third-party information exchange on the platform while protecting confidential information is a major asset for companies working with an extended supply chain or multiple community stakeholders. The system requests information from suppliers on behalf of users, facilitating data collection from multiple sources and ensuring compliance with disclosure requirements. 

Understanding the 'S' in ESG is a process involving extensive stakeholder engagement, which in turn requires dedicated resources. Leveraging the functionalities of ESG data software can really give your social management plan the lift it needs.

How we help you

  • We provide a centralised platform to manage all your data, pulling data from enterprise software such as ERP,HRM, EMS, etc.
  • We guide you on the social indicators to focus on and the metrics to collect.
  • We offer insights powered by data analytics, enhancing your understanding of the strength of governance.
  • We help you complete the requests from investors on corporate governance matters and guarantee the protection of business-critical information, for example about sensitive business strategies.

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