Demystifying the "S" in ESG

Executive MBA participant Sandar Hla explores the meaning of 'social' in ESG and why it can be the most daunting and difficult angle to measure, as well as link to investments, for businesses.

ESG seems to be another buzzword passed around conferences as easily as business cards. What is ESG, is it a trend, or here to stay? To broadly demystify the acronym, ESG is a criteria used by investors to assess environmental, social and governance risks in portfolio assets. The “E” has the most exposure, scientific measures and business opportunities while the “G” is more binary and easier to align to compliance and regulatory standards. Slightly dated articles in the Harvard Business Review or McKinsey Quarterly indicate that over $70 billion was invested globally in ESG equity funds in Q2 2020 alone [1] to reaches in the trillions in previous years [2]. From a cynical perspective, the financing of ESG funds may be opportunistic rather than reflective of systemic changes in how companies operate across its supply chain. These investments today might come just in time for companies recovering from COVID-19 related financial downturns, hedging on the gen-z preference for feel-good sustainability-focused businesses, balanced with future-proofing. With any form of metrics, bias comes in, especially without standardised frameworks or quality data to measure, as is the current case with ESG investments [1]. The field is developing along with harmonised best practices and regulation. The most daunting and difficult angle to measure for businesses and link to investments is the “S” in ESG. However, the S is most relatable as it reflects universal basic needs for fair pay, rest and humanisation. From CEOs, to delivery people, farmers, canteen staff and security personnel, the S represents each of us as part of a larger value chain.

I have seen social sustainability interpreted as broadly as diversity and inclusion initiatives to investigations into human rights violations in supply chains. The key area to evaluate is the level of stakeholder engagement and rights enjoyed by communities impacted by businesses including workers. Working and living in the UK, it is difficult to connect business decisions to supply chain workers across the world. UK-based labour risks exists as well.  British news headlines during COVID-19 uncovered the lack of protection Leicester garment workers received, not just in terms of COVID-19 related social distancing and PPE, but protection from receiving pay below living wage [3]. Business is business is business. These business decisions most likely reflected insecurities driven by lower volume orders. The low sales link to the inability to meet financial targets which then cascaded into impacting supply chain wages. Supplier code of conducts and check-box social compliance audits are a good start but without a triangulation to how the workers interpret these policies and ARE impacted by these management practices through worker interviews, an accurate reflection of a business’ impact on supply chain working conditions cannot be made. The audits do not accurately reflect on-the-ground issues that workers face, especially if disempowerment, harassment, and discrimination is systemic in the company and country culture. Audits only capture glimpses of thematic non-compliance such as excessive overtime or poor health and safety standards. But if non-compliance after non-compliance is reported across multiple thematic areas, then there is likely a larger problem at hand. Yet calling a “forced labour spade” a “forced labour spade” becomes tricky when so much money has been invested in companies and its production lines.

No business wants to admit that they don’t care about human rights in the supply chain. In reality, no business wants to admit that they don’t want to make profits. To expand on the “people, plant and profits” model, the idea of value creation helps companies link supply chain worker welfare to financial viability. This is the follow-up conversion needed in conferences. HOW do businesses align ESG social sustainability metrics into core business? The answer is to stop measuring metrics and to detangle the elements linked in the supply chain. Supply chain transparency and traceability sounds like a simple solution but stirs great anxiety because the collective “we” from consumers to retailer buyers become accountable. The “S” in ESG represents a bigger picture as it represents a bigger responsibility in each of us to be accountable to one another, to enjoy what it truly means to be social.