Social - the 'S' in ESG

The assessment of how a company interacts with the people around it is one of the three key factors in understanding ESG risks and opportunities. This is the ‘S’ in ESG.

A company has many social interactions, whether staff, suppliers or customers, and each operates within the dynamics of society and within the bounds of its reputation and demographic. Understanding how this web of social interactions is managed is key to assessing its risks.

Treatment of a company’s workforce is an important part of its ESG assessment. Equal and fair working conditions, remuneration and rights are all expectations of a company that treats its employees well and with respect. An employee should not be treated differently because of gender, race or beliefs.

There are a number of potential consequences for mistreatment of the workforce, from difficulties in retaining skilled staff to strike actions. Likewise, ensuring the safety of staff is an important consideration. Poor health and safety could lead to criminal prosecution, fines or regulatory sanctions.

The same principles of fairness, equality and safety extend outside of the workforce to other groups of people, for example suppliers. This can be especially key when suppliers are based in countries dealing with poverty or poor working conditions.

There are strong values attached to many of these social interactions, with equality and fairness issues, for example, rapidly creating difficult situations for companies that are seen to exhibit poor behaviours or attitudes. This can quickly lead to consumer action or boycotting, and therefore have a material commercial impact.

The goods and services that a company sells can also be a source of controversy and therefore interact poorly with social values; an arms or tobacco company carries implicit ESG risks from the business that it undertakes.

Understanding the social interactions of a company is therefore very important to understanding its ESG risks. A company that treats the people with whom it interacts in a fair and sustainable manner will minimise their exposure to these social risks.