Businesses risk falling behind for neglecting the ‘social’ element of ESG

It has been increasingly clear over the past five or so years that ESG is no longer just a ‘nice-to-have’. There is real risk in getting it wrong, and businesses that don’t pay proper attention to the ‘S’ risk falling behind. The social aspect of ESG covers a wide range of issues, including labour practices, community engagement, human rights, and employee relations. Companies that neglect these areas risk not only their reputation but also their long-term viability.

Companies must ensure fair wages, safe working conditions and respect for workers' rights, as poor labour practices can lead to strikes, legal battles, and loss of consumer trust. Businesses should also actively contribute to the communities they operate in, which can include local hiring, supporting local businesses, and engaging in community projects. There are non-negotiable matters too, such as upholding human rights. Companies must ensure their operations and supply chains are free from human rights abuses, such as forced labour or child labour. Additionally, fostering a positive workplace culture that promotes diversity, equity, and inclusion can enhance employee satisfaction and productivity, reducing turnover rates and fostering innovation.

Mitigating risks should not be the sole driver for focusing on the social aspect of ESG. Getting it right can benefit businesses in various ways. It leads to more ethical business practices, enhances brand reputation, and improves financial performance. Companies that prioritise the 'S' in ESG are better positioned to attract and retain talent, build stronger customer relationships, and mitigate risks associated with social issues.

As shown in many companies’ ESG reports, such as Pinsent Masons’ Responsible Business & ESG Performance report, while progress has been made, more still can be done.

General counsel’s role

When it comes to the social aspect of ESG, general counsel have an important role in making sure the business is moving forward with meaningful steps. Similar to the issues with ‘greenwashing’, businesses should avoid branding themselves to be ‘socially responsible’ with policies and marketing messages without genuine action. With an increasing level of sophistication and knowledge among stakeholders, businesses simply cannot get away with vague or spurious approaches to ESG issues.

Data can be a vital tool in cutting through the noise and showing progress. Several areas of focus for tracking progress within the business include hiring more diverse candidates and giving back to the community. In-house legal teams are increasingly seeking external expertise to implement tangible and meaningful changes to their social impact and responsible practices. Pinsent Masons’ consulting, process & technology and managed legal services teams, for example, have been instructed by in-house legal departments to ensure they are properly utilising technology to capture useful data which can help inform strategic conversations across the business.

Leadership engagement

Leadership plays a critical role in driving and implementing long-lasting change within an organisation, and the most senior teams should be bought into the importance of the change. Creating board champions for specific issues, such as social mobility for example, is a great way to bring these issues to life, particularly if that person can speak from personal experience and put a human face on the issues. Spending the time engaging with the board in this way can pay dividends for lawyers in the long-term, as one of the greatest challenges in embedding any change or shift in attitude is ensuring that it endures.

Upcoming regulations to impact social considerations

Several upcoming regulations will impact how companies address, and report on, the social aspects of ESG. They include the Corporate Sustainability Reporting Directive (CSRD), International Sustainability Standards Board (ISSB), and Corporate Sustainability Due Diligence Directive (CSDDD). These new rules will have different implications and requirements on businesses’ practices.

CSRD

The CSRD is a European Union regulation that requires companies to provide detailed reports on their sustainability practices. Companies will need to be more transparent about their environmental and social impacts, showing how they are addressing issues like climate change and human rights. It also brings a much broader set of businesses and firms within scope for sustainability reporting, including many non-EU entities.

ISSB

The ISSB is developing global standards for sustainability reporting to ensure consistency and comparability across companies. This means companies worldwide will follow the same rules when reporting on their sustainability efforts, making it easier to compare their performance.

CSDDD

The CSDDD is another EU regulation that requires companies to conduct due diligence on their supply chains to identify and address human rights and environmental risks. Companies must check their entire supply chain to ensure they are not contributing to human rights abuses or environmental damage, and take action if they are.

While environmental and governance factors are critical, the social component of ESG should not be overlooked. By prioritising social responsibility and complying with upcoming regulations like the CSRD, ISSB standards, and CSDDD, companies can achieve sustainable growth and contribute positively to society. As stakeholders increasingly demand comprehensive ESG strategies, businesses that embrace the 'S' will stand out as leaders in ethical and sustainable practices.