Environment, Social and Governance (ESG) Reporting – ESG pillars were first referred to in the 2006 United Nation’s Principles for Responsible Investment (PRI) report. The ESG framework is a powerful and necessary approach to assessing the risks and benefits brought by focusing in on the environment, social and governance/economic issues.
To achieve a strong ESG stance, each of the three elements (Environment, Social, Governance) must be considered. Unfortunately, this balanced approach – and subsequent value creation – is often scuppered by an imbalance in our understanding of how to address the ’Social’ factors, which often get overlooked.
’Social’ element – something businesses must not lose sight of amid a seismic shift towards addressing well-documented environmental factors.
The social element of ESG suffers from middle-child syndrome: it typically gets less attention than its siblings and feels caught in the middle. This apathy towards social responsibility from organizations stems from its contextual and shifting nature, making it difficult to define and measure.
WHAT IS SOCIAL ASPECT ABOUT?
Social component of ESG evaluates the relationships the business fosters with all stakeholders. From employees and suppliers to customers and regulators, we must consider the impact of your operating model on people.
Businesses that fail to meet these social responsibilities can be hit with severe financial penalties, which are compounded by the blow dealt to their reputation. For example:
- Amazon – In 2017, Amazon was ordered to repay €250m in illegal state aid to Luxembourg, as EU authorities clamped down on sweetheart deals that help the biggest corporations slash their tax bills.
- Chipotle Mexican Grill – In 2020, Chipotle was fined nearly $1.4 million over accusations that it routinely violated Massachusetts child labor laws by letting teenagers work too many hours per week and too late on school nights – with authorities estimating more than 13,000 violations from 2015 to 2019.
- Sports Direct – – In 2017, Unite, the union, accused UK sports retailer Sports Direct of breaking promises to offer store staff guaranteed hours rather than zero-hours contracts.
This is a wake-up call for businesses, who must not only recognize the potential implications of social neglect; they must understand the value of taking their social responsibilities seriously and visualize the positive outcomes.
IS SOCIAL ASPECT OF ESG INCLUDED INTO ACTIVITIES OF START-UPS, INCUBATORS AND ACCELERATORS?
Over the last ten years, the corporate world has focused increasingly on implementing stakeholder capitalism through Environmental, Social and Governance principles (ESG).
However, is ESG a distraction to cash-strapped talent and time constrained start-ups in terms of incubators and accelerators? Should founders build their business first and worry about ESG later?
Quite the contrary: start-ups have an advantage over larger companies whose “installed base” of assets, products and culture often needs to be undone to be consistent with ESG principles. Start-ups can build it right from the start, avoiding costly rework later. And they can do this in a way that accelerates the urgent search for product-market fit versus distracting from it. They should start implementation of all three elements of ESG strategy already at the stage of risk assessment, not when a project will reach later corporate level.
As a rule, developing a start-up, people start with Purpose. Purpose crystallizes the unmet need a start-up is answering and the unique strengths it brings to do that. Purpose answers: “What would the world lose if the start-up disappeared?”
ESG is different than Purpose. ESG frameworks suggest how we run the business to deliver purpose, and strategy, and what exposure we have to certain risks. It provides an implementation framework to guide business decision-making. Start-ups must build a strong social contract with employees; including ‘living’ wages, an inclusive culture, and support for mental health.
Start-ups develop a competitive advantage from building Purpose and ESG from the start. Purpose helps inform ‘offense’ on a few chosen areas of distinctiveness. ESG helps inform “defense” in material categories. In all cases, start-ups must cover specific basics including climate targets on E, a strong social contract on S, and diverse governance and strong data processes on G. Optimally, the founder should clarify “who” is accountable for implementation, back priorities with metrics, and report progress to their board alongside other priorities.
CONCLUSIONS
Sustainability isn’t separate from a business strategy. It is central to it.
The markets have become transfixed with ESG, and the demand for more and better ESG data will only grow in the years ahead. It’s time that the markets value S as much as E and G. The only thing that stands in the way is better data.
There are three practical steps that ESG investors, rating agencies, and companies can do to elevate the importance of S to the markets:
- first, and most importantly, companies should start reporting S impact data consistently (already from incubators and accelerators);
- second, ESG investors should start asking for S impact data and making it a requirement from the very early steps – start-ups, incubators or accelerators;
- third, ESG rating agencies, standard-setting bodies, and data providers should align with a specialized S data provider to up-level the value of their data.
S impact data is complex; it cannot be simply captured in a one-dimensional box-ticking survey. Reliable, high-quality S data requires specialized taxonomies, questionnaires, and independent verification. This will also create a whole new level of ESG S analysis.
It’s time to raise the bar on social impact measurement, create better S data and give the market something to price into their models.
