Analysis

Why companies should place great importance on the S in ESG in 2021

Alistair de Kare-Silver

In recent years, the S in ESG has tended to lag the E and has been considered less material by investors and companies. However, the coronavirus pandemic has been a major catalyst for pushing the ‘S’ right to the fore.

One only needs to look at the market reaction to Deliveroo’s highly anticipated IPO – with many institutions citing concerns over the employment status of its riders – and PWC announcing a major new flexible work deal for its employees to see the importance of the S, particularly around the treatment of workers and the workforce.

Expectations of businesses and the positive contribution they make to society have never been greater. The pandemic will end, but expectations on businesses will only grow; there will likely be as much continued focus on the S this year as on the E.

So what does good look like and how should companies ensure they are consistently meeting the expectations of all their stakeholders? We’ve broken the S down into four key areas: People, Purpose, Prosperity and Suppliers to offer a few thoughts on what companies should be thinking about. We also set out some practical ‘best practice’ recommendations.

  • People

One of the most important stakeholders is a Company’s people. The pandemic exposed a widening gulf between those at the top of the workforce and millennials, not just in terms of the wage gap, but also in attitudes towards the workplace. Many junior employees place far greater importance on work life balance, their mental health and wellbeing and social justice issues. The events surrounding the UK Head of KPMG’s resignation in February showed the consequences of misreading the mood of your workforce, or displaying a lack of empathy.

Indeed, MHP’s latest Networked Age Guide on Polarisation looked at the propensity of millennials to engage in workplace activism if they object to their employer’s behaviour. 36% of this age group would join other colleagues in complaining through a collective meeting or union if their employer was doing something they strongly objected to, a higher proportion compared to Gen X. Companies need to ensure they are regularly communicating with staff and showing empathy when doing so.

With large numbers of people working at home during the pandemic, the focus on people’s mental health and wellbeing has become paramount; companies will need to communicate clearly to their staff what support is available, should they need it.

When restrictions ease it is unlikely we will see staff return to the office five days a week, with most companies talking about a hybrid model going forward. As my colleague James Midmer recently pointed out in an article on the future of the office; if they haven’t already, companies should start communicating with their employees about their visions and expectations of what this will look like. Employees will be paying close attention to ensure companies are living up to their commitments and promises on flexibility, and it is easy to see this becoming another tool in the armoury when it comes to the war for talent.

  • Purpose

Companies should consider having a stated purpose which expresses how the business intends to create value for all stakeholders and address solutions to ESG issues. The more companies can intertwine their purpose with their core business, the better they can deliver value for all stakeholders, including shareholders.

  • Prosperity

One of the major UN’s Sustainable Development Goals is on creating shared prosperity and equitable growth, and in turn reducing poverty and inequality. Businesses should show how they are creating economic and social prosperity in the communities within which they operate. This can be through the sourcing of local products and services as well as job creation. Companies can also show what support they are providing to their local communities, be it through charitable donations or employee involvement in certain social action projects.

  • Suppliers

Companies need to have strong checks and balances in place over who they work with and ensure there are mechanisms in place for stakeholders to report any human rights violations or forced labour. Companies should perform human rights due diligence across their entire supply chains and encourage stakeholders to provide regular feedback so they can respond quickly to any misconduct. Any association or implication of modern slavery in any form can be highly damaging with Boohoo being a prime example of a reputational crisis that can ensue.

MHP recommendations around ESG best practise

  • Identify the areas where you can make the biggest impact

There is a lot to consider and companies simply can’t do everything. We recommend corporates should begin by conducting a materiality assessment to establish which issues matter most to both stakeholders and to the long-term success of the business. This assessment should guide ESG priorities.

  • Demonstrate action not just aspirations

To inspire confidence management teams need to show tangible evidence of actions taken to positively benefit society, rather than simply making gestures. To help guide reporting and disclosure around this, companies can consider adopting certain sustainability reporting frameworks such as The United Nations Sustainable Development Goals (UNSDGs) and / or the Global Reporting Initiative’s (GRI) G4 guidelines.

  • Consider talking about the S more prominently in results statements and other materials

We are increasingly seeing companies talking about what they have done to support their stakeholders through the pandemic far more prominently in their results and trading statements. We like the way Taylor Wimpey talked about supporting its workforce through COVID-19 in the highlights section of its Full Year Results announcement, and Dunelm’s slide on its people on the second page of its results presentation.

There are other ways of bringing your ESG reporting and narrative to life. Many companies host ESG presentations along with publishing stated targets and KPIs on their websites. In this regard, near-term, tangible targets will be seen as more effective and meaningful than long-dated vague aspirations. The use of infographics, videos and other digital content can also bring policies to life and increase their impact.