Why Business Leaders Can’t Afford to Ignore the “S” in ESG

Most ESG (Environment, Social, and Governance) ratings say they account for a firm’s social footprint — but in reality, the “S” in ESG is often ignored or vaguely defined. That’s the finding of a new report co-authored by HEC Paris Professors Marieke Huysentruyt, Bénédicte Faivre-Tavignot, Leandro Nardi, and S&P Global’s Bruce Thomson.

Drawing on a new analysis of 18 major ESG frameworks, the researchers show how corporate social metrics fail to reflect the true impact of companies on workers, communities, and inequality. Unlike carbon emissions or governance, the social dimension remains fragmented, inconsistent, and frequently dominated by environmental or financial concerns.

This research urges companies and investors to expand the lens of social responsibility beyond internal HR policies — and into the entire value chain.

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Marieke Huysentruyt, Bénédicte Faivre-Tavignot, Leandro Nardi: We consider a firm as part of an ecosystem, and so if we want to understand the social dimension of a firm, we need to consider its entire value chain. That means we not only look inside the firm - for instance, at the working conditions, work-related rights and equal opportunities in the workplace - but we also look at rights and justice for workers in the supply chain, the impact that the firm has in the communities where it operates, on its end-users or consumers and the wider society. It's hard to single out which of these domains is most important.

Traditionally we've been focused first and foremost on employment practices, but now is the time to really open up and take stock of firms’ social responsibility, the social role they play in a more holistic, comprehensive way. What’s even more disconcerting is that the social dimension of firms has often been neglected, even outright ignored. This is in part because taking stock of the social scope of a firm can be quite complex, at times political and conflictual. Compared to say carbon emissions, measurement of a firm’s social impacts is less standardized, and there is little agreement about which topics should be covered.

As a result, I believe companies have stayed away from the “S” of ESG for too long. But this, I believe, is bound to change. There has been a huge wake-up call in the past few years. We've seen the protests of the Yellow Vests and #metoo, and the COVID-19 crisis has certainly accelerated the movement to challenge what companies are doing in terms of their social dimension. In fact, I believe that a company’s social scope will become a critical driver of comparative advantage. Going forward, excellence on the social dimension may well make or break companies.

MH, BFT, LN: The first step was to take stock of which are the topics that are considered to be valid topics to have better understanding of what is the social impact of a company. Then, as I mentioned earlier, there's the question of how do you actually measure these? We also considered the synergies between environment, governance and social questions.

These frameworks force us to consider those different dimensions as stand-alone dimensions, but of course what becomes very exciting is when there are major changes like the question of climate refugees. It's clear that they bring into play social issues that companies are confronted with, cutting across different topics and connecting with the environment and social challenges.

However, the biggest obstacle we meet is the problem of coverage. It's the foundational problem. But then once we go beyond this paper, we discover that there are other issues. For example, do we use qualitative or quantitative measures, should they be comparative across firms, and so on? We are just beginning to make sense of what today is a very complex set of ESG frameworks, frameworks which are incredibly influential. Going forward, they guide investment decisions and investment resources of companies in terms of priorities.

MH, BFT, LN: I believe leadership matters a great deal because it can create urgency. When it comes to advancing the social scope of business, I think the most appropriate posture for leaders is one of openness and humility. Practicing humility helps leaders embrace and accept uncertainty. It leads them to adopt a complex systems frame, be more willing to search for solutions to complex societal challenges in partnership. So, managers who want to excel by optimally setting the social scope of the firm are well advised to practice humility.

One thing you should know is that when it comes to ESG frameworks and reporting, it's a necessary condition to have a leadership that is ready to acknowledge its starting point. This is, in all likelihood, suboptimal, far from perfect, but it also has the capacity to improve. ESG frameworks can help companies do exactly that – find ways to make progress. ESG frameworks make gaps or shortcomings more visible. Then, they encourage companies to regularly monitor and report on progress to all of their stakeholders.

Well, there's still quite a lot of distance to go. It is fair to say that today’s major social problems – like growing inequality – challenge the credibility of business. And so, the conversation about should companies get involved is not over yet. There are still many companies that want to get their CO2 emissions down first and foremost and will do everything necessary to reach that objective, maybe to the detriment of human rights. So, we need to stay vigilant and keep pressing for action.

At the same time, a growing number of companies are convinced that inequality matters and that they have a role to play, complementing robust political response. These companies often start with relatively well-defined projects, tackling one issue – for instance, making their goods accessible to the poor, not necessarily addressing the full value chain. What I find fascinating though is that engaged companies are increasingly building or joining ambitious coalitions, like Les Collectifs in France or the joint B4IG-WBCSD platform internationally – eager to tackle inequalities. There, you see companies putting their heads together, exchanging best practices about many social topics simultaneously– from living wage over forced labor and just transition.

Well, ideally what I would love to do is to work with many companies and many different organizations to test different ways to accelerate and change certain practices, managerial practices or even production processes. That could help a company to strengthen their social impact. I would like to test and experiment different ways of changing the status quo because I think that it will probably be part of the answer: developing new ideas, rigorously testing those in the field. In this way, the best and most promising ideas can be scaled with a clear focus on how we can create a society that creates opportunities for all, and that is inclusive, that respects justice and human rights, principles that generate and share benefits fairly with everyone.