Under Review: Why the “S” in ESG is now more important than ever

As the prominent anti-apartheid and human rights activist and winner of the Nobel Peace Prize, Desmond Tutu said:

“A time of crisis is not just a time of anxiety and worry. It gives a chance to choose well or to choose badly.”

As businesses continue to reflect on the previous weeks, they are having to take various decisions to help them navigate the crisis. The outcome of these choices will have a significant implication on their reputation and, eventually, their bottom-line. One such crucial decision for companies is how they look after their employees and internal stakeholders.

Last week we discussed that asset managers must have ESG high on their agenda as they adjust to the “new normal”. Historically, the “E” and “G” have dominated the spotlight compared to “S”, as social matters are generally less understood and not easily quantifiable or measurable. According to the UN’s Principles for Responsible Investment (UNPRI), the “social element of ESG issues can be the most difficult for investors to assess.” However, the unprecedented pace of social change due to the pandemic has brought the “S” of ESG into sharp focus. Goldman Sachs’ Head of the Sustainable Finance Group John Goldstein said: “…the ’S’ is climbing into the front seat”.

Social bonds have become the fastest-growing part of sustainable finance and some of these are earmarked for vaccine development or defraying crisis costs. But more broadly, there is a new focus on companies’ approach towards employee welfare, healthcare and supply chains. There is a rapidly growing awareness that these factors must be considered not only by business owners and senior leadership teams, but also by asset owners and investors.

This consideration is not just limited to companies in the financial services space but extends to almost all businesses operating across various sectors. If neglected it can result in a strong negative reaction from the public and subsequent changes in companies’ policies, as we saw when Victoria Beckham reversed a decision to furlough 30 staff at her fashion label following heavy criticism of her application for public money. The backlash over pub chain Wetherspoon’s suggestion that staff should not be paid after its pubs closed and the Frasers Group’s attempt to keep open its Sports Direct outlets despite a Government order to shut all non-essential shops in March are other examples which highlight the scrutiny on businesses over how they treat their employees.

Furthermore, investors are closely looking at what senior leaders are doing to “share the pain” with the employees. The Investment Association recently urged companies to review executive bonuses in case of suspension or cancellation of dividends. Moreover, it said that where employees are directed to take pay cuts, executives too should follow the same approach.

There is no doubt that the “S” pillar of ESG will continue gaining traction in the coming weeks and the time has passed for businesses to make small commitments. New York City Comptroller Scott M. Stringer who oversees the city’s pension fund said: “As shareholders, we expect companies to protect the health, safety, and economic stability of their workers. The long-term success of companies depends on the long-term success of employees, and this call to action is not just the right thing to do, but the smart thing to do.”



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