TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Let’s focus on the ‘S’ in ESG to improve social outcomes
Many believe improvement of the ‘S’ pillar of performance in environmental, social and governance (ESG) issues is at odds with financial returns.
Change Size
Health matters: Medical workers vaccinate workers of a factory in Cikarang, West Java, against COVID-19 on March 9, 2022. A total of 5,000 booster vaccines were administered that day. (Antara/Fakhri Hermansyah)
I
n less than two decades, the focus on environmental, social and governance (ESG) issues in capital markets has moved from a niche concern to the mainstream. This shift is reflected in the amount of capital being invested in ESG-oriented investment funds, which totaled US$649 billion in 2021.
The private sector’s consideration of ESG issues will continue to grow as customers, investors, governments and civil society groups demand more transparency and improved performance in how businesses address the environmental and social impacts of their operations.
The growing market for ESG investments has amplified the corporate commitment to the environmental pillar of ESG, particularly regarding climate change. As of today, 683 of the world’s 2,000 largest publicly traded companies have committed to a net-zero strategy, according to the Net Zero Tracker. Additionally, the financial sector is increasingly investing in renewable energy and reforestation projects through the establishment of sustainable funds.
Companies are also making efforts to improve their performance relating to the governance pillar of ESG, by establishing internal corporate governance codes and enacting policies. However, the social (S) pillar of ESG, which covers a wide range of issues that include human rights, workplace health and safety, diversity and inclusion, employee engagement, business ethics and community engagement, has not received adequate attention in comparison to the other two pillars of ESG.
The lack of focus on the social pillar is due to many factors. One is the belief that improvement of the “S” pillar of performance is at odds with financial returns, as it will impose an unnecessary burden. However, this view is unfounded since improving the “S” pillar of performance promotes responsible business practices and acts as a risk mitigation mechanism, which in turn strengthens stakeholder trust.
Another factor is the notion within the investor community that assessing social performance is difficult since its indicators are not as straightforward as the other ESG pillars. This notion is not entirely true. For example, the baseline standards for business and human rights are clearly defined in the United Nations Guiding Principles on Business and Human Rights (UNGPs).
The World Economic Forum (WEF) has also issued stakeholder capitalism metrics that include social aspects, such as diversity and inclusion, pay equality, wage level, workplace health and safety and continued development of employees.
