The 'social' aspect of ESG

In the first part of our article we discussed the ‘E’ or the environmental component of ESG. In this part we will discuss the ‘S’ or the social component of ESG, that is, the approach of a company towards it employees, customers, and the community at large.

 

The various aspects of social welfare draw their origin from international instruments which inter alia include the Universal Declaration of Human Rights, the Core Conventions of the ILO, UN Guiding Principles on Business and Human Rights, the Sustainable Development Goals and the UN Guidelines on Consumer Protection. The principles laid down in these international instruments are also reflected in the national laws of many countries, including India. 

 

Though our national laws regulate employment conditions, industrial relations, health and safety conditions, wages, consumer rights and rights of some communities, yet social issues like diversity, compensation practices, CSR and stakeholder protection have attracted a lot of attention in the recent years.

 

Gender diversity on board became the initial focus for policy-makers and investors. Norway became the first country in the world to introduce a binding gender quota on board in early 2000s. India, Germany France and many other countries also introduced laws mandating gender quota. India also has a mandatory requirement of one woman independent director for top 500 companies (top 1000 from April 1, 2020). It is easy to predict that these requirements are going to be more stringent in future. In 2018, California became the first State in the USA to implement women quota on board. As part of good governance practice, companies like Google, Facebook, Microsoft, Twitter and some others publish voluntary diversity reports. In 2010 the “30 per cent Club” campaign was started in UK with the objective of achieving at least 30 per cent female representation on FTSE100 boards. The campaign became popular and expanded to 14  countries/regions. Currently, it targets to achieve 30 per cent female representation on boards as well as senior management by 2020.

 

The debate on diversity is expanding to include ethnicity, disability and sexual orientation, not only on board but also in senior management. Recently, the US SEC issued a guidance on these issues. Some companies have also started making voluntary disclosures around this subject. In its 2018 annual report Goldman Sachs stated that, it is undertaking initiatives to increase the representation of diverse communities at all levels across the firm. The new recruitments at analyst/ entry level would have 50 per cent women, 11 per cent black professionals and 14 per cent Hispanic/Latino professionals in USA, and 9 per cent black professionals in UK. In 2018, Godrej India set an example by publishing “A Manifesto for Trans Inclusion in the Indian Workplace”. Pay parity across diverse set of employees is also something being intensely highlighted by investors.

 

Another aspect that has attracted a lot of focus is — “providing social security to women”. In India, the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act was enacted in 2013 to provide protection to women against sexual harassment at workplace. Similarly, the Maternity Benefit (Amendment) Act, 2017, provides for granting of 6 months of paid leave to women.

 

Some countries also have laws around paternity leave. For instance, in Japan fathers can take upto one year of paternity leave. India is yet to introduce such law. However, companies like TATA Steel, TVS, PepsiCo and others are setting examples by having paternity leave policies.

 

Apart from welfare initiatives for employees, companies are being evaluated on how they ensure the well- being of their customers and their impact on the local community.

 

The Companies Act, 2013, recognises community as a stakeholder. It prescribes mandatory CSR spend by a company.  However, this is not enough. Considering the economic strength and the over- reaching presence of companies, they are now expected to play a larger role for the welfare of communities. The National Guidelines on Responsible Business Conduct (NGRBC) introduced by the MCA in 2019, provide that companies should respect and be responsive to all stakeholders especially those who are vulnerable and marginalised. The framework for Business Responsibility Report (BRR) introduced by SEBI inter alia, prescribes disclosure on actions taken by a company to engage with the vulnerable and marginalised stakeholders.

 

Companies also have responsibilities towards their customers. The NGRBC recognises that companies are responsible to ensure that the products/services provided by them are ethical, safe and provide value to customers. The BRR framework requires a company to make disclosures on consumer complaints, customer survey and related matters.

 

All over the world, regulators, investors and shareholders are concerned about sustainable performance of companies. Huge consensus is emerging that financial capital is not the only capital of companies, and that their ESG performance should be tracked for evaluating their long term worth.

 

 Globally, ESG factors are emerging as the main determinants of flow of funds into companies. Larry Fink, the CEO of BlackRock, in his 2019 letter to the CEOs of organisations emphasised on the Purpose of an Organisation, that is, companies are not only expected to generate profits but also, contribute to the well-being of the society. Further, several index providers have devised indices that specifically incorporate ESG issues. This trend has also started picking up in India.

 

For longterm value creation and sustainable growth, companies are well advised to incorporate integrated thinking in their culture and start focusing on ESG issues.

 

Sinha is senior advisor & Sahai is associate, Cyril Amarchand Mangaldas

 



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