The rise of social ESG

The crucial role of the 'S' in ESG: exploring emerging social trends and strategies for companies to drive positive impact

Patricia Hui FCG HKFCG(PE), lawyer and governance professional, looks at the social dimension of ESG and provides practical guidance for companies to help them adapt to changing social dynamics.

‘We are faced not with two separate crises, one environmental and the other social, but rather with one complex crisis which is both social and environmental.’ 

Laudato Si 139

In recent years, environmental, social and governance (ESG) criteria have become increasingly important for evaluating a company’s sustainability, ethical practices and value. There has been a significant shift towards incorporating ESG considerations and practices into corporate governance frameworks and business operations worldwide.

While the ‘S’ – or social dimension – has traditionally lived in the shadows of the ‘E’ and the ‘G’, business leaders are starting to recognise that environmental and societal challenges are intertwined, and that the ‘S’ is equally crucial for driving long-term value creation. The regulatory landscape is evolving, with countries like Australia and Canada, as well as the European Union, incorporating social elements into their reporting criteria.

The importance of the ‘S’ in ESG

The ‘S’ in ESG is about human rights and equity – an organisation’s relationships with people and its policies and actions that impact society, communities, employees and other stakeholders. It involves assessing all people’s interactions based on principles of ethics and justice, and a consideration for well-being. Internally, this includes employee relations, health and safety practices, and talent management within the company. Externally, it encompasses stakeholder management, human rights considerations and community relations.

Companies that prioritise the social dimension of ESG demonstrate a commitment to upholding ethical standards, respecting human rights and making positive contributions to society. This, in turn, can enhance their reputation, attract top talent, build trust with stakeholders and mitigate social risks. Ultimately, this contributes to their long-term sustainable growth and success. It is essential for companies to prioritise the ‘S’ in ESG and to align their strategies with emerging social trends to foster a more inclusive and sustainable future.

Emerging social trends

Social trends are expected to influence the business landscape and shape companies’ ESG strategies as we progress. These emerging trends highlight the evolving expectations of stakeholders and the need for companies to adapt to changing social dynamics. Some of the critical social trends to watch include the following.

Diversity, equity and inclusion (DEI)

The Global Gender Gap Report 2024, recently released by the World Economic Forum, reveals that the global gender gap score in 2024 is 68.5%, which means that 31.5% of the gap remains unaddressed. Progress has been extremely slow, with only a 0.1% improvement from 2023. At the current pace, it will take a staggering 134 years – five generations from now – to achieve full gender parity. Women’s workforce representation lags behind men’s across nearly every industry and economy, at 42% overall and only 31.7% in senior leadership roles.

The focus on DEI has slowed due to ongoing economic uncertainty and corporate budget cuts. However, companies will face heightened pressure to not only promote gender equality, but also to advance DEI initiatives across various dimensions to nurture a more diverse and inclusive workplace. These initiatives include, among other things, supporting diverse gender identities and expressions, removing unconscious bias in the workplace, and ensuring fair and unbiased processes and outcomes for all individuals (the ‘E’ in DEI). Stakeholders such as employees, customers, investors and regulators will seek transparency, accountability and measurable progress in addressing systemic inequalities and championing equal opportunities.

Mental health and well-being

The latest data from Gallup reveals that, in 2023, global employee engagement stagnated, overall employee well-being declined and worker stress levels reached a historic high, resulting in a global economic cost of $8.9 trillion, or 9% of GDP. These developments are causing hiring costs to climb and performance to decline, thus reducing creativity and innovation. The World Health Organization famously stated: ‘There is no health without mental health.’ Businesses increasingly acknowledge the decisive role of mental health and well-being in boosting productivity, morale and retention, leading to a more engaged and resilient workforce and a more positive corporate culture.

Climate mental health is a social trend that focuses on the psychological effects of climate change on people and communities. As the world encounters more environmental challenges, such as natural disasters, extreme weather events and ecosystem disruptions, many individuals are feeling anxiety and stress related to climate change. This growing recognition of climate mental health underscores the need to address not just the physical, but also the emotional and psychological aspects of environmental issues.

Digital transformation

The impact of digital transformation is multifaceted and profound, touching virtually every aspect of our lives. It is marked by global connectivity, greater convenience and accessibility of information and services, and expanded access to education, e-commerce, e-government, smart cities and digital entertainment and media platforms. However, this amplified reliance on digital technology has also raised concerns about data privacy, cybersecurity, digital inclusion and the impact on traditional industries and employment. It requires continuous adaptation, education and collaboration amongst individuals, businesses and communities to manage these rapid changes.

Leadership skills for a changing world

In today’s rapidly changing and interconnected global landscape, leadership skills must continue to develop in order to more effectively address the complex challenges and opportunities that arise. As traditional top-down, hierarchical organisational structures give way to more collaborative and inclusive models, leaders are increasingly required to adapt their leadership styles to foster a culture of innovation and creativity. This involves not only honing their emotional intelligence to navigate intricate interpersonal dynamics, but also inspiring and nurturing their teams toward a shared vision and cultivating a culture that encourages and develops great leaders at every level of the organisation.

Moreover, influential leaders must remain agile and open-minded in the face of constant change, continually learning and growing to stay competitive in a fast-paced market. Success in such an environment demands that leaders embody the qualities of visionaries, strategists and motivators, capable of leading with both foresight and compassion to drive their teams toward sustained success amidst perpetual evolution.

Personal data privacy

As artificial intelligence (AI) continues to expand and permeate various aspects of our daily lives, the volume of data being shared and generated online is growing exponentially. Given this trend, it is imperative to emphasise and prioritise the safeguarding of personal data privacy. The primary goals are to ensure that individuals retain complete control over their personal data, including its usage and accessibility, to protect them against potential harm such as theft or fraud and to prevent any misuse of personal data for manipulation or discrimination.

AI technology has the potential to offer numerous benefits, but it also presents a range of unique and unprecedented challenges. Some of these challenges include the higher risk of data breaches due to vulnerabilities in AI security protocols, as well as the potential misuse of data and privacy concerns due to AI’s reliance on and accumulation of large information databases. Additionally, there is a risk of perpetuating and exacerbating bias within AI systems, resulting in unfair and discriminatory outcomes in decision-making processes. AI-generated content can also be used in phishing attacks, posing new challenges for cybersecurity. Finally, concerns have been raised about the potential for surveillance overreach and the misuse of AI technology for monitoring and tracking individuals, raising important questions about privacy and civil rights.

Corporate procurement practices

With human rights violations now being exposed far more often and supply chain practices under intense scrutiny, it is vital for companies to elevate their due diligence process within their corporate procurement practices. This involves comprehensively examining and evaluating potential suppliers and partners, establishing unequivocal ethical sourcing guidelines that align with international standards, and continuously and proactively overseeing compliance with rigorous human rights criteria throughout each supply chain tier.

Emphasising transparency, traceability and accountability can help companies demonstrate their steadfast dedication to responsible sourcing and ethical business behaviour. This approach also establishes a robust foundation for sustainable and ethical operations that resonates throughout the industry.

Stakeholder engagement and accountability

Stakeholder engagement is the bedrock of effective corporate governance, facilitating a culture of transparency, accountability and a cohesive alignment of interests between the organisation and its diverse stakeholders. As the social dimension of ESG continues to gain prominence, simply treating stakeholder engagement as a box-ticking exercise is no longer sufficient. Various stakeholders, including employees, suppliers, customers, communities and investors, are advocating for higher standards of transparency, active engagement and robust accountability from the companies with whom they interact.

To build trust and credibility, companies need to actively engage stakeholders in decision-making, seek their input, and address their concerns and priorities thoughtfully. By embracing diverse perspectives, companies can make better-informed and socially responsible decisions, identify areas for improvement, take proactive steps to tackle social challenges and show their commitment to creating shared values with their stakeholders.

Climate justice and environmental equity

The Business Guide to Advancing Climate Justice, jointly published by Forum for the Future and B Lab in April 2024, reported that, 'while billions of dollars are invested in climate solutions annually, only a small percentage is allocated to support the communities most vulnerable to its impacts – frontline communities. As climate change intensifies, the most severe harm often falls disproportionately on frontline and underserved communities, who are least able to prepare for and recover from climate disasters. Vulnerability to climate change is exacerbated by extractive forms of capitalism and widespread inequality that marginalises specific communities.’

In the foreseeable future, there will be a stronger emphasis on the convergence of social and environmental concerns, particularly in terms of making certain that actions to address climate change are just and accessible. Companies will be expected to acknowledge and actively work to alleviate the disproportionate impact of climate change on disadvantaged communities. This will involve engaging in climate justice efforts, striving to mitigate environmental harm through a social equity lens and promoting sustainable practices that benefit all members of society.

Actions companies can take

Driving positive social impact requires a multifaceted approach that starts with unwavering leadership commitment and extends to every level of the organisation. Securing leadership buy-in is pivotal, not only in establishing the overarching tone and direction, but also in cultivating an environment that stimulates inclusive and creative collaboration and engagement from all involved parties. It is also imperative for organisations to move beyond tokenism and to translate their frameworks, policies and strategies into tangible, consistent actions and results.

Embedding DEI in the corporate culture

As workplaces become more diverse, organisations should review their existing policies to accelerate inclusion for a broader range of employee needs, going beyond the minimum requirements set by law and regulations. Inclusion programmes targeting biases in hiring, promotions, opportunities and daily interactions can help nurture a culture of belonging and respect. Boosting allyship through affinity-based learning and employee resource groups can foster understanding, empathy, solidarity and positive change throughout the organisation.

Investing in employee well-being programmes

Developing clear and comprehensive guidelines can significantly assist in creating effective processes for addressing prevention, identification and support for distress, substance abuse and other mental health issues. Encouraging open and normalised conversations about mental health can play a crucial role in reducing the stigma often associated with these issues. This can help employees feel more empowered and secure in sharing their experiences without fear of judgement. It is also vital for organisations to establish policies that explicitly prohibit harassment and bullying. These rules should be paired with a well-defined process for thoroughly investigating complaints and addressing any discovered violations. Companies must take a strong stance against harassment and bullying by consistently following through on the consequences for those who engage in such behaviours. This ensures that the workplace remains a safe and supportive environment for everyone.

Organisations can support employee well-being by providing mental health resources, upholding work–life balance, authorising flexible work arrangements, implementing holistic wellness initiatives, providing cancer support, offering stress management programmes and setting up a psychologically safe work culture that respects the mental health and well-being of the employees.

Empowering the workforce in the age of AI

The rise of AI presents incredible opportunities to transform how organisations operate and empower their workforce. By aligning AI initiatives with humanistic values and involving employees in the early stages of implementation, organisations can create strategies that maximise the benefits and minimise the potential negative impacts. As the nature of work evolves, it is essential for companies to invest in upskilling and reskilling programmes to enable their employees to adapt to the changing landscape. One practical approach is for organisations to subsidise online certification courses in fields such as machine learning and AI engineering, and to collaborate withtraining and development specialists to tailor the learning content to meet their specific needs. By reinforcing a culture of continuous learning, companies can ensure that their employees are prepared to embrace technological advancements and navigate the dynamic nature of the modern workforce.

Essential leadership skills to learn

The role of leadership is not static. Leaders and managers at all levels and in every function need to continuously learn and adapt to the changing requirements of leadership. Organisations should provide employees with the tools, resources, training and support needed to develop and enhance their leadership skills. This involves embracing change, viewing challenges as opportunities for growth, developing emotional intelligence, recognising and addressing biases, respecting differences, promoting inclusive work environments, demonstrating empathy and communicating effectively to empower, inspire and motivate. While technological change requires new employee skills, leadership style must also evolve to be AI-ready, focusing on coaching rather than micromanaging, facilitating collaboration, cultivating diversity and measuring impact versus output.

Protecting data privacy in the age of AI

In June 2024, the Office of the Privacy Commissioner for Personal Data, Hong Kong issued Hong Kong’s first set of personal data protection guidelines for businesses using AI services. According to the framework set out in the guidelines, companies using AI solutions should take various measures to protect personal data, including conducting risk assessments, deciding on the level of human oversight and minimising the personal data collected to train the model. Organisations should have an internal AI governance strategy to demonstrate the commitment of top management to ethical and responsible procurement, implementation and use of AI. They should also establish a governance committee, led by a C-level executive, that reports directly to the board.

Enhancing supply chain transparency and ethical sourcing practices

Companies should map their supply chains to understand the various stages and entities involved in enhancing supply chain transparency. Once this is done, they can conduct comprehensive risk assessments to identify potential vulnerabilities or ethical concerns. Auditing suppliers is vital to make sure they adhere to standards and practices that align with the company’s values.

Furthermore, applying ethical sourcing practices involves engaging with suppliers and encouraging them to adhere to human rights standards and environmental regulations. When companies ensure that their supply chains comply with these standards, they can minimise risks, improve their reputation and contribute to positive social impact by supporting ethical and sustainable practices.

Engaging with stakeholders and listening to their feedback

Effective stakeholder engagement requires establishing and maintaining transparent and open communication to actively address the interests and concerns of diverse groups, setting up effective feedback mechanisms and fostering collaboration. Leveraging digital platforms can significantly enhance the reach and impact of stakeholder engagement efforts. Companies should look to reduce their carbon footprint through stakeholder engagement. By integrating stakeholder engagement as a fundamental consideration in all business decisions, companies can create more sustainable, adaptable and inventive business models that align with the needs and expectations of all stakeholders involved.

Advancing climate justice

The Business Guide to Advancing Climate Justice has identified four key insights that the private sector should consider as it works to advance climate justice. These are: ‘prioritise trust-building with frontline communities’, ‘adopt a new mindset’, ‘offer immediate and sustained support to meet frontline community needs’, and ‘consider your spheres of control and influence’. The report also offers guidance on taking action through community partnerships, internal engagement, internal operations and value chains.

Conclusion

From the rise of sustainability initiatives and digital transformation to the emphasis on diversity and inclusion, companies are now at the forefront of social innovation and progress. As we navigate the complexities of modern societal challenges, embracing these emerging trends and embedding these principles into business operations will be pivotal for shaping a more sustainable, inclusive and equitable future for society and the planet. The path forward may be challenging, but with creativity, collaboration and a commitment to positive social impact, we have the potential to lead the way towards a brighter, more sustainable tomorrow.

Patricia Hui FCG HKFCG(PE)

Lawyer and governance professional

Ms Hui has extensive experience advising various industries, boards, management teams and stakeholders on legal, regulatory and compliance matters, corporate governance and strategy across different regions. She has worked as an in-house General Counsel and Company Secretary for a Fortune 500 US multinational corporation, a prominent listed conglomerate and an international insurtech startup, roles that have equipped her with a deep understanding of the complex legal and governance issues that companies face.