SOCIAL-BUSINESS  NEXUS

Kiran Dhanapala assesses the impact of ESG on a business

Environmental, social and corporate governance (ESG) principles focus on how nonfinancial factors impact organi­sational success in the long term. And the ‘S’ in ESG addresses a business’ responsibility to its workforce and the community in which it operates.

External risks include social trends and dynamics, labour strikes, consumer protests, scarcity of employees, safety risks and geopolitical events, community relations, human rights, data privacy, education and training among others.

For example, the Russia-Ukraine war, and deteriorating situation in Gaza and the rest of the Occupied Palestinian Territory, affected supply chains across the globe with rising prices and scarcities.

In Sri Lanka, union action during the countdown to national elections is also a risk that needs to be considered in terms of business continuity, labour costs, work productivity and so on.

Businesses must be alert to changes in societal trends and dynamics as many of these risks are beyond the control of organisations.

However, many risks remain within the control of management provided that best practices are observed. Stakeholder surveys (especially among staff) can play an important role in prioritising issues that call for action.

Board composition plays a role in being alert to a rapidly changing environment, which brings with it social risks and issues that are relevant to a company. And its membership can sometimes exacerbate a mismatch between corporate needs and contribution.

Often, its composition, skill sets and culture don’t adapt soon enough as Dutch biz author Paul Polman observed recently, in his NetPositive newsletter.

A 2021 Bloomberg study of directors of the 100 largest US companies found that boards are rather ESG incompetent: only 13 percent had oversight on ESG issues and a mere 10 percent regularly reviewed these.

The study also found that only 21 percent of directors had experience with the social part of ESG, particularly on health and diversity issues.

Furthermore, a 2024 study by the World Business Council for Sustainable Development (WBCSD) and the ERM Sustainability Institute found only 21 percent of Fortune 100 board members had expertise in the social part of ESG.

Polman advocates the ‘3Cs’ for major business transformation: composition, competence and contribution.

Composition means expanding boardroom diversity in every way to provide an improved worldview.

Competence is needed across diverse sustainability topics including climate and biodiversity. Continuous board level learning is important especially regarding trending issues such as circularity.

Contribution is about making more room for strategic discussions and stricter reviews of a board’s contribution including compensation based on performance. All this will strengthen corporate treatment of the social component in ESG.

An example of this includes risks and opportunities in an ageing demographic profile such as in Sri Lanka. This implies that a smaller labour pool of women professionals is involved in the informal care economy, and/or are unable to find roles with the required flexibility to balance their multiple roles and responsibilities.

Smart employers faced with limited labour availability will find that they have to offer greater flexibility, part-time roles, working from home options and possibly even elder daycare services, to attract a better skilled and more diversified pool of talent in a diminishing labour market.

Meaningful ESG reporting calls for tangible and transparent social data, and the early and thoughtful formulation of metrics, which are useful for companies – as follows.

Track the annual circulation of employee feedback surveys to gauge staff opinion.

Follow employees’ response rates to the annual feedback survey as measured in the reporting period.

Watch the percentage of employees participating in best practice health and wellbeing initiatives, which help reduce absenteeism and improve productivity.

Establish a diversity, equity and inclusion (DEI) policy to keep track of whether the company is fostering and preserving a culture of DEI.

Track employee turnover for the calendar year – turnover is defined as the number of full-time equivalents (FTEs) leaving the business.

Record the number of work related injuries experienced by workers as defined by local jurisdiction in the reporting period.

Track the gender pay gap by comparing gross hourly earnings of men and women employees as measured in the reporting period, and transform that difference into a percentage format.

Watch the ratio of basic salary and remuneration of women to men in each employee category and important locations of operation.

Establish a data privacy policy and take note of how individual personal data is collected, stored, used, shared and protected.

Establish a cybersecurity policy to keep track of the company’s cybersecurity strategy.