In the latest episode of our First Call podcast we discuss the regulatory drivers that are keeping ESG firmly on the boardroom agenda, and examine a trend we observed in our recent research – the growing importance of the ‘S’ in ESG.
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In the third instalment of the First Call, S-RM’s CEO, Heyrick Bond Gunning and Natalie Stafford, Head of ESG and Sustainability, discuss S-RM’s latest research, ESG Report 2024: The Rise of Social Sustainability, the idea for which stemmed from client conversations on ESG. As Natalie explains, over time her team were hearing more and more client questions centred around social issues. “That really peaked our interest, is social really starting to rise up the board agenda?”, says Natalie, “So we decided to commission a survey with 550 corporates and 200 investors to understand the extent to which, if at all, the Social issues within ESG and sustainability are considered to be a growing risk and/or value creation opportunity.”
Social issues are coming to the fore
The Social pillar of ESG is a broad area that covers issues such as; human rights, modern slavery, community programmes, EDI and labour laws. Also areas that may not be thought of as typically falling into the Social category, such as data protection, geopolitical risk and responsible supply chains. But as Heyrick points out, “all things that well-run businesses should be addressing to ensure sustainability”.
While our survey results showed that the Environmental pillar is top under any metric – KPIs, budgets, resources, and effort – as Natalie explains, “if you follow the money, it is S that’s going to have a growing share of the ESG budget over the next five years”.
For example when we asked corporates, ‘how is your budget split across the three pillars of ESG’? Today that stands at 33% on Social, ticking up 1% over the next five years, at the expense of Environmental spend. For investors it’s a similar story – Social is currently 31% of their ESG budgets, rising up to 33% in the next five years.
Companies are often starting at a lower base, they haven’t done as much in many of these areas so we are expecting to see budgets grow for Social issues.”
“So these Social issues are getting growing traction with boards and C suite”, reports Natalie, “plus companies are often starting at a lower base, they haven’t done as much in many of these areas so we are expecting to see budgets grow for Social issues.”
The US – same but different
ESG is approached under the ‘sustainability’ banner in the US and we sometimes see confusion here between ESG investing and ESG programmes - two different areas that often get conflated. But, our survey unequivocally shows that US companies are concerned about ESG-related issues. Particularly when it comes to EU regulations coming down the line, where many US companies with a global footprint are going to start falling into scope.
Regulatory drivers
When we consider the Environmental pillar of ESG, this where the most regulation and legislation comes from and where the majority of government policy has been focused. That’s a big driver of why organisations are more mature in their efforts around the Environment, they’ve had to look at this pillar for years and have targets in place. “So it’s inevitable that [the Environment] will be a big a big focus for them. But if we look at the next wave of regulation and legislation and regulation coming online particularly out of the EU”, points out Natalie, “that has big focus on social issues – particularly on human rights.” For example, the first wave of companies impacted by the Corporate Sustainability Reporting Directive (CSRD) will be reporting in less than year, in January 2025. The CSRD directive will require a whole new range of data to be collected and assessments to be done in order to report on the social issues, so organisations need to be ready.
If we look at the next wave of regulation and legislation and regulation coming online particularly out of the EU, that has big focus on social issues – particularly on human rights.”
However, the research shows variations across geographies and sectors. In the UK for example, corporates had ‘domestic modern slavery laws’ as their a top concern and CSRD came third on the list. That’s because there are a number of different national modern slavery laws, many of which have been around for some time and are going through revisions, and we're expecting the requirements on companies to increase as part of this. “It's quite a complicated patchwork when you consider all of the different modern slavery legislation at the companies have to abide by,” says Natalie.
“Sector-wise there are interesting variations but many as you would expect,” reports Natalie. Manufacturing for example, is concerned about domestic supply chain legislation and Financial Services are understandably very concerned about what the future iterations of the Corporate Sustainability Due Diligence Directive (CSDDD) could mean for them.
Surprises along the way
Within the research there are two areas that ranked low amongst respondents. Firstly, only 23% of corporates include ‘responsible supply chain’ within their ESG programme and secondly, only 19% factor geopolitical risk. Both are surprising and concerning. The most onerous supply chain regulation, the Corporate Sustainability Due Diligence directive (CSDD) is coming. And for issues linked to geopolitics, we need only consider what the Red Sea crisis means for the sustainability practises of companies who are now having to ship their goods via the much longer route around the Cape of Good Hope. But Natalie can understand why geopolitics may be left out, “I think this failure to really think about ESG and geopolitics together, some of it is partially borne out of the way that ESG is measured and viewed. There is an absence of obvious metrics to track geopolitics and how companies performing when it comes to that. But there's still other ways that you can incorporate it into your ESG programmes,” she points out.
Key take aways
So then, what can organisations do in the face of increasing ESG regulations and the rise of social sustainability in particular?
“First of all, my biggest piece of advice is don't get overwhelmed.” Says Natalie, “There's an awful lot out there when it comes to ESG and sustainability, and it's easy to get lost in it all. So what you need to do first is really consider carefully what are the most material issues for your business now and over the next 5 to 10 years and then prioritise those accordingly.”
First of all, my biggest piece of advice is don't get overwhelmed.”
Examples of types of questions include: do you need a double materiality assessment? Is the one you've got sufficient? Is it up to date? Does it reflect the current state of the business and where you expect the business to go, do you need?
Then, carry out a gap analysis of the human rights policies in your supply chain. Are you really thinking about the biggest risks that you face within that supply chain and how do you address them? Do you need to do a horizon scan? What could be coming down the line for your business, whether that's regulation or particular issues, which are going to come become more pertinent to your customers or consumers?
And then finally, make sure that you don't delay. “This is a really pressing issue and businesses need to get ahead of it now.” Natalie urges, “Regulation is here or it's coming it does take a while to prepare for it, particularly if you look at the CSDDD, that's going to require an awful lot of preparation by businesses. It's not something you can do quickly in a couple of months. You need to be on top of it now. And even considering that regulation is not yet in play. Still, there is media, investor and consumer scrutiny. That's all here now. So I think the core message there is you really can't afford to delay when it comes to your ESG or sustainability programmes.”
Reach out to Natalie or Heyrick if you’d like to discuss any of the topics covered in the podcast.
