The social factor in ESG

The social factor, in addition to the environmental factor, played an important role in the activities of companies many years ago. At that time it was treated as a kind of "soft" asset used mainly for marketing and promotional purposes. Over time, its importance has grown and today it is one of the three leading factors of sustainable development.

Today, the social factor is not only charity and support of local communities in the vicinity of which business is conducted. It now encompasses many more aspects, such as human rights, workplace safety, diversity, anti-discrimination, employee relations, supply chain sustainability, consumer relations, corporate social responsibility, and data protection, among others.

From the perspective of European law, the "S" factor, like the "E" in ESG, is extremely important. It is worth noting that environmental and social aspects are often intertwined in sustainability regulations. If only by looking through the prism of climate change, which we are witnessing and which significantly affects the well-being of the following generations. It is worth noting the preamble to the Regulation on Sustainability Disclosure in the Financial Services Sector ("SFDR", Regulation (EU) No. 2019/2088, OJ EU L317), in which social issues are an explicit part of the concept of "sustainability factors."

The emphasis on the social component of sustainability efforts is now growing rapidly. This is primarily because demands from investors and customers are increasing in this regard. Shareholders are increasingly asking how social responsibility issues are managed at a given company. But not only shareholders... Such questions are increasingly being asked by customers at the stage of choosing a brand's product, or by potential employees considering accepting a job offer. For all of them, how a company approaches social issues is increasingly important. And while the social dimension seems to be the most difficult to measure, all research on the subject clearly shows that a company's high social commitment builds its trust and commitment from stakeholders. So what is really behind the letter S and social action? This category consists of three main aspects: external communication, relations with business partners and employment conditions. The company's information policy and transparency of communication with customers are important. Also of great importance is the reliability of cooperation and the credibility of subcontractors and suppliers who are in the supply chain. In the context of employees, it is important not only to comply with applicable labor laws and health and safety rules, but also to ensure working conditions that promote professional development and eliminate any risk of any discrimination. What becomes important here is the employer's concern for the mental and physical health of employees, a good working atmosphere, the development of employees and a transparent promotion and compensation system. The social factor of ESG includes concern for both internal and external relations. Here, all activities that build positive relations with all stakeholder groups are important, including shareholders, investors, customers, suppliers the environment and the local community.

However, it is worth remembering that social factors do not always depend on the company or its immediate environment. The geopolitical situation, national and international events, or events in a particular industry can also suddenly and unexpectedly negatively affect the business, if not managed properly and on time. For example, let's take a look, for example, at the attitude of various stakeholder groups towards companies that still remained in the Russian market after the country's aggression against Ukraine. Many of these brands are recording significant losses as a result. Customers have begun to boycott stores that continue to operate successfully in Russia. This is one example of when a company's neglect of the social factor so significantly affects its reputation and financial health. But the history of business is rife with other infamous incidents including bullying, harassment, discrimination, disregard for labor laws, and unethical actions in the supply chain. Neglecting these issues later avenges itself for years to come. Therefore, it is not worth downplaying this social aspect of business and giving it less priority than the financial aspect. Every company should therefore implement appropriate goals and measures into its business strategy and treat their implementation seriously and with due diligence.