How the social aspect of ESG has evolved during COVID-19
How the social aspect of ESG has evolved during COVID-19
The social aspect of ESG (the “S”) has become a prominent area of focus for many companies in 2020. Almost every retailer and restaurant emailed their customers and employees regarding the workplace health and safety measures they will take to stop the spread of COVID-19. Furloughs and layoffs became the unfortunate norm for many companies. The media and public highly scrutinized companies that received federal COVID-19 relief funds and denounced those that applied those funds toward buying back shares or providing senior management with bonuses and pay raises as opposed to reducing layoffs.
Before 2020, companies and their stakeholders commonly overlooked social actions, because they did not associate these actions with value creation. 46% of investors said they had the most difficulty analyzing and embedding social aspects into their investment strategies, according to a BNP Paribas Global ESG Survey last year.
ESG rating frameworks reinforced investor uncertainty in the ability of social practices to create value. A 2017 NYU Stern analysis indicated that ESG rating agencies track more of the social policies and commitments of companies as opposed to the impact of these actions. The study found that only 8% of the 1,750 social metrics used by 12 different reporting frameworks evaluated the effects of social practices. The rest of the metrics measured company efforts and activities.
Fortunately, social metrics have rapidly improved in recent years to help companies disclose the most relevant and outcome-based data. To improve your company’s social performance and response to disruptive events such as COVID-19, it’s recommended that you update your metrics and actions in three areas: workforce engagement, customers, and community and society.
The announcement of Google and other companies that their employees will not return to the office until at least summer of 2021 suggests that remote work will persist for the foreseeable future. Employees may increase their performance and productivity while working remotely, but only if companies invest in effective work-from-home programs and policies. An Airtasker study found that telecommuters worked 1.4 more days every month than employees in the office. The same study, however, found that 54% of telecommuters felt “overly stressed during the workday” compared to 49% of office workers.
Reducing remote working stress requires an infrastructure that adequately engages the workforce. Most companies lacked this infrastructure pre-COVID. PwC found that 83% of companies did not have the technology, policies, and systems in place to remotely track their workforce at the start of the pandemic. To address this remote engagement gap, employers have invested in new technology and social programs. Most noticeably, video conferencing services have helped companies keep their workforce both happy and productive by hosting structured work meetings and fun social events.
An organization’s handling of layoffs and furloughs likely stands out to stakeholders in measuring the effectiveness of remote employee engagement strategies. One Harvard Business Review study found that remaining employees after layoffs experienced a 41% decrease in job satisfaction, 36% decrease in organizational commitment, and 20% decrease in job performance.
Most companies needed to exercise different strategies to reduce layoffs or reassure remaining employees during this pandemic. HSBC, Standard Chartered, and NatWest cut salaries for top executives. Other companies introduced voluntary short-term leave or staggered temporary furloughs to maintain jobs and lessen the negative impact of lost income. These actions should translate to strong social scores in rating and reporting framework themes such as SASB’s “Employee Engagement” and S&P/RobecoSAM’s “Human Capital Development”.
Local supermarkets probably best demonstrate the drastic transformation of the relationship between businesses and their customers in 2020. Before entering the supermarket, an employee may guard the door to make sure the store does not exceed the “COVID-safe” indoor capacity. Inside, you will find social distancing markers, sterilization wipes for carts, and a mandatory face mask policy. Finally, the supermarket may post “Only Take One/Two” signs near items in high demand and low stock, such as hand sanitizer, toilet paper, or meat.
There has been a major effort by companies to stop the spread of COVID-19 and other infectious diseases in their social actions. At the same time, many companies have tried to provide affordable services and products to their most vulnerable and disadvantaged customers. Gilead Sciences increased access to its Remdesivir drug in low-income countries by licensing it to five generic drug makers “royalty-free”. Meanwhile, Amazon removed more than 3,900 selling accounts in March for violating their fair pricing policies.
Customer relationship missteps that further the spread of COVID-19 or prevent access to necessary products and services to survive the pandemic will significantly deter future value creation for any company. ESG rating systems consider many customer issues in their social scoring; SASB, for example, tracks “Access & Affordability”, “Product Quality & Safety”, and “Selling Practices & Product Labeling”.
Hiking or gouging prices of high demand products could result in further damage to your business and its reputation. For example, the Washington State attorney general stopped five Washington businesses from selling protective masks and hand sanitizer at inflated prices by filing lawsuits and fines of up to $2,000 per violation.
Community & society
Many companies have tried to improve their reputation and image by offering social services to help communities fight, protect, and recover from COVID-19. Examples include donating medical supplies to first responders and essential employees, supporting relief funds, and accepting delayed rent, mortgage, utility, and other payments.
Early 2020 data from the public relations firm Edelman and its Trust Barometer shows that the public has paid attention to these actions. Most Trust Barometer survey respondents, 65%, believed that CEOs should take the lead in addressing the pandemic. Yet the majority felt CEOs and companies have not adequately answered the call. Only 47% of respondents thought business did a good job of increasing accessibility of essential products and services to fight COVID-19. Meanwhile, less than 40% of respondents believed the actions of companies during this pandemic put people before profits, protected the financial wellbeing of their employees, and helped smaller suppliers and business customers.
Overall, Edelman concluded that survey respondents expressed greater trust in businesses that tapped into their core purpose when developing solutions to community problems as opposed to selling products or services. Edelman identified four corporate S actions that will likely improve your company’s reputation:
- Donating needed COVID-19 protection and treatment equipment
- Collaborating with competitors to develop effective COVID-19 responses
- Switching production to products and services that address the pandemic
- Redefining your company’s purpose and goals to fight this pandemic and future societal problems
Measuring social performance past 2020
The ESG sector and global market have never witnessed a crisis on the scale of COVID-19. Before 2020, many ESG actors probably would have overlooked the importance of social actions and metrics such as remote working infrastructure, layoff mitigation, product and service accessibility and affordability, and public relations. However, crises tend to expose the largest gaps in supply chains. If your company has found these or related social performance problems in your supply chain, we highly recommend addressing them as soon as possible. Improved social performance will both attract investors and prepare your company for long-term risks and future problems such as climate change.