10 March 2022

Exploring the “S” in ESG (and how to improve your strategy)

The criteria ESG has become a crucial factor to bear in mind when it comes to nowadays business strategies. Not only is it a trend but a reality that shows an empirical change in the mindset of investment models. ESG stands for environment, society and government, the three keys for sustainable practices rising from the consciousness of companies towards these aspects.

In the concerning field of law and according to Clifford Chance expertise, awareness has definitely increased around ESG factors. The acronym exists since the 2000’ decade but has evolved from mere socially responsible investment to an essential dimension in all the processes of a firm, that transcend and have an impact on the operation perse. Even though its limits of action may result diffuse, companies must be able to assess and dive into pertinent ESG issues, for instance through indexes, with the purpose of achieving a more certain decision-making, as well as easier identification of results before the eyes of clients.

ESG criteria has had to make the top board agendas in order to prevent any failure to address these matters, knowing that otherwise could ruin finances and reputation. As stated by Deloitte, the “S” component reminds the 2030 Agenda, suggesting those actions correspondent to working conditions, cooperation with affected minorities and safe plus healthy interpersonal relationships. Moreover, the task of performing a fair and just transition of social responsibility at firm’s level, appears now as mandatory derived from regulations at national and even supranational levels, but also shows important results in profitability.

The imperative social issues that affect our current historical momentum, require to make a special focus on diversity, inclusion, respect for human rights and responsible hiring, to begin with. However, here appears the main question together with the main problem of the “S”: on the one hand, how can a firm manage, as sustainable as possible, its social impact inside and outside (workforce, clients, political environment, institutions); and on the other hand, how can this firm measure if its “S” strategy is correct, when most of its components are way to abstract to be measurable. 

S&P Global answers the first by ranging all those factors that might influence financial performance from short to long term challenges, keeping in mind that more reliable returns will arrive over the long term. First there is the case of strikes and protests, which might immediately affect reputation and profitability in the shortest term by creating a lack of employees or profound discontent of customers. Secondly come those issues related to the product or service itself, usually located on the midterm, attending to its safety risks or encountering geopolitical conflicts along the supply chain. Finally, demographic changes and consumer preferences will present long term shifts, starting from the complexity of social dynamics shown at extended public opinion, not just on the media but sometimes in real life boycotts

Right after having clear all these contingencies and their degree of impact throughout the timeline, is the moment to measure how much effort is the firm employing on the “S”. Even though most of the above mentioned components are in fact too abstract to be efficiently measured, the SABS Standards are very useful to help you carry out this intricate task. They will grant rigorous and transparent evidence based research from subject matter experts, even more, oversights and approval from an independent board.

Amartya Sen, an Indian economist, presented four sub-dimensions to analyse the social aspect of sustainable development: equity, diversity, social cohesions (connectedness within and outside the community at the formal, informal and institutional levels) and quality of life

Success in this sense will arrive at law firms from the capability of anticipating the growing tendencies of demands for transparency, stakeholder scrutiny and legal regulation and legislation. Also, an adequate human rights risk management is now mandatory, for example inspired on the UN Guiding Principles on Business and Human Rights, conceding enough space to the design of a mechanism: investment planning, policy development and implementation

Last but not least, when it comes to the cultural imperative of inclusion and diversity, it is required to understand the current demography of your workforce and identify areas of weakness. To later adopt inclusion campaigns, (perhaps preceded by self-identification ones, as one size doesn’t usually fit all) that achieve transparent impact, also visible for stakeholders

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