Record high temperatures cascaded across the Northern Hemisphere’s summer months, and extreme weather events continue to be documented across the globe; the impacts of climate change on people and the planet have never been more keenly felt. As the importance of addressing the climate emergency becomes ever more present in our daily dialogues, investors, consumers, businesses and markets are increasingly demanding that positive social impact is integrated into environmental action; that is, that the Social element of ESG is inherently embedded in Environmental concerns.
The International Labour Organization’s Guidelines for a just transition towards environmentally sustainable economies and societies for all emphasise the need for social consent mechanisms to be embedded in environmental planning. Social consent is increasingly a requirement for companies to do business, with social licence to operate a key concern among consumers and investors. A recent example of this principle in action can be found in Uruguay, where citizens are disavowing companies with high water consumption footprints as the country experiences its worst drought in 74 years.
Embedding the S in E strategies requires organisations to think about the potential impacts (both positive and negative) that their environmental response could generate. By examining these potential impacts from the outset of strategy formation on environmental actions, companies can avoid unintended social consequences – such as unjust transitions – of their environmental agenda. Considering the Social in relation to the Environmental also offers companies the opportunity to boost their activities’ positive social impacts, such as community engagement and participation, and enabling measurement and reporting of these positive social impacts via a recognised standard, such as the Business for Societal Impact – B4SI framework. Combining the E and the S agendas creates a mutually reinforcing plan and a double win for sustainable business.
As part of holistically assessing organisations’ sustainability performance, regulators and benchmarks are also taking a closer look at companies’ impacts on the people and communities their businesses interact with. In the US, the Securities and Exchange Commission (SEC) is proposing a new rule that would require SEC-registered domestic or foreign companies to include climate-related information in registration statements and reports (such as annual reports). While this will prompt companies to take rapid action to mitigate the environmental impacts of their activities, ignoring the social element of environmental mitigation would be a miscalculation. In decarbonisation, for example, the abrupt and irresponsible defunding of carbon-intensive industries can lead to the socio-economic collapse of entire communities, especially in mono-industrial regions, such as some Appalachian communities, which have been overwhelmingly reliant on the coal industry. Careful transition planning is required to ensure no-one is left behind in the drive to net zero (see our Just Transition report, as featured in July’s monthly newsletter, for guidance on pathways).
To operationalise ESG strategies’ goals and drive meaningful actions, organisations must create robust metrics and KPIs to measure performance and impact in the social dimensions of their environmental actions, and commit resources to continuous tracking of metrics and KPIs to ensure environmental initiatives provide social benefits for affected stakeholders. Some key steps organisations should take to embed Social concerns into Environmental strategies are:
- Use a people-centric approach to planning environmental caretaking.
- Map the potential impacts, both positive and negative, of environmental strategies.
- Engage internal and external stakeholders in decision-making and deliberative functions, taking into consideration the right to consent of affected individuals and communities.
- Create, assign and track social impact metrics and KPIs directly aligned to an organisation’s environmental strategy.
A good way to start a conversation on the social impacts of a company’s activities is undertaking, and regularly updating, materiality assessments. Materiality assessments used to be entirely voluntary, but have recently become a mandatory part of reporting against the EU’s European Sustainability Reporting Standards (ESRS), which underpin the new Corporate Sustainability Reporting Directive (CSRD). These assessments gather views and identify issues of significance across the ESG impacts of a company’s business activities. SLR’s ESG strategic advisory teams have extensive experience in supporting companies with materiality assessments and reporting requirements, including under CSRD rules, and in turning these assessments into comprehensive ESG strategies tailored to organisations’ individual needs and contexts.