Dismantling ESG – What about the ‘S’?

Throughout the semester, our teams delved into various facets of the ESG landscape, ranging from exploring global standards and their applicability across niche industries to leveraging coding and AI to gauge sentiments and synthesize key insights. The diversity of projects within our cohort underscores the importance of integrating sustainability across businesses, irrespective of their size or scale. However, companies often perceive sustainability initiatives as a tick-box exercise and consistently underperform in the advancement of the social pillar of ESG.

The Divergent Interpretation of the 'S' 

This raises a fundamental issue that we have observed across G20 jurisdictions, the focal point of our project. Through client discussions, it has become evident that each country and its regulator have their own interpretation of what constitutes the "S" in sustainability. Although they may adopt global standards, the extent to which they require firms to disclose material information varies significantly. This became particularly apparent when assessing countries with a history of human rights violations. We found that while they are likely to be open and willing to adopting standards like the GRI, they may not include or require firms to report on matters focusing on remuneration, child labor, and health and safety, further highlighting the "pick and choose" approach when it comes to the social aspect of sustainability. 

As we delve further into our project, two pertinent questions continue to arise:

1. Is it possible to create a global consensus on social considerations? Will firms eventually hold social issues in the same regard as financial and environmental materiality? 
2. What constitutes a best-case example? Is it the EU's forward-looking policies? If so, should other countries strive to meet similar standards? 

The Impact of Domestic Sentiment 

Such questions continue to recur because, although each G20 jurisdiction appears to be making progress in implementing disclosure requirements that drive positive outcomes, it is evident that domestic sentiment and entrenched policies significantly impact the extent to which global reporting standards are adopted and mandated. Existing sentiments within financial services, across policymakers and regulators, also play a substantial role in defining social outcomes.

At present, several jurisdictions seem wedded to the view that impact is primarily driven through financial and environmental activity and reporting, leaving substantial progress to be made in the social impact space. To some extent, this outcome mirrors the fragmented global landscape on social issues such as migration and conflict. However, the work of global standards emphasizing double materiality cannot be understated. Even if it does not result in substantial changes in domestic policies, it is drawing attention to the importance of such matters. As countries begin to place a greater focus on the "S," the hope is that this will highlight its significance to other countries, prompting them to follow suit and establish best practices in this area.