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Putting the ‘S’ in ‘ESG’ – a corporate guide

Lexicon of most important terms and phrases within the Social aspect of ESG

Why ESG is taking centre stage

Issues such as climate change, corporate corruption and financial inequality have become pressing global concerns. In turn, companies have faced growing calls to be more environmentally sustainable, socially responsible and culturally transparent in how they run business.

This focus has become encapsulated in one term: Environmental, Social and Governance, or ESG.

What do we mean by ESG?

ESG has become an umbrella term for a broad range of environmental, social and governance factors used to assess a company’s impact on people and the planet and how ethically and transparently the company is run as a business.

These issues are increasingly central to a company’s reputation, its financial performance and risk profile, and how it is likely to be judged and evaluated by an array of stakeholders, including investors, clients/customers, rating agencies, and regulators, as well as the media and civic groups. ESG factors now have the power to influence a company’s ability to raise capital. They have also become extremely relevant to recruitment and the retention of talent.

In short, it is no longer sufficient simply to fulfil legally prescribed obligations on these issues. For a business to be valued and perceived to operate effectively and sustainably, ESG considerations need to be properly embedded across its culture, operations and business strategy.

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How does ESG differ from CSR?

Environmental, Social and Governance (ESG) and Corporate Social Responsibility (CSR) both address the sustainability of a company’s business practices (where ‘sustainability’ means meeting the world’s current needs without compromising the ability of future generations to meet theirs). However, each term has a different focus. 

CSR (also simply known as ‘corporate responsibility) traditionally refers to the implementation of sustainable business practices within a company, and the principles, people and other resources put in place to support those practices. ESG primarily looks to assess a company’s sustainability practices from a capital markets and investment industry perspective, where the focus is on how capital flows can be deployed to foster sustainability.  

(Note, recently, ‘ESG’ has become the more dominant term in the European corporate world because the European Union’s legislative approach towards sustainability has been very much influenced by this capital markets perspective.) 

What does the ‘S’ in ESG mean for my business?

For most of the past decade, concerns over climate change have led companies and their stakeholders to focus primarily on the ‘Environment’ aspect of ESG, such as reducing pollution and carbon footprints, and using resources in a more sustainable way.

However, the ‘Social’ element of ESG has become increasingly important in recent years. This seeks to detail or assess how your company treats the people it interacts with, including employees, customers, suppliers, and local communities. (It also acknowledges that for climate and environmental actions to be just, inclusive and successful over the long term, their impact on people and communities also needs to be taken fully into account.)

‘Social’ factors include working conditions, health and safety, employee relations, diversity, equity & inclusion, operations in conflict regions, and a vast array of further topics connected with sustainable labour relations. As with the other aspects of ESG, meeting social criteria offers investors greater confidence that your company won’t fall prey to sustainability risks inherent in its industry. Rigorously monitoring how the people in your labour force, community, and industry are being treated helps to avoid reputational and litigation challenges. It also presents opportunities to show how your business is going beyond the minimum legal requirements to create a business that puts people first.

On the following pages, we explain the terms and phrases that are most important to understanding and taking action on the Social element of ESG.

The ‘Social’ lexicon for corporates

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Anti-bribery and corruption (ABC) – A set of standards and guidelines that have been drawn up to combat bribery and corruption in business. It primarily addresses four issues: bribing another person, being bribed, bribing a foreign official, and negligent failure by commercial organisations to prevent bribery. Businesses increasingly recognise the benefits of a ‘zero tolerance’ approach to bribery and corruption. Among other things, it provides recourse and unequivocal support for employees when under pressure to pay or accept a bribe. It also helps to create a more stable business environment with positive long-term reputational effects.

Anti-discrimination or equal treatment – Means that organisations actively work to maximise diversity and inclusion within the workplace and to promote equal opportunities. Companies are required to protect the rights of their employees, and to ensure employees are not discriminated against because of their race, gender, age, disability, religion, sexual orientation or other protected characteristics.

B Corps (The UK B Corporation Movement) – Companies verified by the not-for-profit organisation B Lab as meeting high standards of social and environmental performance, transparency, and accountability. In order to become a certified B Corp, a company is assessed on its impact on its workers, communities, customers and the environment. From a legal perspective, B Corps must include in their articles of association a commitment to create material positive impact on society and the environment and to consider all stakeholders (including employees) in the company's decision-making, not just shareholders.   As at early 2022, B Lab reports there are over 4,000 certified B Corporations across over 150 industries in more than 70 countries. CMS has a number of B Corps clients. 

Career development – Socially conscious businesses will look to provide ways for all employees to develop their career paths. These include opportunities for promotion, mentorship, on-the-job learning, further education and industry-related qualifications.

Code of Ethics/Code of Conduct – A set of principles designed to instruct and help professionals conduct business honestly and with integrity. A Code of Ethics document may outline: the mission and values, and underlying principles of the business or organisation; the standards to which staff are held and what behaviour is or isn’t expected; and how staff are supposed to approach and resolve situations that may contravene expected behaviour.

Community relations – Businesses are increasingly seeking to develop strong relationships with the communities in which they operate. Purposeful and inclusive stakeholder engagement is a key tactic to improve environmental citizenship, reduce reputational risks, and foster mutually beneficial relationships between business and local people. In the legal world, pro bono advice is one example of purposeful engagement, as lawyers leverage their professional skills to support individuals or whole groups within the local community.

Community & social value – A means of expressing the benefits that an organisation is bringing or plans to bring to a specific community or to a population generally. This might include how the services, products or employment opportunities they provide might improve the economic, social or environmental wellbeing of an area. Organisations may develop a social value statement to make clear their intent to all stakeholders. They may also develop a social value framework, which details, for example, the areas/themes of social value focus, what outcomes this activity hopes to achieve and how and in what units these outcomes will be measured. 

Corporate awareness of family life – Many businesses are working to create a more family-friendly workplace that can enable parents or guardians to adapt their working life around the needs of a family. Investing in family-friendly policies such as flexi-working, job-sharing, on-site childcare and enhanced parental leave helps improve workforce productivity and a company’s ability to attract, motivate and retain talented employees of all genders. 

Corporate Human Rights Due Diligence – A way for companies to proactively manage potential and actual adverse human rights impacts that could arise from their activities. It involves four core components: (a) Identifying and assessing actual or potential adverse human rights impact the company may cause or contribute to through its activities, or which may be directly linked to its operations, products or services by its business relationships; (b) Integrating findings from impact assessments across relevant company processes and taking appropriate action according to its involvement in the impact; (c) Tracking the effectiveness of measures and processes to address adverse human rights impact in order to know if they are working; (d) Communicating how impact and effects are being addressed and showing stakeholders – in particular affected stakeholders – that there are adequate policies and processes in place.   

Corporate Social Responsibility (CSR) – A self-regulating business model that helps a company become socially accountable to itself, its stakeholders, and the public. By practising corporate social responsibility, companies can be conscious of the kind of impact they are having on all aspects of society, including economic, social, and environmental. CSR is also known as corporate citizenship.

Data privacy – Corporations have both a social and a legal obligation to protect the personal information of their employees and customers. Data breaches, which are occurring with increasing frequency, have a significant impact on both corporate reputation and customer/client confidence. While consumer data can provide tremendous value to a business, privacy is a social value that needs recognition and respect. Data privacy regulations provide some rights to consumers regarding the handling of their information, but they may not cover everything. Recognising the need for privacy as a social value can enhance a company’s reputation, boosting its ESG score.

Diversity, Equity and Inclusion (DEI) – A policy that broadly outlines the programmes and regulations that companies and organisations adopt to create a fair and supportive working environment for, and encourage representation and participation from, a diverse range of employees. Diversity, equity and inclusion efforts generally focus on increasing the representation and equal treatment of women, members of minority ethnic groups and members of the LGBTQ+ community, among others.

Education of employees – Innovative tools and programmes that provide training and support help to close the skills gap and prevent career stagnation. Employee education is also a core element of ‘career development’.

Employee participation (or employee engagement) – Employee participation is the process whereby employees are involved in decision-making within a company or organisation, rather than simply acting on orders. Employee participation is part of a process of empowerment in the workplace. 

Employees’ representatives – An employees’ representative is an employee within an organisation who is chosen by his or her colleagues to represent them in negotiations or consultations with the employer (e.g. a member of a works council or union). In ESG analysis, strengthening the voice of employees and other non-shareholder interests at the board level is increasingly viewed as an important component of running a sustainable and socially responsible business.

Equal opportunities – All employees within an organisation should be entitled to and have access to all of the organisation’s facilities at every stage of employment. This means equal chances to apply and be selected for posts and projects, to be trained and promoted and to have employment terminated fairly and on equal terms with colleagues.

Executive remuneration – What senior management are paid, and in what form, is primarily addressed under the ‘Governance’ element of ESG. But it also has strong social responsibility implications – for example, where there is a massive disparity between the pay of executives and workers. Some pioneering enterprises are seeking to bring transparency and fairness to this process by using a publicly stated calculation to determine executive pay (e.g. making it a multiple of the minimum paid to any worker). Public pressure is also growing to tie business-leader pay to ESG performance. 

Gender balance – Refers to equal participation of women and men in all areas of work, projects or programmes in the workplace. 

Gender gap – Refers to a relative disparity between men and women in the labour market – for example, in terms of salary, opportunities for advancement, or representation at senior and board levels.

Gender pay gap reporting – The practice of reporting the difference in average earnings between men and women. In the UK, an employer with more than 250 staff must report its organisation's gender pay gap. Other countries with reporting requirements are Australia, France, South Africa, Spain and Sweden. 

Global Reporting Initiative (GRI) + GRI Standards – The Global Reporting Initiative (GRI) is an independent, international, and non-governmental organisation that seeks to deliver the highest level of transparency regarding the impact that companies worldwide are having on the economy, environment and on people. It has created the world’s most widely used sustainability reporting standards – the GRI Standards – to enable comprehensive and comparable disclosure. Similar initiatives include B Corps certification and the Workplace Disclosure Initiative.  

ILO Standards – These are legal instruments drawn up by the constituents (governments, employers and workers) of the International Labour Organisation (a United Nations agency) that set out basic principles and rights at work. The standards are classified as either ‘Conventions’ or ‘Protocols’, which are legally binding international treaties that may be ratified by member states, or ‘Recommendations’, which serve as non-binding guidelines.

ISO 26000 (Social responsibility standard) – This standard drawn up by the International Organisation for Standardisation helps clarify what social responsibility is. It enables businesses and organisations to translate principles into effective action. It also shares best practices relating to social responsibility globally. However, ISO 26000 provides guidance rather than requirements, so it cannot be certified, unlike some other well-known ISO standards.

Modern slavery – Refers to exploitation of people who are coerced into service or other forms of servitude, often through the threat of violence. Examples include bonded labour, forced marriage, human trafficking and organ trafficking. A number of countries require certain commercial organisations to publish an annual statement setting out the steps they take to prevent modern slavery in their business and supply chains.

NFRD (Non-Financial Reporting Directive) – An EU directive that came into effect in 2018.  The directive requires public disclosure documents such as annual reports, sustainability reports, and integrated reports to include the following topics: environmental matters, social and employee aspects, respect for human rights, anti-corruption and bribery issues and diversity on boards of directors. In 2021, the EU published a proposal for a Corporate Sustainability Reporting Directive (CSRD), which revises and extends the scope of the sustainability reporting requirements introduced by NFRD.

OHS (Occupational health and safety) – A multidisciplinary field concerned with the safety, health, and welfare of people at work. All companies should implement management measures to eliminate and where not possible, mitigate the risks for the health and safety of employees.

Parental entitlements – The rights of employed parents in the workplace. The most important entitlements are maternity/paternity leave, different cash benefits, the right to specific working hours (e.g. working half the standard hours in order to spend more time with children) and the ability to obtain leave to care for a child with specific disabilities.

Race to the bottom – The condemned practice of companies vying with each other to procure cheaper labour and materials in order to maintain their competitiveness or profitability. ‘Race to the bottom’ practices impoverish communities, countries, ecosystems and natural-resource supplies, and often sacrifice quality standards and worker safety. It also refers to jurisdictions competing with each other to cut taxes and/or regulation to attract overseas business and investment. 

Social clauses in supplier contracts – Social clauses can be used in procurement documents or contracts to require suppliers to deliver social benefits to communities, alongside goods and services. Social clauses could include a commitment by the supplier to pay workers a ‘living’ wage, to avoid zero-hours contracts and to hire local unemployed. The contract should clearly outline the proposed social benefit, the intended deliverables and the reporting requirements used to track implementation. These processes should be made clear to suppliers before being hired so there is no doubt about expectations.

Social dialogue – The process of negotiation by which different actors in society (i.e. ‘social partners') reach agreement to work together on policies and activities. When it comes to ESG, the social dialogue relates to the negotiation between employees and employers on matters of common interest relating to economic and social concerns. Specifically, a ‘bipartite' social dialogue brings together employees and employers, whereas ‘tripartite' social dialogue also involves government or EU representatives.

Social finance – A growing area of finance that seeks to deploy capital to generate both a financial return and address a social (or environmental) need (e.g. by financing the development of social housing, or employment and training programmes). Capital is typically lent to ‘social enterprises’ to finance a specific project. Lending instruments include social impact bonds and social impact funds. 

Socially responsible Investing (SRI) – Refers to an investment strategy that seeks to achieve both financial returns and social/environmental good. Socially responsible investment can involve negative screening – where companies are avoided because their activities are deemed socially detrimental (e.g. production of arms, tobacco, alcohol or gambling services) – or positive screening where companies are selected because their activities contribute to social good (e.g. affordable housing, training and education, access to financial services). Every company in an SRI portfolio should have good (or improving) environmental, social and governance (ESG) practices in its own operations, supply chains, and culture. 

Social risks – Refers to risks relating to actions a business takes that affect the surrounding community, such as labour and human rights issues or violations and corruption.

Social ROI or Social Return on Investment – A method for measuring non-financial value, particularly around ESG factors. It measures how effectively an organisation uses resources to create sustainable value. Social ROI enables organisations to measure how much change is being created by tracking relevant social, environmental, and economic outcomes.

Social washing – Statements or policies that make a company appear more socially responsible than it actually is. Similar concepts are greenwashing (embellishing environmental credentials), pinkwashing (support for the LGBTQ+ community) and bluewashing (support for the UN global compact). 

Sustainability Accounting Standards Board (SASB) + SASB standards – SASB was an independent, non-profit organisation established in 2011 to set standards for companies to use when disclosing sustainability or ESG information to investors and other providers of financial capital. In 2021, SASB and the International Integrated Reporting Council (IIRC) merged into the new Value Reporting Foundation (VRF). SASB Standards identify the subset of environmental, social, and governance issues most relevant to financial performance in each of 77 industries. They are designed to help companies disclose financially material sustainability information to investors.

Transparency in recruitment processes or transparent hiring processes - A transparent recruitment process is now considered fundamental to ensuring diversity, equity and inclusion (DEI) in the workplace. The process will typically include publicly disclosing selection criteria for positions, having a documented process of selection through equitable, written assessment of applicants against the relevant selection criteria, and providing clear reasons for decisions to employ or not to employ. Together, these steps look to prevent the manipulation of the appointment process (i.e. the practice of discrimination) in any way.

UN Principles on Business and Human Rights - A set of guidelines for UN member states and companies to prevent, address and remedy human rights abuses committed in business operations. 

Values-based investing – Using an organisation's core values or ethics to determine where (and where not) to invest.

Whistleblowing – Enabling whistleblowing (in the sense of reporting a wrongdoing in an organisation) is a vital element of a healthy, functioning ESG-led corporate culture. A credible, supportive whistleblower programme allows all stakeholders to efficiently report both on progress and violations in meeting publicly stated ESG goals. It depends on having both an effective reporting mechanism and internal investigation process. Whistleblowing in the context of ESG has a twofold importance: firstly, without an effective whistleblowing mechanism, an organisation may be less robust when it comes to ESG compliance and reporting. Secondly, a robust whistleblowing reporting system helps notify a company of potential wrongdoing or shortcomings, take action quickly, and reduce the need for potential regulator involvement.

Workforce Disclosure Initiative - (ShareAction | Workforce Disclosure Initiative) –  A survey that has been designed to gather information on the issues most crucial to decent work and human rights in the workplace. Run by ShareAction, a UK-registered charity, and part-funded by the Foreign, Commonwealth and Development Office (FCDO), the WDI allows companies to demonstrate to their investors, clients and other stakeholders how they manage their staff and supply chain workers, and show how their approach to workforce management is aligned with their business strategy. To date, companies disclosing data to the WDI have provided evidence of efforts to improve health and safety standards, policies and practices related to employee wellbeing, and actions relating to supply chain management. 

Work-life balance or employee well-being – Helping all employees to maintain a healthy balance between work and other aspects of their life is widely seen to be key to maintaining a stable, high-performing and productive workforce over the long term. As well as having clearly prescribed working hours and vacation allowances, organisations that are committed to providing a work-life balance will clearly establish that employees are not expected to work overtime or ‘take work home’ as a matter of course. Such employers may provide flexi-time options and accommodate workers in their ability to meet family or personal commitments within working hours. Work-life balance and employee wellbeing policies also mitigate worker mental health issues including stress, depression and burnout. 

Key contacts

Caroline Froger-Michon
Partner
Paris
T +33 1 47 38 43 03
Mia Kalajdžić
Partner
Zagreb
T +385 1 4825600
Dennis Fromm
Dennis Fromm
Business Development Manager
Berlin
T +49 30 20360 2256

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