Why S is often the overshadowed sibling to E and G

March 9, 2023, 2:19 PM UTC
A U.S. ban on imports from Xinjiang created a major material risk for retailers purchasing Xinjiang cotton.
Qin Meihua—VCG/Getty Images

Last week I wrote how, despite politicians hyping the issue into an existential threat over the past year, major corporations documenting their environmental, social, and governance policies for investor scrutiny is actually a decades-old process.

But while G had its moment in the spotlight during the boom-and-bust dotcom era, and E rose to prominence following the Paris Agreement in 2015, it seems S has yet to capture the popular imagination in the same way.

“The S of ESG is a much more challenging [investor consideration] for a variety of reasons,” says Saskia Kort-Chick, director of ESG research and engagement for responsible investing at AllianceBernstein. “There is no carbon footprint for social issues. There is no one particular metric that is relevant across sectors and industries that is representative for how a company is performing on S issues.”

The Social aspect of ESG covers issues surrounding how a company interacts with its employees and the broader community surrounding its operations. Those interactions have received more attention in the media as a facet of business activity since the pandemic, when stay-at-home orders initiated a surge in white-collar worker rights movements.

The recent string of mass layoffs at tech giants including Spotify, Twitter, and Alphabet might sharpen investor focus on the S issue, too.

But, to Saskia’s point, the highly publicized disputes between staff and managers at major tech firms are relatively easy for investors to analyze because each event generates a lot of public data. Assessing whether a mining company’s upstream supply chain is exploiting forced labor, for example, is a trickier task. There is no one-size-fits-all approach to measuring social risk, but that doesn’t mean the risk isn’t there.

“I think, generally, there’s a misconception that S issues have no material impact on operations,” Kort-Chick says, noting that “increasing legislation around the globe related to human rights and modern slavery…creates a huge regulatory risk as well as a challenge to supply chain management for companies.” 

Case in point, last year the U.S. government banned the import of products of any products sourced partially or entirely from the Xinjiang region in China, where Washington and numerous independent reports say Beijing has pressed the local ethnic Uyghur population into forced labor, a charge Beijing denies. Companies that fall foul of the import ban risk fines and shipment seizures, as well as the PR fallout from being caught profiting from alleged forced labor.

That embargo helped highlight for companies operating in Xinjiang how Social risks can be material, as well as moral. To avoid falling foul of the law, fashion retailers had to conduct deep audits of their supply chains—which they should have been doing anyway—and, in some cases, eliminate Chinese cotton from their mills, all at a steep operational cost. 

Making investors understand the materiality of S factors on business operations is the first step to helping them fully incorporate S with their ESG assessments, Kort-Chick says. Once investors recognize the material risks, they can gather appropriate data to assess their exposure and challenge companies that aren’t doing enough to mitigate S-class issues.

On that last point, I asked Kort-Chick what she thinks of divestment as a tool for pressuring companies to enact operational changes.

She says while that’s a tool AllianceBernstein has at its disposal, the company’s “preference is to continue engaging with the company and to leverage our voice and to remain having a seat at the table.”

Eamon Barrett


Decarb on the horizon
Speaking of legislative changes and how they are catalyzing ESG investments, in an op-ed for Fortune, BCG analysts write how new rules in the U.S. and the EU have “fundamentally changed the economics of many critical decarbonization technologies,” creating business opportunities over “two time horizons.” That’s immediate-term value capture and mid-term growth.  

As the world embarks on a seismic shift to electric vehicles, Mexico is primed to reap the benefits. The North American country sits on the world’s 10th largest lithium deposits and has a pedigree in auto manufacturing. But, Fortune’s Will Daniel reports, one factor presents a critical roadblock for Mexico’s EV future: a lack of energy infrastructure.

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