From G to E and now to S: The shifting pendulum of ESG

On the 05/12/21 at 7:45AM


Tzoulianna Leventi

Tzoulianna Leventi, investment analyst, Aberdeen Standard Investments on how companies of all sizes are recognising that managing business sustainably is no longer simply about reputational risks.
Tzoulianna Leventi, Investment Analyst, Aberdeen Standard Investments

ESG (environmental, social and governance) is fast-becoming one of the better known acronyms used in business today. Investors are increasingly focusing on how companies around the world embed and implement ESG considerations in their operations. However, companies of all sizes recognise that managing businesses sustainably is no longer simply about reputational risk. This is leading to a structural force of change that has brought with it new risks – and even more opportunities. 

Smaller companies leading the way

Smaller companies in particular are embracing these opportunities. Historically, this has predominantly focused on the E and the G – but no more. Due in part to the devastating impact of Covid-19, the S – or social factor – has come to the fore. This covers a vast array of important matters, from human rights and labour issues, through to supply chain and sustainability KPIs, data security, customer privacy and community welfare.

While it’s more difficult to measure and quantify the S, we are seeing more businesses embrace social issues. In particular, many are adopting measures to improve diversity and inclusion around gender, ethnicity and expertise.

Smaller companies are also increasingly aligning their corporate responsibility policies with the UN Sustainable Development Goals. This has led to improvements in business practices, as well as company culture. This past year, it has also been encouraging to see the number of smaller companies offering support to their local communities affected by pandemic-related issues.

How does this look in the real world?

Implementing policies that not only consider social issues, but that also go some way to addressing social inequality, can set a company apart from its peers in the eyes of investors. For example, we recently engaged with Bytes Technology Group, a UK based IT solutions and services provider. The company is trying to promote a more diverse culture and is increasing diversity hiring. It is also running employee development activities and providing a variety of certification opportunities. 

At the same time, management is promoting staff health and wellbeing. Take its ‘Cycle to Work’ scheme. Through this, it is able to promote an active lifestyle, improve employee health and reduce community emissions. As a result of these initiatives, the staff turnover rate has improved. The company also achieved a strong Glassdoor score (a website that allows employees, old and new, to anonymously rate a business).

Facing challenges together

Employee surveys are nothing new. However, we are finding that companies are conducting surveys more frequently. They are also looking for more innovative ways to engage with employees, to better understand their needs and concerns. 

The Covid-19 pandemic has been one of the biggest challenges for businesses in recent history. Lockdowns have demanded a seamless implementation of health & safety conditions. Management teams have had to find new methods for monitoring processes and review working environments. And, in some cases, they have also had to address potential or real Covid-19 outbreaks. In our experience, companies have demonstrated resilience and successfully supported staff. Several have quickly implemented Covid-19 protocols, such as track & trace, reporting and meticulous safety frameworks.

Act local …

Smaller companies, by their very nature, tend to be more plugged into their local economies than multi-national Blue Chips. As such, they are usually more cognisant of the impact – positive and negative – they can have on the communities in which they operate. Many take their responsibilities seriously.

Long-standing Italian luxury brand Brunello Cucinelli seeks to achieve a ‘fair and sustainable profit while giving back.’ As a key employer in the region, the local community is at the heart of the company. It seeks to create opportunities for local young people irrespective of their qualifications. In 2013, it also set up a School of Arts and Crafts to help people learn and develop. The company pays them a monthly wage while they do so.

… think global

Beyond the immediate community, some smaller companies are finding innovative solutions to problems facing our planet. Notably, our ability to create a more sustainable future. Dutch company Corbion produces plant-based bioplastics, used as an alternative to packaging in fruit & vegetables, single-use shopping bags and disposable drinking cups. Another great example is a Norwegian business Borregaard, operating the world’s largest biorefinery. Using lignin, a binding agent found in wood, the company supplies sustainable alternatives to oil-based chemicals. Its products have a wide range of applications, including dispersing agents in concrete, textile dyes, pesticides, batteries and ceramic products.

UK retailer Dunelm is focusing on the sustainability of its supplier partnerships, setting ambitious ethical supply standards. As part of this, the company has pledged to use 100% responsibly sourced cotton in its own brands by 2025. It has also stated that a 100% of the timber it uses will be legally sourced.

Final thoughts…

Small- and mid-sized companies are proving that not only does their size provide them with the agility to implement change quickly, but also that they can foster the kind of culture that cultivates creativity and innovation. Embracing the S in ESG is allowing smaller companies to identify improvements for all areas of their business. This is resulting in more diverse and engaged workforces, as well as more profitable organisations. It also means these businesses are well placed for the sizeable challenges facing the world. 

For investors too, this increased focus on S will create opportunities as we move to a fairer, more sustainable world.

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