GRI: The Global Reporting Initiative was founded in 1997 and set-up by the Global Sustainability Standards Board. It aims to provide guidelines for sustainability reporting to organisations internationally.

CSR: A broad concept, Corporate Social Responsibility is a company’s commitment to operating responsibly, incorporating ethical and moral considerations in their activities.

SRI: Socially Responsible Investing is a concept that incorporates ESG considerations and criteria into investment decisions.

IAHR: The Investor Alliance for Human Rights aims to encourage institutional investors to respect human rights in their operations.

PRI: The UN Principles for Responsible Investing is an organisation propagating principles of responsible investing, persuading investors to implement ESG factors. It has over 2,000 participating signatories from over 60 countries representing more than US$80 trillion of assets.

CHRB: The Corporate Human Rights Benchmark was launched in 2013. It assesses companies based on a set of human rights indicators.

Although the social focus of sustainable investing has received the least attention of ESG’s three components, socially responsible investments have a long history. As far back as the eighteenth century, religious organisations, such as the Quakers or Methodists, withheld investment or business from morally questionable activities such for example gambling, tobacco and alcohol production.

The first socially screened mutual funds arose in the 1970s in the US. A notable example of socially responsible investing in the latter half of the last century is seen particularly in the approach to apartheid in South Africa: investors across the board withheld investment from the country and the subsequent economic turmoil this created contributed to the system’s dismantling.

In recent years, a growing number of organisations and multilateral principles have fused social responsibility and investments. The voluntary UN-backed Global Compact and Principles for Responsible Investing and the Corporate Human Rights Benchmark are just a few examples of socially relevant commitments. While each promotes socially responsible behaviours, they go about it in different ways: UNGC encourages large, usually publicly traded, companies in the world to adopt a broad set of environmental and social principles and annually report on their adherence to these principles. UNPRI specifies a series of investment principles for implementing ESG, helping companies follow a line of action to meet ESG objectives and report on their performance. In contrast, the CHRB analyses the largest publicly traded companies (irrespective of their choice) on their compliance with human rights standards.

Yet, despite CSR’s long history, the performance of many companies remains behind expectations. For example, in 2019 the CHRB reported that half of companies failed to meet any of the five basic criteria for human rights. The vast majority of the 200 companies they analysed – the largest listed companies from high-risk sectors – were failing to implement the UN Guiding Principles on Business and Human Rights (UNGPs). However, the top 100 companies showed improvement from 2017-19, moving from an average score of 18% to 32%, suggesting that – while there is still a long way to go – businesses are starting to acknowledge, the crucial role they play (and the public expects them to play), in delivering positive social outcomes for their workers, their customers and the communities they operate in.

Social factors impact every business, every day, everywhere in the world. Areas such as workers’ rights, gender pay equality and diversity are typically the first associated with the S in ESG, but corporate social responsibility goes much further than a firm’s relationship with its employees: it encompasses all corporate interactions with suppliers, politicians, customers, communities and society as a whole.

Investors and the public are increasingly looking for evidence showing how businesses are addressing a broad range of social issues such as whether a company provides a safe and healthy working environment for its employees, how it supports social mobility, how it addresses workforce diversity; or if it donates time, money or resources to give back to communities as well as how it ensures that its products and services don’t pose any safety risks - and these are only a very few examples.

Equally, delivering on the social component requires corporates to be nimble – to continually assess and understand the expectations of its stakeholders, which may well differ depending on geographies, to quickly and effectively respond to changing cultural demands, attitudes or preferences.

What’s more, consumers are aware of their power and are prepared to use it. A recent study found that over half (55%) of UK consumers believe their individual protest actions, such as boycotting a company or speaking-out on social media, can make a difference in how companies behave. And over a third (37%) claimed they have stopped doing business with a company as a result of its actions. 

While a large number of companies have shown their motivation to “do the right thing” during the pandemic, and social enterprises (both of these we’ll be covering in the next two articles of our ESG series) are boosting the concept of a good corporate citizen, there’s a broad swathe of evidence that socially responsible corporates perform better and yield higher returns for their investors:

• A number of studies show supply chains that meet human rights, operate good labour practices and closely collaborate with their supply chain partners are more stable and hence perform better.
• Equally, research confirms that good working conditions increase staff satisfaction and loyalty and as such boost productivity.
• A review of 92 research studies about the impact of human capital on corporate success, conducted by the Investor Responsibility Research Center Institute (IRRCI), found positive correlations between how companies manage workplace relationships and their financial performance.
• An analysis of 4,100 global public companies revealed that companies with no women on their boards tend to underperform and displayed higher financial volatility compared to their mixed board counterparts.
• Research by Accenture suggests that fusing ‘old school’ profitability measures with social and environmental efforts incites a revenue increase of 5-20% for participating companies and a supply chain cost reduction of between 9-16%, while improving local welfare, labour standards and improving customer health.
• A review of Corporate Responsibility studies found clear evidence that the social dimension in ESG increases firm value through lower risk.

Reporting methods on environmental factors, such as carbon emissions, fossil fuel reserves and clean energy use, have more or less become mainstream. Most companies, however, haven’t yet mastered similar data granularity for their social performance, typically facing the following hurdles:

• Contrary to the majority of environmental factors, the majority of social issues need to be assessed qualitatively rather than quantitatively.
• The reporting of social issues and measures tends to be more localised and is harder to define, especially when you compare to environmental issues where the carbon footprint provides for a well-understood, comparable metric. Hence a lot more thought and analysis is required if companies are to avoid ‘social washing’ situations.
• Bearing the fruit and seeing the impact of social measures tends to require a longer lead time compared to environmental action. Therefore companies need to find a way to report and sufficiently measure progress over years.
• The diverse range of social factors requires businesses to generate many different sets of data, which is as time-consuming as it’s costly.
• Up until now, there has been a lack of industry frameworks that harmonise how companies ought to capture social performance.

Acknowledging that “social issues are less tangible, with less mature data to show how they can impact a company’s performance,” the PRI published a guide “ESG integration: How are social issues influencing investment decisions?” collating case studies which show how investors and businesses alike can assess social factors.

Some investors are also utilising Abraham Maslow’s famous human hierarchy of needs to measure relative social impact: Companies that serve the higher, self-fulfilment needs of customers tend to receive higher valuations than those that serve the basic needs (food, security).

Maslow's hierarchy of needs:

Recommendations on the most effective reporting stress the need to focus on impact and not just efforts: An often cited study by the NYU Stern Center for Business and Human Rights found that only 8% of the more than 1,700 “S” indicators examined evaluated the effects of company practices, leaving corporate decision makers (and investors) in the dark about the social value for money of their social measures.

While industry associations and networks offer support, directly learning from peers how to tell the full story is another good way of tackling the “S challenge”: A look into the annual reports of CSR leaders such as Unilever or the Lego Group showcase excellent impact reporting. Sportswear firm, Adidas, hit by negative press over child labour incidents in its supply chain, is now scoring top points on human rights indicators, having taken resolute action as well as providing transparent data about the impact of the firm’s social responsibility policy.

A recent global survey of nearly 30,000 consumers found that 62% of those want companies to take a stand on current issues such as sustainability or fair employment practices. The study also highlighted that firms that stand for something bigger than what they sell – and communicate their purpose clearly – are more likely to attract customers. What’s more, such companies report 30% higher levels of innovation and 40% higher levels of workforce retention than their competitors.

In recent years, a number of companies have transformed from businesses with a strong CSR focus to purpose-led companies. “Purpose is thinking about business in a much wider sense than before. It is about our role in – and connection to – society,” NatWest Group’s CEO, Alison Rose, commented when NatWest Group set out its new commitment in February this year to be a purpose-led organisation that will champion potential, helping people, families and businesses to thrive. In doing so, NatWest focuses on three areas where we believe we can make the biggest impact: supporting enterprise, building financial confidence and taking a leading role in tackling climate change (for more information please visit: https://www.natwestgroup.com/our-purpose.html).

Successful purpose-led businesses are following three key principles: 1) Assessing how their strengths can be used to make a difference for society, 2) Using their purpose as a guide for each business decision, and 3) Proactively engaging with the public (for example charities or customers) via stakeholder panels to foster an on-going dialogue – helping to anticipate changing views and preferences – and to jointly develop social initiatives or even co-create new products and services.

#  ESG  Environmental. social & governance

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2022 © NatWest Markets Plc. All rights reserved.