Sustainable investing has become increasingly important in recent years. To help guide decisions in the world of finance, ESG principles were established. ESG stands for Environmental, Social, and Governance. These principles help investors evaluate companies in terms of these three aspects of sustainability. According to recent studies, 22 percent of all Swiss investment funds were positioned as sustainable in 2023 – that’s 15 percent more than the previous year.

Despite this encouraging growth, the world still lacks two to three trillion US dollars in sustainable investments annually to achieve the United Nations’ Sustainable Development Goals (SDGs). ESG investments, therefore, aren’t just a trend – they’re an urgent necessity.

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What is the S in ESG about? The S for Social in ESG puts people at the center. Specifically, it involves the well-being and development of employees, as well as the diversity and inclusion of a company’s workforce. Social sustainability aims to combat workplace exploitation – such as forced or child labour – and to create fair, safe jobs. Factors such as fair wages, opportunities for training and development, and inclusive workplace cultures are among the social criteria.

Social Aspects in the Shadow of Environment

Of the 17 UN Sustainable Development Goals (SDGs), eleven relate to social development. These include poverty reduction, access to education, and the promotion of gender equality. However, in recent years, around 60 percent of SDG-related investments have flowed into the environmental sector, pushing the E into the spotlight. Investors are more likely to fund renewable energy than education or poverty alleviation. The fact that the S often takes a backseat is not lost on many – over 40 percent of investors in surveys express concern that social issues are being neglected in favor of climate concerns.

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What are the SDGs? The Sustainable Development Goals (SDGs) are 17 universal goals established by the UN in 2015 to promote sustainable development on a global scale by 2030. These goals cover areas such as poverty reduction, health, education, gender equality, clean water, sustainable energy, economic growth, climate protection, and peace. The SDGs aim to ensure that social, economic, and environmental aspects are equally considered to secure a just and sustainable future for all people worldwide.

This imbalance has several causes, according to experts. For one, environmental sustainability aspects are often easier to measure than social ones. This is crucial for investors who want to track the impact of their money. CO2 emissions, for example, are a seemingly (illustrated in this article) clearly measurable figure. It’s much harder to quantify fair working conditions. What metrics can determine whether a company takes employee health protection seriously? Whether teams are diverse or whether the company is family-friendly?

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In addition, environmental regulations and laws are far more advanced than those in the social sphere. The European Union introduced the EU Taxonomy – an ecological framework gradually implemented since January 2022. This set of criteria defines European standards and assesses all economic activity based on its environmental sustainability. In doing so, Europe is standardising the E in ESG. For the S in ESG, however, there are currently no such unified standards. And it will likely take time until a comprehensive framework exists that encompasses all economic activities and forms of sustainability.

The Secret to Success: Satisfied Employees

Despite the lack of regulatory frameworks, companies and investors should pay attention to social sustainability criteria. They are often just as important – if not more so – than environmental criteria when it comes to a company’s success. Why? Because companies that perform well in the S of ESG take good care of their employees. A fair and healthy work environment significantly boosts productivity and, most importantly, employee satisfaction. This can save companies a great deal of money: satisfied employees are less likely to quit. In short: companies that prioritise the needs and well-being of their staff are more economically successful – they generate more revenue with fewer resources and have lower personnel costs due to reduced turnover.

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How can the S in ESG be measured?
Social sustainability criteria can generally be measured both qualitatively and quantitatively. Employee satisfaction can be assessed through staff surveys or by looking at turnover rates. Training opportunities, for example, can be measured by how much time and money companies provide per employee for education and development. Diversity and inclusion can be evaluated by metrics such as reported incidents of discrimination, diversity in leadership, or gender pay gaps.

On the flip side, companies that fail to take the S in ESG seriously risk negative public attention and may face boycotts and reputational damage. But that’s not all: if a company loses the loyalty of its workforce, it can be brought to a standstill. Several international airlines, for instance, have been unable to operate for days due to large-scale strikes by flight attendants, pilots, and ground staff over unresolved working condition and salary issues. The financial losses from such strikes can be significant – for Swiss International Air Lines, this year’s strikes have already cost tens of millions. Strikes and social scandals can also cause long-term damage if they harm a company’s reputation and customer loyalty, potentially leading to fewer bookings and lost revenue.

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E, S and G are interconnected

Investors should also consider the interplay between the different aspects of sustainability. Effective and holistic sustainability practices take all ESG criteria into account. Therefore, they shouldn’t be viewed in isolation. For example: what good is it to me as a consumer if my T-shirt is made from organic cotton but sewn by children? It pays for investors to look closely at whether companies perform well across all ESG categories and take their responsibilities to the environment, society, and their employees seriously.

This conclusion is also supported by research. A new paper on impact investing from the University of Hamburg shows that impact in individual ESG categories should not simply be summed up. Using the earlier example: the sustainability of organic cotton should not be lumped together with that of working conditions in a single rating, as important details can be lost. A broad sustainability rating doesn’t show if a company excels in environmental sustainability but fails socially. For a truly holistic approach to sustainability and measurable impact, this kind of differentiated view is essential.

*For transparency: This article was originally published in German on 15.02.2024.

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