ESG is based on three pillars. Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change. Social criteria examine how it manages the human element, including relationships with employees, suppliers, customers, and the communities where they operate. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
In the first of this three-part series, we examined the Environmental pillar of ESG and how it functions. Here, we take a closer look at ESG’s social pillar and what factors, initiatives and ideals fall into this classification.
Factors under the social umbrella are:
- Diversity, equity, and inclusion (DEI)
- Customer satisfaction
- Data protection and privacy
- Employee engagement
- Community relations
- Wage equality
- Labor standards
- Human rights
Once deeply explored, social aspects can start at home with culture, including DEI hiring, training and advancement initiatives — from entry level through C-suite — the existence of employee resource groups (ERGs), wage equality, labor standards, harassment policies, and quality of healthcare and other compensation packages. Commitment to these policies can prove a company is walking the walk by starting with the treatment of its own employees. True Social awareness must go much further.
Companies must address questions, such as, are there human rights abuses in your companies supply chain? What causes are the company supporting financially? Are your partners and suppliers supporting similar commitments or are they looking the other way with issues such as forced child labor?
According to Ernst & Young, social includes legal obligations such as the U.S. Foreign Corrupt Practices Act, which outlaws bribery, and the European Union’s General Data Protection Regulation, which preserves data privacy.
“A thoughtful social approach, as part of a holistic sustainability and ESG strategy, can impact how an organization recruits and retains talent – particularly among younger generations of people where it’s become an expectation. It also helps define the impact an organization has on the communities in which it does business or operates. Organizations that have diverse perspectives among their workforce, combined with an inclusive culture, drive better decision-making, stimulate innovation, increase organizational agility, and strengthen resilience to disruption.”
According to S&P Global, a number of social factors can affect a company’s financial performance, ranging from short- to long-term challenges:
- Workforce issues which may include labor strikes or consumer boycotts that can affect the company’s profitability and reputation.
- Products or services that can create a safety risk for consumers, workers, or anyone along the supply chain.
- Future demographic shifts or consumer preferences that can cause a product or service to fall out of favor and lose market share.
With United States unemployment at a 50-year low and Baby Boomers rapidly aging out of the workforce, companies must do everything they can to compete for the Millennials, who already make up the largest cohort of workers — with Gen Z rapidly stepping in behind them. These generations care deeply about social justice and not just as potential employees but as potential investors, as KBS recently explored in ESG in Commercial Real Estate.
In their Emerging Trends in Real Estate 2020 report, PwC and the Urban Land Institute found that Millennials, which recently surpassed Baby Boomers as the biggest generation, are driving ESG, with 55 percent of them pointing to those priorities as factors in their investment decisions, well above the prior two generations.
Like with “green washing,” which has long been a practice in environmental matters, the days when companies can pay lip service to a principle and have it pass the sniff test should be mostly gone. Those who will gravitate toward companies with solid ESG efforts will also want substantiation that a company’s social ideals are embedded into its DNA, with quantifiable results.
To further illustrate the dominance of social and ESG as a priority, McKinsey contends more than 90 percent of S&P 500 companies now publish ESG reports in some form. And, in many jurisdictions, reporting ESG standards and practices are either required or being carefully considered.
“The rising profile of ESG has also been plainly evident in investments, even while the rate of new investments has recently been falling. Inflows into sustainable funds, for example, rose from $5 billion in 2018 to more than $50 billion in 2020 — and then to nearly $70 billion in 2021; these funds gained $87 billion of net new money in the first quarter of 2022, followed by $33 billion in the second quarter. Midway through 2022, global sustainable assets are about $2.5 trillion. This represents a 13.3 percent fall from the end of Q1 2022 but is less than the 14.6 percent decline over the same period for the broader market.”
While the social pillar of ESG has been formidable to evaluate, companies that strive to help allay societal ills through philanthropy have found that positive collaboration between companies and communities ensues.
KBS, for instance, has donated time, money, and effort to charitable organizations since its inception 30 years ago. Championing and supporting philanthropic community and national programs have always been a core value for the company. KBS enthusiastically seeks opportunities for its team members to participate in causes that benefit those in need and the environment locally and nationally. In December 2022, the Orange County Business Journal recognized the Newport Beach, CA, CRE company among its “Companies That Care.” The honor designates KBS as having gone above and beyond to make the Orange County community a better place to live through philanthropic efforts and accomplishments.
The commercial real estate industry is heavily affected by environmental pressures because it is one of the largest stressors, worldwide. The same can be said for social. The industry must consider the needs of workers and supply chains of all types and not just for construction of its buildings but also the employees of every tenant who works in those buildings every day. Because almost every business is housed in some form of CRE, whether an office, a factory, or an industrial plaza, it creates an ongoing dependency on the CRE industry.
This put significant pressure on the CRE industry, but it also provides opportunity to make dramatic change. If the industry swings together to prioritize social, it can be the massive lever that compels countless others to make the switch too. With great influence comes great responsibility and CRE can lead the way, bringing every other type of business with it.
Learn more about the latest in commercial real estate, visit KBS.com/Insights.
