Blog by Emma O’Connor, Junior Associate
The term ESG was introduced in 2005 and refers to the environmental, social, and governance standards that companies should adhere to.[1] ESG metrics provide consumers and investors with information on a company’s social and environmental impacts, so that stakeholders can make more informed choices that reflect their values.[2]
The social component of ESG considers companies’ internal impacts on workers and external impacts on consumers and their community.[3] The “S” in ESG encompasses human rights abuses, treatment of employees, maintenance of office health and safety, diversity and inclusion, worker engagement, and community engagement.[4]
Measuring the “S”
Consumer demand has led to many ESG standards and strategies, but there has been far less dedication to the “S,” or the social pillar, than the environmental.[5] The social pillar of ESG is broad and difficult to measure, leading to a myriad of social standards and interpretations which has caused some confusion among businesses.[6] There is currently no universal metric for social issues, so it is harder to hold companies accountable for their social impact in a concrete, tangible, and clear manner.[7] The lack of universal regulation or enforcement of human rights standards has rendered the global community incapable of mitigating these harms, especially because we now live in a globalized world with transnational corporations and “cross-border economic activity.”[8]
Other challenges to the social dimension of ESG include a lack of consensus about the elements that corporations’ must monitor to meet expectations, trouble measuring social impact due to its complexity, misalignment on measurement timelines, and the frequency of “impact washing” due to a lack of external, independent regulation of businesses’ measurement and reporting.[9] Impact washing occurs when companies mischaracterize or deceive the public about their true social impact.[10]
The Case for a Greater Focus on the “S”
Holding companies accountable for their treatment of employees, community, and workers in their supply chains has become increasingly vital. Corporations have become some of the most pervasive, powerful, and wealthy entities in the world. 157 of the richest 200 bodies on the globe are now corporations, not countries.[11] However, corporations are not bound by the same international treaties delineating shared human values and principles as countries. Without adequate regulation, companies have prioritized short-term profits over human and environmental well-being without significant repercussion.[12] Across the globe, 50 million people are victims of modern slavery, and the private sector is responsible for 86% of these cases.[13]
For example, the Chinese fashion brand, Shein, has subjected its employees to 75-hour work shifts, underpayment, and unsafe working conditions in residential buildings or spaces without windows.[14] Starbucks was accused of over 200 labor law violations for an “aggressive and illegal union-busting campaign” including firing employees in retaliation for unionizing and refusing to bargain with unions in good faith.[15] Brands such as Hearthside Food Solutions which sells Lucky Charms, Cheetos, Chewy, and Nature Valley Granola Bars hire migrant children in the United States for “some of the most punishing jobs in the country” with long hours and underpayment.[16] The New York Times reported on this “shadow workforce” of underage migrant workers which spans “across industries in every state” of the United States.[17]
The prevalence of labor violations indicates that further national regulations and mandatory disclosure requirements are needed to align countries with international standards on ethical business practices. The UN Guiding Principles on Business and Human Rights explains that states have a duty to protect their citizens from human rights abuses perpetrated by businesses.[18] The International Bill of Human Rights states that individuals are entitled to the “freedom from discrimination,” “right to equality between men and women,” “freedom from slavery,” “right to form trade unions,” “right to strike,” and “right to an adequate standard of living.”[19] The Universal Declaration of Human Rights prohibits slavery, degrading treatment, and unjust or unfair working conditions.[20]
Ultimately, the “S” in ESG deserves greater attention to hold corporations accountable to adhering to universal human rights values and provide consumers with transparency.[21]
[1] Lucy Pérez et al., Does ESG really matter— and why?, McKinsey & Company (2022), https://www.eticanews.it/wp-content/uploads/2022/09/does-esg-really-matter-and-why-vf.pdf.
[2] Anrafel de Souza Barbosa et al., Integration of Environmental, Social, and Governance (ESG)
criteria: Their impacts on corporate sustainability performance, 10 Human. and Soc.
Sci. Commc’n 1, 2 (2023).
[3] Bahtiar Manurung & Yogi Bratajaya, Let’s Focus on the “S” in ESG to Improve Outcomes,
Found. for Int’l Hum. Rts. Rep. Standards (2022), https://fihrrst.org/lets-focus-on-the-s-in-esg-to-improve-social-outcomes.
[4] Id.
[5] Manurung & Bratajaya, supra note 3.
[6] Paolo Taticchi & Chiara Andreoli, Social Impact Measurement and Management in Impact
Investing: The Jungle We Must Steer Through, Copenhagen Business School (CBS) (2022) https://research-api.cbs.dk/ws/portalfiles/portal/83258534/paolo_taticchi_et_al_social_impact_measurement_and_management_in_impact_investing_publishersversion.pdf.
[7] Id.
[8] Jennifer Zerk, Corporate liability for gross human rights abuses: Towards a fairer and more
effective system of domestic law remedies, OHCHR, 14 (last visited Feb 21, 2024). https://www.ohchr.org/sites/default/files/Documents/Issues/Business/DomesticLawRemedies/StudyDomesticeLawRemedies.pdf.
[9] Id.
[10] Id. at note 8.
[11] 69 of the richest 100 entities on the planet are corporations, not governments, figures show, Global Justice Now (Oct. 17, 2018) https://www.globaljustice.org.uk/news/69-richest-100-entities-planet-are-corporations-not-governments-figures-show/.
[12] Id.
[13] 50 Million People Worldwide in Modern Slavery, Int’l Lab. Org. (Sept. 12, 2022) https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_855019/lang–en/index.htm.
[14] Astha Rajvanshi, Shein Is the World’s Most Popular Fashion Brand—at a Huge Cost to Us All, Time (Jan. 17, 2023), https://time.com/6247732/shein-climate-change-labor-fashion/; Vauhini Vara, Fast, Cheap, and
Out of Control: Inside Shein’s Sudden Rise, Wired (2022), https://www.wired.com/story/fast-cheap-out-of-control-inside-rise-of-shein/.
[15] News: Help Majority Staff Report on Starbucks, U.S. S. Comm. on Health,
Education, Labor & Pensions (2023), https://www.help.senate.gov/chair/newsroom/press/news-help-majority-staff-report-on-starbucks.
[16] Hannah Dreier & Kirsten Luce, Alone and Exploited, Migrant Children Work Brutal Jobs Across the U.S., N.Y. Times (2023), https://www.nytimes.com/2023/02/25/us/unaccompanied-migrant-child-workers-exploitation.html.
[17] Id.
[18] Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework, OHCHR (2012), https://www.ohchr.org/en/publications/reference-publications/guiding-principles-business-and-human-rights.
[19] International Bill of Human Rights, OHCHR (1966) https://www.ohchr.org/en/what-are-human-rights/international-bill-human-rights (last visited Feb 21, 2024).
[20] Universal Declaration of Human Rights, U.N. (1948), https://www.un.org/en/about-us/universal-declaration-of-human-rights#:~:text=Article%2014,principles%20of%20the%20United%20Nations.
[21] Samuel Tang & Colin Higgins, Do Not Forget the “How” Along with the “What”: Improving the Transparency of Sustainability Reports, 65 Ca. Mgmt. Re. 44–63, 45 (2022).