Environmental, Social, and Governance (ESG) investing has been gaining traction for decades, promising a holistic approach that considers a company’s impact beyond just the bottom line. Yet, progress has been frustratingly slow. Despite significant growth in ESG assets under management, expected to increase to US$33.9 trillion by 2026, critics argue that real-world impact remains elusive. Could the answer lie in a neglected element—the “S”?

Missing the “S” is a Financial Liability

Larry Fink, CEO of BlackRock, the world’s largest asset manager, stated in his 2021 letter that social responsibility is crucial for long-term success.

A narrow focus on environmental and governance factors ignores a wide range of social risks that translate directly into financial risks. Ignoring the “S” isn’t just an ethical failing; it’s a financial misstep. More importantly, while diversity, equity, and inclusion (DEI) are crucial components of the “S” in ESG investing, the social dimension encompasses a much wider range of considerations, including:

• Labor Practices and Worker Wellbeing: This includes fair wages, safe working conditions, respect for worker rights, and measures to prevent discrimination and harassment. The 2023 Gallup report mentions disengagement costing the global economy $8.8 trillion.
• Consumer Protection and Responsible Technology: The development and deployment of technology need to be done ethically to protect consumers and reduce societal harm. This includes transparent AI decision-making, data privacy considerations, and responsible use of facial recognition technology. According to Cone Communications/Porter Novelli 2023 Global CSR Survey, 90% of global consumers say they would switch brands to ones associated with a good cause (compared to 83% in 2020). 83% of global consumers would boycott a brand if they knew it had unethical labor practices.
• Community Relations and Social Impact: Companies have a responsibility to consider the impact of their operations on the communities they operate in. This includes responsible sourcing practices, minimizing environmental pollution, and engaging in social development initiatives.
• Human Rights and Supply Chain Management: Companies are increasingly held accountable for human rights violations within their supply chains. This includes preventing forced labor, child labor, and discrimination against marginalized groups.
• Lack of Diversity and Inclusion: Companies with homogenous workforces miss out on the benefits of diverse perspectives, leading to poorer decision-making and a higher risk of overlooking emerging trends.

A 2019 study by McKinsey found that companies in the top quartile for gender diversity on their executive teams were 21% more likely to outperform on profitability.

The Rise of Social Data and the “S-Factor” Companies

Companies like S-Factor, founded by human rights expert Bonnie-Lyn de Bartok, are working to bridge the data gap in social impact investing. de Bartok emphasizes the critical role of “Big Data + Regulation” in uncovering and analyzing social factors within a company. These factors include labor practices, supply chain management, health and safety standards, community engagement, modern slavery risks, indigenous rights considerations, ethical sourcing, diversity and inclusion efforts, and compliance with relevant regulations and standards.

Bonnie-Lyn also emphasized that despite the increasing demand for social data from investors, a significant gap exists in readily available and reliable information. This lack of data hinders companies from effectively disclosing their social performance and makes it difficult for investors to accurately assess social risk and opportunity.

The time has come to recognize “S” as the cornerstone of successful ESG investing.

A key reason for the data gap is the lack of standardized reporting frameworks and metrics for social factors. While environmental and governance factors have benefited from frameworks like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), the social aspect of ESG remains comparatively underdeveloped.

The timeline of ESG disclosure reveals a concerning pattern. While the terminology has evolved from Socially Responsible Investing (SRI) in the 1960s to ESG today, the core focus on environmental and governance factors has largely remained unchanged. Reports tend to focus on compliance and risk mitigation, failing to capture the immense potential of social impact investing. This lack of progress suggests a systemic issue: “the absence of political will to prioritize social data collection and standardization,” says de Bartok.

A Shift in Investor Priorities

The opportunity lies in reframing the narrative on social impact for capital mobilization. There is a growing recognition of the importance of social factors among investors. Prioritizing the “S” in ESG isn’t just about social responsibility; it’s about smart investing. This shift is not just anecdotal; it’s backed by data.

For instance, a 2020 report by the CFA Institute titled Future of Sustainability in Investment Management highlights a survey finding that while environmental factors were initially the primary focus in ESG investing, the importance of social factors is growing. In their 2020 practitioner survey, 85% of respondents said they consider social factors in their investment decisions, compared to 73% just three years prior.

This shift in focus reflects growing awareness of the financial implications of social risks and the potential for positive impact through social investing. Instead of focusing on the risks of inaction, we need to showcase how investing in social goods can translate to capital gains: reduced operational costs, enhanced brand reputation, increased innovation, and talent acquisition. By addressing social factors proactively, companies can avoid costly disruptions and legal issues.

A real-world example further illustrates the rising investor focus on social impact. Unilever, a multinational consumer goods giant, launched its Sustainable Living Plan (USLP) in 2010. This ambitious plan sets out ambitious goals for social and environmental improvement, including improving the livelihoods of millions in its supply chain, promoting gender equality, and reducing its environmental footprint.

Initially, some investors questioned the financial viability of the USLP. However, Unilever’s commitment to social impact has demonstrably translated into financial success. This case study highlights the potential for companies to achieve both social good and strong financial performance by prioritizing the “S” in ESG.

As Kofi Annan said, “There is no development without sustainability. There is no sustainability without equity.”

As Kofi Annan, former Secretary-General of the United Nations, aptly said, “There is no development without sustainability. There is no sustainability without equity.” The pursuit of profit without social responsibility is a recipe for short-term gains and long-term instability. A stable and thriving society is the foundation for a healthy economy.

The answer lies not in yet another rebranding exercise, but in a fundamental shift in perspective. We need to reframe the narrative around social impact investing, highlighting the financial benefits and dispelling the stigma. Position social impact as a source of alpha, or excess returns that cannot be explained by market factors. Companies with strong social performance are often better positioned to manage risk, attract and retain talent, and build brand loyalty, all of which contribute to superior financial performance.

The time has come to recognize “S” as the cornerstone of successful ESG investing. By prioritizing social responsibility, investors can unlock significant financial returns while contributing to a more just and sustainable future.