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The "S" in ESG requires a different methodology than the "E", John Ruggie argues

"The S in ESG: Best practices and the way forward?", 1 July 2021

In the investment world, environmental sustainability has moved closer to core considerations. Matters of social sustainability, the subject of the S in ESG, still lag. That needs to be fixed, but first it must be understood on its own terms...

Developing metrics for the E is complex enough. But rough approximations of comparable company data can be produced by combining big data, including from remote sensing technologies, with artificial intelligence. But if the pressure to produce high quality data for the S simply mimics that path, the results will be far more problematic. Why is that, and what can we do about it?

The S is about risks to people. Some of these are readily quantifiable: what is the health and safety record in your operations? Others are harder: was the indigenous community in whose lands you’re opening a copper mine consulted? ...

In short, measuring the S in many instances is far more difficult and not amenable to tick-box exercises that businesses yearn for. What is to be done? That’s a long story. I can address just two points here.

The first concerns the concept of materiality...

In short, materiality doesn’t get you far enough. Companies must identify and address serious risks to people that their activities and relationships may pose. Those may become material risks in the narrow sense, but by then great harm to people may already have been done.

My second point concerns how investors and operating companies can be expected to identify such risks. Financial risks, of course, are assessed through a due diligence process. So why not for the S in ESG? Companies can employ the human rights due diligence process prescribed in the UN Guiding Principles on Business and Human Rights. It has served as the global soft law standard for the past decade and is now being incorporated into European Union hard law...

So, my message to you today is that we need to think of the S in ESG as addressing the people dimension of sustainability, which in turn requires more qualitative metrics and more sophisticated AI than the E...

In the end it all comes down to this: measure what matters, not merely what is easily measured.