Building a strong "S" in ESG capability

When it became clear in 2020 that the Covid pandemic would lead to profound social changes, J.P. Morgan Chase co-President Daniel Pinto declared that the "S" of ESG would be an imperative for investors.

“Either you are socially and environmentally responsible or you are not, I think that this is the world we are heading towards. It’s possible that some companies will really struggle to finance themselves, their cost of capital will go to the sky and they may not exist going forward.”

The "S" of ESG represents a major corporate governance risk factor. Your company can be highly damaged by lawsuits and negative press over social factors, from human rights violations in your supply chain to negligent management of health and safety during a crisis, to lawsuits by employees over bias, discrimination or harassment.

The cost of capital is a good reason for companies to build a strong "S" of Social Development. But it's not the only reason and not the most important for the business. Social capability is much more than compliance. In the 1990s the United Nations shifted its definition of human development to be a purpose or goal of the global economy in its own right. This is real importance of the "S".

The "S" of ESG is especially relevant to the ASEAN region. Given Southeast Asia's demographic dividend of a young population combined with high economic growth and investment, business leaders unhesitatingly place human development as one of the top three things to get right in the next ten years.

The pillar called ASEAN Economic Community (AEC) cannot stand without the ASEAN Social and Cultural Community (ASCC). Whether you call the "S" "Society" or "Stakeholders" in ESG, the contribution of business to ASEAN's human development capability is immensely important.

Why a strong "S" contributes to business success

Building the "S" has practical benefits for business. With today's post-Covid talent war, employers know that if you don't have human development capability, you will not attract talent. Your employees will leave for a competitor who provides a better place to work with better career opportunities and an employee experience that includes work-life balance.

On the bright side, companies whose business is to work with governments, both national and local, find that being able to demonstrate credibility and capability in managing the "S" of ESG helps them win contracts and get support for their growth. The Covid pandemic has accelerated awareness that governments and businesses need to collaborate on the "S" factor.

Business leaders who want to build a strong "S" in ESG soon discover that measurement is not simply a question of quantitative reporting.

Capability in human development is qualitative as well as quantitative, for the simple reason that people have a say in the impact of a social initiative. In the mining industry, for example, you cannot begin operation without the consent of the people who are going to be affected. The International Council on Mining and Metals (ICMM) became convinced that the profit from a mining operation cannot be at the expense of people or planet. In 2003, ICMM published a process of measuring social impact according to 10 Principles for sustainable development and ethical performance.

However measurement is not easy. The United Nations Principles for Responsible Investment underline that ‘S’ factors have created a measurement gap in ESG.

“The social element of ESG issues can be the most difficult for investors to assess. Unlike environmental and governance issues, which are more easily defined, have an established track record of market data, and are often accompanied by robust regulation, social issues are less tangible, with less mature data to show how they can impact a company’s performance. But issues such as human rights, labour standards and gender equality—and the risks and opportunities they present to investors—are starting to gain prominence.”

You need a framework that measures the qualitative as well as quantitative data. The framework needs to be strategic, so that the company can define how ESG benefits the business and provides milestones for development as well as having a positive social impact.

AHDO's human development accreditation

The ASEAN Human Development Organisation is a nonprofit committed to human development as a purpose in line with the United Nations principles and development goals, as well as the International Labour Organisation’s decent work mission.

In 2021, we recognised that businesses lacked the capability to set goals and measure the "S" in ESG. Beyond that, they needed a framework for building their own human development capability strategy.

So we created a robust framework called Advancement in Human Enterprise and Development (AHEAD). It is an accreditation process that allows companies to be recognised for having a systematic assessment and validation of human development in their organisations. The system also applies to non-business organisations such as public organisations and higher education institutions, as well as for ESG investment bodies and foundations.

The AHEAD accreditation covers 8 strategic areas of human development.

1. Purpose, Goals, Strategy
2. Human?Development Functions, Stakeholders and Social Contribution
3. Enterprise, Innovation, Performance
4. Learning and Development of employees, contingent workforce, leaders
5. Rights, Diversity, Inclusion
6. Freedom, Voice, Participation
7. Investment, Resources, Technology
8. Measurement, Impact, Sustainability

For organisations that consider the "S" as a purpose and not just a reporting responsibility, we built into the accreditation a number of benefits for the business itself. For example, companies define their competitive advantage in being a recognised leader in human development. The capability model makes their organisations more productive and effective. The framework provides a process for continuous improvement, research and being ready for the future of work. The qualitative measurement of KDIs (Key Development Indicators) build leadership, value creation and workforce sustainability. Finally the scope of the AHEAD model is not limited to internal employees but extends to stakeholders and the contingent workforce.

Startups and SMEs

We recognised that startups and medium sized organisations do not have the resources and scope to build functions and expertise in all these areas.

So we created the?Human Enterprise and Development Strategy Template for Assessment Review with Tutorial (HEADSTART) framework designed to help smaller organisations create a high quality, sustainable human development organisation.

The HEADSTART process provides tutorial support as well as a strategic framwork to help leaders create an effective, ethical and sustainable human development organisation.??

If you are interested in building a strong "S" in your ESG capability, you can find out more about these two accreditation frameworks on the ASEAN website.