The Importance of the “S” in ESG

Joanne Rodriguez Mycocycle ESG E+E Leader

by | Feb 27, 2023

ESG Social

(Credit: Canva Pro)

In 2004 the concept of environmental social governance (ESG) was monikered in the landmark study “Who Cares Wins.” Released through the United Nations Global Compact along with 20 signatories representing financial sectors, it was the position of these signatories that companies incorporating ESG strategies into their organizations would reap greater value for their shareholders and be more successful long term. Long regarded as a consistent financial metric with over $20 trillion of assets under management today, isn’t it time to consider how we align more with the intangible assets of the social impact of ESG?

The GlobalCompact Who Cares Wins S in ESG

(Credit: The Global
Compact)

Renewed Focus on the S

Placing values on environmental or governance standards is much easier than a social impact. Financial regulators pushed back on the notion that social implications related to the fiduciary performance of a company. It is easy to measure reductions in water or electricity or to organize KPI’s around governance that improve processes. What organizations need help with is a holistic approach that considers how to track the benefit of social impact. Generally, an internal metric measured through CSR programs, like the number of volunteer hours a company undertakes within their HR strategy or the reduction of absenteeism related to proactive healthcare programs, rarely have we seen a big “S” push for the true benefit of external social justice. Until now.

A recognition that social justice issues: included under headings like racial justice, economic inequality, LGBTQ rights, climate health, and other problems with social implications, deserves their seat at the regulatory table is a trend that is becoming so big it can no longer be overlooked. PWC’s 2022 Corporate Director Survey suggests that most Boards are not substantially discussing social issues as part of their governance responsibilities and may be missing a critical blind spot. According to Rachel Dekker and Elizabeth Freele in their January 2023 article “Mining’s top ten ‘S’ trends in ESG for 2023,” the number one trend was related to global crises driving local risk. Global instability is leading to socioeconomic stress. By August of 2022, over 71 million people were measured in poverty as the impact of cost-of-living increases took hold. Dekker and Freele noted, “In 2023, contributions to local poverty relief, liveability, and economic development can build resilience in your company’s operating context, contributing to stronger relationships and helping manage asset-level social risk.”

The data that rewarded financial investments to organizations strong in “E” and “G” will now be forced to look at the social arm through a new lens. In addition, strong signals are coming from the regulatory sector to support the need to consider the adverse impacts of climate to under-represented communities as well.

The role of the EPA

In September 2022, the Biden administration announced $3 billion in block grants issued through a new environmental justice initiative. By forming the new Office of Environmental Justice and External Civil Rights, the EPA is bringing to light the recognition that low-income communities and communities of color are more likely to experience harm from climate disasters and pollution.

A study released in April of 2022 titled “Historic redlining and the siting of oil and gas wells in the United States” found that redlined neighborhoods were more likely to host oil and gas wells, contributing to higher rates of respiratory illness among residents. Black Americans are exposed to 38% more polluted air than white Americans. They are also 75 percent more likely to live adjacent to industrial or service facilities resulting in elevated environmental exposures to noise, chemical emissions, odor, and traffic.

Creating the new EPA office is part of the larger climate and environmental policy coming out of D.C.—like the Inflation Reduction Act. The IRA will invest billions of dollars in climate and energy programs like electric charging infrastructure and incentives to help households electrify their appliances. But the more considerable impact of the IRA on climate justice is through the DOE-backed Justice40 initiative, which directs federal agencies to deliver 40 percent of the “overall benefits” of their environmental and energy investments to disadvantaged communities. While the terminology of the Justice40 initiative is still being widely debated in Congress, it is a harbinger of what corporations can start to expect concerning working with the General Services Administration (which is the largest asset holder in the United States.)

An electric vehicle charging station in California, which in August adopted rules banning the sale of new gas-powered cars by 2035.

(Credit: Frederic J. Brown / AFP / Getty Images)

The EPA and other agencies will reward companies aligned to help the federal government meet its goals. The impact will be the need to recognize how their organizations impact communities of color and those measuring as low-income. Everything from a company’s physical assets to logistics to HR will become very transparent, with close attention to human and environmental implications. But the EPA is not the only one pushing for radical transparency and accounting here.

Human Capital and Scope 3 initiatives support greater social impact

Both of these are hot topics for the SEC. With scientists prompting the alarm on the closing window of opportunity to slow climate change, and 40% of all emissions coming from public companies, the SEC proposed new climate-related disclosure requirements for public companies. The proposed rule amendments require public companies to provide specific climate-related financial data and insights into greenhouse gas emissions in public discourse filings. As part of the issuer rule, companies must disclose emissions they are directly responsible for and emissions from their supply chains and products. It will force an up-and-down stream reporting process exposing environmental vulnerabilities, potentially including the negative environmental impact associated with their operations.

Power Plant Factory

(Credit: Pixabay)

While climate change risks led all disclosure reporting for the first time in 2022, the second most significant increase in ESG disclosures came in human capital management (HCM). SEC rule changes mandated improvement to transparency in reporting related to a corporation’s workforce. No longer enough to report the number of employees, HCM metrics expanded to include information on (1) the percentage of employees who are women or people of color; (2) information on corporate initiatives to improve gender and ethnic diversity in their workforce; (3) information on employee turnover and retention rates.

The Human Capital Working Group of the SEC has proposed new reporting templates for public companies that would support greater transparency around the extent to which firms invest in their workforce. The working group contends that the need for human capital management disclosures stems from a disproportionate amount of value that now derives from an intangible asset base (like the workforce). In other words, as the proportion of the intangible asset value grows on the balance sheet, so should the need for disclosure. The SEC as a regulatory body, is focused on the holistic reporting undertaken by corporations to support investor decision-making.

The Elephant in the Room

We need social impact entrepreneurship and investing NOW. VC funding for female and Black founders is declining, with only 1.9% and 1% in 2021 compared to 2.4% and 1.3% in the previous year. These statistics should make us question the integrity of Venture Capital and PE firms in genuinely supporting the best ideas and innovations in the market.

Entrepreneurship and innovation, particularly climate innovation, are critical drivers of economic growth. But unfortunately, the world of startup innovation has been dominated by white men and funded by white men, not because they are the only founders worth funding but because they have more access to capital, networks, and mentors—more so than women or people of color. Consequently, there is less social representation in the early lifecycle of a company, and the social impact decisions directly reflect this phenomenon.

 TechCrunch

(Credit: TechCrunch)

According to McKinsey, closing the gender gap in entrepreneurship could add up to $5 trillion to the global GDP by 2025. And according to ProjectDiane, increasing the number of Black women who raise venture capital could create over one million jobs by 2026.

Despite the lack of VC funding, female-founded companies and Black founders outperform their peers. For example, startups with a female founder generate 10% more cumulative revenue over five years than those with a male founder. And startups with at least one Black founder have a 35% higher multiple on invested capital than the average startup.

Now is the time to act and support female-founded companies and Black founders in entrepreneurship, especially those with ESG impact. Investing in these underrepresented groups can create a more diverse and equitable ecosystem that benefits everyone. We can support the “S” in ESG with intention and widespread impact.

Guest Author

Joanne Rodriguez

(Credit:
Joanne Rodriguez)

Joanne Rodriguez is the CEO of Mycocycle. Mycocycle develops and licenses a nature-based process to reduce waste and create new biobased low-embodied carbon raw materials. Their process optimizes fungal mycelium to reduce greenhouse gases in the carbon-heavy waste management and construction materials sectors. Joanne is a sustainability subject matter expert specializing in green chemistry, resilience, circular economy, and green infrastructure practices. She has served on Advisory Boards for the US EPA, USGBC and currently serves the Bipartisan Policy Center through the American Energy Innovators Network. Mycocycle has been recognized by Forbes, FastCompany, the Wall Street Journal, and Crane’s Business. Joanne is a 2021 E+E Top 100 Leader.

Please visit their website for more information. Follow Joanne on Twitter for more reflections on nature-based solutions and all things mushrooms.

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