How the 'S' in ESG is changing the way we do business
The “S” in Environmental, Social and Governance (ESG) is becoming increasingly critical as people and organizations become more conscious about how the social aspect of doing business will impact their future. And while there are implications across the board — for consumers, communities, businesses, employees and supply chains — there’s also an opportunity to use this urgency to create purposeful change.
“The rise in emphasis on the “S” is driven by a few things,” says Jennifer Shulman, Partner, KPMG Global Lead, ESG Advisory Hub. “For one, the COVID-19 pandemic highlighted you can’t have a healthy economy without a healthy population. It provided a natural experiment for a few things, including the fact that during the COVID recession companies that were more diverse tended to outperform those that were less diverse — a simple business case for business performance around having a more inclusive, diverse and equitable (IDE) organization.”
Social movements driving business change
There’s been an intense focus on social movements recently, and the shift of social justice to the forefront has impacted companies around the world, challenging individual beliefs as well as giving rise to operational concerns and questions around IDE, which are directly related to the “S” in ESG.
“In terms of social conscious and social justice, that’s where we’ve seen a lot of changes toward the equity lens,” says Silvia Gonzalez-Zamora, Partner, People & Change and National Lead of the Inclusion, Diversity and Equity service offering at KPMG in Canada. “There’s greater understanding that we can’t stand by anymore with injustice happening and not speak up about it.”
Ethical supply chains are also a critical factor, as capital markets and younger consumers harbour an active interest in how a company is acquiring profit, and if it’s off the backs of racialized, marginalized or vulnerable populations. Historical notions of value — stock price, profitability or revenue as judged quarterly — have shifted away from pure profit, to now consider the type of profit.
“Capital markets are asking for this and asking for it repeatedly, and companies are being questioned and rated on their ESG metrics,” Shulman says. “What used to be a nice to have, is now a must-have for most companies.”
“Looking at the big picture, ESG connects the dots — it highlights the interconnections between us and our environment, the impact we have on each other, the world around us and the pivotal role organizations play in that,” says Oriana Vaccarino, Social Psychologist and Manager in People & Change Services, Management Consulting at KPMG in Canada. “Human resources leaders, and business leaders in general, can help execute on ESG priorities, particularly the “S,” by cultivating an understanding of those interconnections and developing common ground across different groups to create common purpose.”
How HR leaders can drive the ESG agenda
A recent KPMG global study ‘The future of HR: Lessons from the Pathfinders’ found that there is a range of ways HR functions are responding to the rise of ESG in the corporate agenda. The role of HR leaders changed dramatically in the last year, evolving from human resource generalists who were essentially cost gatekeepers, to people leaders who oriented and educated employees, to sitting at the table of decision-makers driving workforce change with the title of Global Equity Officers.
“They’re raising the bar,” Gonzalez-Zamora says. “The conversation has shifted to C-suite roles held by strategic HR positions. The equity transformation mindset isn’t fighting any more with a growth mindset — if you want to grow, it’s part of the deal to be equitable.”
What used to be a check-the-box exercise to say yes, there’s a woman on the board, and yes there’s a person of colour on the board, has become much more than that. HR has been empowered — sometimes usurped in a good way — by the C-suite to drive a cultural shift that goes beyond a headcount figure on the annual report. It’s no longer a simple hiring exercise because having a diverse organization doesn’t necessarily create an inclusive one — and inclusivity plays a stronger role than ever.
People want to be heard, to be listened to, and to feel that their voices are contributing. To achieve that, organizations need to take that step beyond checking boxes and understand what those numbers ultimately mean for their success and sustainability.
"We’ve been working to tie strategies, action plans and goals to the long-term outcomes organizations are aiming for and measure success that way,” Vaccarino notes.
Leveraging analytics to shape IDE strategies
To gauge the effectiveness of IDE programs, Gonzalez-Zamora, who has a background in analytics, says they’ve developed an impact measurement framework that offers customized strategic initiative examples based on where organizations want to go. The measurements go in stages: start with what resources are going into it, like the budget used for training; then look at the actual output, such as attendance to that training; and next, you go longer-term to the impact you want to create, which would be a change in culture.
“When we started this journey, clients were very focused on targets, like the number of women on the board, but it’s not about targets anymore — it’s about measuring the impact,” Gonzalez-Zamora says. “It’s determining the long-term goal and what steps the organization can take in order to get to that.”
Despite being a challenging space for data, finding ways to leverage people analytics informs a stronger HR and business strategy. An old expression says if you can’t measure it you shouldn't do it, but it’s also if you can’t measure it, you can’t manage it.
"It’s a journey that companies are on, it’s not a flip of a switch and everything has changed,” Shulman says. “Understanding where you are in that journey, where your policies succeeded or failed, and shifting appropriately is an important part of honesty and transparency in your ESG reporting.”
Being transparent with employees is also critical, and organizations should be driving a collaborative approach that says: we’re in this together. It’s about fostering a sense of inclusion and community within the company itself and goes back to creating a common purpose and an environment where people feel valued for their contribution to the overall goals of an organization. Engage your team, define those goals together and be transparent about what’s being put in place, how you’re tracking on that and why, and welcome their input into the process. Don’t be afraid to be open about the fact that efforts, processes and progress might not be perfect.
“A common thread — whether we're talking about the role of leaders, how we’re analyzing and measuring or why it's important to be transparent — is an empathetic approach towards each other and towards communities as a whole,” Vaccarino says. “By understanding interconnectedness, you're taking that empathetic approach.”
Vulnerability is a critical part of transparency, Gonzalez-Zamora agrees, because “we’re all here to learn, we’re all in a space that’s very fluid. Terminology is changing every day, and we see a lot of our own leaders going through individual journeys of education.”
Ultimately, diversity means nothing without a sense of belonging — it’s only the beginning of the spectrum. Organizations must understand accessibility, drive inclusion and build equity and anti-oppression movements to speak up for those who don't have a voice. That all comes from the heart, and that’s what drives interconnectedness.
“ESG is about caring for each other and caring for our planet — that’s the whole purpose,” says Gonzalez-Zamora. “If we don’t start understanding the impact we have on others and the planet and what that’s going to create for future generations, we’re going to lose the battle.”
Contact the KPMG in Canada to learn more and explore related insights.