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Esg Street Signs

The Hardest Letter in ESG Is Fast Becoming 'S'

Aug. 2, 2022
The pressure to manage social change is catching up with the pressure around environmental sustainability.

In early May, after published reports of a draft U.S. Supreme Court opinion overturning Roe v. Wade, a handful of notable companies such as Starbucks, Tesla, Microsoft and Amazon immediately released statements committing themselves to financially assisting employees seeking medical services unavailable within their state. Then, with the official court decision of June 24, dozens of major companies – from Disney and Meta to JP Morgan Chase and Johnson & Johnson – quickly announced a similar intent.

To gauge how manufacturers were handling the news, we did an informal survey of 50 CEOs of global manufacturing companies. While 64% were either unlikely or decidedly not going to offer such reimbursements, the other 36% were either exploring the option (18%), or had decided to offer reimbursements (18%). Moreover, while 57% said their employees had not inquired about such a policy, 43% said they had.

If nothing else, these different approaches demonstrate how complicated and complex the world of Environmental, Social, Governance goals – or, more specifically, the “S” of ESG – has become for manufacturers, including those who don’t sell directly to consumers.

Directors, investors and government officials tend to discuss ESG as if it were a monolithic policy goal. Take the U.S. Securities and Exchange Commission’s (SEC) proposed rule to “promote consistent, comparable and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance factors.” Despite the reference to ESG, the driving factor in this specific regulation revolves around disclosure of greenhouse gas emissions. There’s not a word in the SEC’s announcement that reflects concern about the disclosure of metrics involving social issues. Yet clearly corporations are increasingly feeling pressure in that area. 

To better understand the increasing complexities of “S” from a corporate policy perspective, look at the genesis of ESG in 2005. It started as a list of recommendations by the financial industry. In that original context, the emphasis on “S” was placed on concerns for worker health and safety, including the potential for human rights abuses on a company or supplier premises. “S” also incorporated investors’ attentiveness to community relations.

“S” has evolved. Companies have experienced increased pressure from consumers and employees on an expanding social front. First came the emphasis to create more diversity in governance by placing more women and people of color on corporate boards. Then almost 400 companies signed a letter in 2015 urging the Supreme Court to end state bans on gay marriage. When former President Trump prohibited the entry into the U.S. of migrants from Muslim countries in 2017, many companies like JPMorgan Chase used the opportunity to reaffirm their corporate values – while others like Nike and Goldman Sachs went farther, vocalizing specific opposition to the policy. By late 2020, after the death of George Floyd and the rise of the Black Lives Matter movement, the top 50 companies in America had pledged $50 billion to support racial justice. And after Russia’s invasion of Ukraine, demonstrating their opposition to doing business with oppressive regimes, more than 1,000 companies curtailed or severed their dealings with Russia

The evidence is clear that the pressure on companies related to managing social change, even if it’s informal as opposed to regulated, is catching up with the pressure accorded environmental sustainability.

The challenge is, while manufacturers understand the key role they play when dealing with the “E” in ESG, corporate responsibilities start to blur with the “S.” Ask Bob Chapek, CEO of the Walt Disney Company.  He’ll tell you that when it comes to social activism, companies are damned if they do and damned if they don’t. This past March, when Florida’s state legislature was debating the Parental Rights in Education Act (labeled the “Don’t Say Gay” bill by opponents), Disney chose not to take a public position. But once the bill passed,  backlash coming from its own workforce led Disney to backtrack and come out against the new law. That led to Florida’s Republican governor revoking the company’s special tax status in the state, which for 55 years allowed Disney World to function as its own municipal government. 

Ultimately, some market analysts say it’s better to worry about being on “the right side of history” than worry about alienating some consumers. Many manufacturing CEOs, who may agree but whose jobs depend on corporate growth and positive balance sheets rather than history’s judgment, are finding the balancing act challenging.

Stephen Gold is president and CEO, Manufacturers Alliance.

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