The social aspect of company operations, in accordance with European Union legislation, is as important as environmental or governance issues. Under this reporting pillar, companies measure and report risks and opportunities for employees, others, and communities based on a set of specific standards and indicators. In other words, companies assess how they treat the people in their environments.
Social standards address the human aspects of business operations. Understanding and implementing them can certainly help businesses manage potential risks and opportunities that impact their human capital and the communities in which they operate.
These cover a wide range of issues, such as labor rights, ethics, diversity and inclusion, occupational health and safety, community relations, human rights, stakeholder relations, and social issues. When reporting on this dimension of sustainability, it is essential to address the following reporting standards:
- ESRS S1 Employment – in this scope, entities report all employee matters relating to their "own workforce" (this group includes employees and non-employees, e.g., independent contractors, temporary workers, and individuals employed by companies primarily engaged in "employment-related activities"). Relevant to this standard are employee issues such as safety (tracking indicators of occupational accidents and other health and safety risks in the workplace), employment stability, freedom of association, social dialogue, work-life balance, and well-being initiatives. This reporting aspect emphasizes working conditions, equal treatment, and equal opportunities. It also includes monitoring diversity in employment in terms of gender, ethnicity, age, and sexual orientation, as well as assessing the organizational climate.
- ESRS S2 Employees in the Value Chain – this standard requires reporting on the same issues as ESRS S1, but applies to a different group of employees, those who are not considered "own workforce." These will most often be individuals performing work in the entity's value chain at both upstream and downstream levels, including logistics or distribution service providers, franchisees, and retailers. In preparing for reporting, it is crucial to map your value chain and identify the employees in the value chain who will be covered by the report.
- ESRS S3 Social Environment – addresses the economic, social, cultural, civil, and political rights of communities. It addresses issues of freedom of expression, freedom of assembly, and impact on human rights defenders and indigenous peoples' rights (including their culture). The entity should report on its impact on the local community, both positively (e.g., improving local infrastructure) and negatively (e.g., pollution from production facilities degrading the local environment), and what actions it takes to prevent or mitigate these negative impacts. Importantly, this analysis not only covers the area of the entity's direct presence and operations, but also the communities affected throughout the enterprise's value chain, through suppliers, and through its own products or services. The entity should analyze these impacts, describe them, and take appropriate steps to eliminate or enhance them.
- ESRS S4 Consumers and End Users – This reporting standard applies to consumers who are end users. Companies should prioritize their rights to privacy, freedom of expression, and access to high-quality information. Companies must not discriminate against any social group, and their services should not be inaccessible to a given community. On the contrary, they should engage the local community by taking action to support local social initiatives and development.
In summary, the importance of the social aspect in ESG is multifaceted. Companies that care about their employees, customers, and local communities reap numerous benefits. Well-thought-out social practices help businesses maintain a positive image, avoid scandals, consumer boycotts, and lawsuits, protecting the company's value and stabilizing its market position.
Meeting social impact requirements isn't easy. Many challenges lie ahead: identifying and managing stakeholder groups, collaborating with suppliers who must also adhere to sustainability standards, and providing employees with working conditions that will attract new talent and retain them. Organizations also often face the daunting challenge of gaining and maintaining the trust of their local community.
Crucially, collecting, monitoring and reporting social indicators is often still a challenging task due to the fact that not all social aspects are easily quantifiable and comparable.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of October 16, 2024
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