It is time for the 'S' of ESG to catch up with the 'E'

Human rights, an important part of the 'S' of ESG (environmental, social and governance), should be higher on the agenda of companies, according to PwC sustainability partner Noor Sanders and human rights specialist Anna Bulzomi. 'The S of ESG will become as important as the E of environment.'

Within ESG, the 'E' has received a lot of attention from organizations and their stakeholders in recent years. Rightly so, but it's time the 'S' was as high on the agenda. Stakeholders, such as investors, customers and employees, increasingly expect more from companies in the social field. But reporting requirements such as the CSRD, the EU taxonomy and more specifically the upcoming Corporate Sustainability Due Diligence Directive (CSDDD) directive also encourage this.

Violations of human rights often make headlines and lead to great public outrage. Consider unsafe and unhealthy working conditions, forced and child labor, threats against whistleblowers and sexual harassment of employees. 

Human rights are certainly not a far-flung topic. We live in a part of the world where worker protection is generally well regulated, but human rights are also violated closer to home. Consider incidents with migrant workers in greenhouses, slaughterhouses and construction.

Organisations become aware of the issue of human rights

Companies increasingly realize human rights are an important subject. More transparency leads to increased stakeholder interest, but also makes the interaction between the E and S of ESG clearer. A company's decision to switch to sustainable fuels can have negative consequences for the rights of workers and communities elsewhere in the world. Electric cars, for example, are an important answer to CO2 reduction targets. However, there have been several reports of human rights violations in the extraction of minerals such as lithium and cobalt, which are necessary for the production of the EV batteries. 

Earlier this year, climate activist Greta Thurnberg demonstrated in Norway not against oil refineries, but against the installation of wind turbines. These were placed on the land of the indigenous Sami. These issues can no longer be viewed in isolation. Achieving a just transition is an enormous challenge.

Human rights concern the entire value chain

Most companies will declare they respect human rights. Naturally, no one wants to be associated with violations or abuse. In practice, however, this is easier said than done. First, because human rights permeate the entire value chain. Companies and investors have an impact, positive or negative, on a large number of stakeholders, such as employees, communities or consumers. For companies that operate globallly in different cultures, countries and regions, identifying stakeholders, how they are affected and what rights they have is quite a task.

Implementing standards means collecting and processing a lot of data

In addition, few companies fully implement the relevant OECD and UN standards in this area. They also did take initial steps to respect human rights. 

Implementing the OECD and UN standards starts with: 

• identifying a company's actual and potential negative impacts on human rights,

• identifying the most significant impacts, 

• taking measures to prevent or limit the negative impact, and 

• providing access to effective extrajudicial remedies to stakeholders whose rights are at risk or have been violated. 

Identifying the most important issues requires a good understanding of a company's value chain. This requires a great amount of data and information to be collected and processed - often information that is not, or not completely, available or reliable. And the setting up of a monitoring system and complaints mechanism has not even begun.

Reporting on human rights does not lead to improved living conditions

Reporting on human rights is certainly not an end in itself. Reports are end products, below which lie objectives, strategies, policies and measures. The goal is not to report or be compliant. It aims to improve the lives of people in the value chain and minimize negative impact. This affects almost all dimensions of an organization: HR, purchasing, risk management, but also, for example, product innovation or design. 

For example, companies can look for alternatives to raw materials from countries with a high risk of human rights violations, or where fewer harmful chemicals are needed in the production process. Because you can't tackle everything at once, focusing on the implications of human rights on purchasing and production could be a good starting point.

ESG means a holistic view of sustainability

The 'S' of ESG – where human rights crosses all three areas – will become as important as the 'E' of environment. Most organizations have taken the first steps in the field of climate and environment. We are sure that they will do the same in the field of human rights. It is important that they investigate the overlap between human rights and climate. These two topics do not stand alone. In practice, they intersect across all industrial and geographic sectors. 

To tackle today's challenges you need a holistic vision. In many cases, you even have to address human rights issues first before moving on to environmental issues. You cannot limit yourself to one or the other. The transition to a greener economy cannot take place without putting people and their rights first.