3 Reasons Why CFOs Are Focusing on the Social Component of ESG in 2022

by Leahruth Jemilo

3 key priorities related to the Social component of ESG and their impact on the bottom line; essentially why CFOs are paying attention to ‘S’ more than ever before.

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The data is clear: ESG matters as an important component of a healthy bottom line. That’s according to our latest research at Corbin Advisors, where we survey investors to keep pace with changing trends and to ground our advisory in research-based insights. And that’s why we’re increasingly having meaningful conversations with CFOs, a role laser-focused on long-term value creation. When you consider that 84% of surveyed investors reported that ESG has grown in importance as an investment factor over the last two years, it’s critical for companies to identify ESG-related strategic priorities that align with value creation. Increasingly, these strategies center on the Social component, which investors note has increased in importance to their investment thesis – with 48% surveyed noting it is “important/critical,” up from 28% in 2018.       

When probed about the most important factors of the Social component, investors cited Human Capital Management and Diversity & Inclusion. On the Corporate side, the trend is similar. When asked to “classify the level of importance your management team places on ESG as a factor in your company’s long-term success,” 45% of respondents said it is “very important,” an increase from 24% in 2019.

The Social component of ESG has been challenging to quantify as it encompasses a wide breadth of topics and often presents as nebulous. But, that is changing. In 2019, the UN Global Compact established a CFO Taskforce to more formally engage CFOs worldwide as part of the mission to advance the UN Sustainable Development Goals and integrate them into corporate strategy, financing and investor relations. CEO and Executive Director of the UN Global Compact, Sanda Ojiambo, said of this endeavor, “there is no doubt that the focus of business models is irrevocably shifting from being aimed squarely at shareholders and short-term financial expectations to far broader, more sustainable, and equally profitable alternatives. As this trend gathers pace, the role of the finance department will become ever more key.” With that in mind, and amidst the ever changing and evolving ESG landscape, we identified a few key priorities related to the Social component of ESG and their impact on the bottom line; essentially why CFOs are paying attention to ‘S’ more than ever before.

1. Employee retention saves the bottom line

Turnover is costly, in both tangible and intangible ways. The Society for Human Resources Management states that on average, employers will need to spend the equivalent of six to nine months of an employee’s salary to find and train their replacement; for an employee making $60,000 per year, that is $30,000-$40,000 in recruiting and training costs. Intangible losses include investments made as part of team bonding; the time and energy spent as part of learning how to work most effectively with new team members – navigating different personalities and various levels of knowledge and expertise - and developing an efficient workflow. While these intangible assets aren’t as easy to quantify, they are not insignificant in terms of both time and energy expenditure.    

2. Access to the best and brightest is essential to both short and long-term value creation

An organization is only as good as the individuals it employs. Even with a unique business idea  - well suited for the market - and a well thought out business plan, without the right people it is less likely to achieve the best business outcomes. Employing the right individuals is key to an organization’s success and to attract, recruit and retain the right people you must cast the widest net as part of talent recruitment efforts. This means working to actively diversify your talent pool and look outside traditional recruitment efforts to achieve a more diverse workforce.

As our work and personal lives have become inextricably linked over the last two years, we are seeking greater inclusion and belonging at work – perhaps now more than ever before. Part of achieving this sense of inclusion and belonging is creating an environment where your employees see themselves represented across the workforce. Particularly, the ability to identify with someone in a position of leadership helps one to see themselves in a similar role; seeing someone like you represented in leadership can be an incentive to stay at an organization because you may associate that with career advancement opportunities. As Marian Wright Edelman, founder of the Children’s Defense Fund, famously said, “It’s hard to be what you can’t see.” An important part of talent retention is inviting talent to see growth opportunities for themselves by creating a workforce of diverse talent at all levels across the organization.  

3. Engaged employees contribute more significantly

There is a plethora of recent thought leadership linking employee engagement to productivity; the surge in interest of this topic is due in part to the current labor market and the Great Resignation – although at Corbin we refer it to as the Great Reflection (credit to Kristian, a Lyft driver in San Francisco who preferred a more optimistic label, coined it as such and shared it with me on a recent ride) indicating that people are reflecting in a new way about what they want out of their work lives, whether it’s a different type of job, a new environment, a more flexible schedule, something more mission or purpose driven, a new geographic location, etc. This period of time, which refers to the roughly 33 million Americans who have quit their job since the spring of 2021 has changed the way in which we think about employee engagement.  Gallup has been researching employee engagement for over 50 years and reports that engaged employees produce better business outcomes than other employees – across industry, company size and nationality, and in good economic times and bad. Gallup’s research has found that “without employee engagement, there’s no team engagement, making it more difficult to improve business outcomes.”

As we navigate these unchartered waters amidst the Great Reflection, it is the Social component of ESG that will continue to be in the spotlight. Employing a well thought out and inclusive talent management plan as part of your holistic business strategy can prove to be a competitive advantage setting your organization apart from its peers. The war for talent is upon us; to stay relevant and competitive today it is necessary to elevate the Social component of ESG and incorporate human capital management as an integral part of plans for long-term value creation.

Leahruth Jemilo is Head of ESG Advisory at Corbin Advisors.