3 simple principles can tackle social vulnerability, ESG goals

In what is considered to be a highly polarised business landscape and political environment in the US, many investors and executives find themselves grappling with the demands of ever-growing environmental, social and governance (ESG) mandates, reporting and preferences. Set against the backdrop of America’s cultural divide, political encampments are often at odds on whether to take a stand on societal and global issues.

In the business world, such a divide manifests in whether an executive should serve shareholders (in accordance with the Milton Friedman concept) or the wider stakeholder community. Indeed, whilst regulators and influential pools of capital – including pension funds – are responding to the increasing demand for ESG, some investors to the right of the political spectrum have taken refuge in conservative-focused exchange-traded funds, investments that are ostensibly aligned with some Republican ideals.

Even when confronting the most easily codified component of ESG – the E or environmental piece – some business leaders question whether commitments to move towards -1.5 Celsius (commensurate with the Paris Climate Agreement) might conflict with a fiduciary duty. Indeed, 18 months into an energy crisis on both sides of the Atlantic, in efforts to reduce cost and improve margins, some executives and boards have quietly debated reverting to traditional forms of energy – such as coal – rather than building out renewable energy capacity.

As the debate on ESG and sustainability unfolds, many within the private sector are stepping in and assuming greater responsibility in the communities in which it operates. This may be partly due to the potential for greater efficiencies. The successes of many public-private partnerships (P3) investments in infrastructure show that the private sector – even when working in tandem with the public sector – can be highly efficient in delivering large-scale capital projects.

Moreover, within advanced economies today, many governments are criticised for failing to effectively deliver the social contract to their citizens. Deepening and widening socio-economic inequalities – partly the result of structural and secular shifts of moving from goods-producing to services-providing economies – can also be compounded, albeit unintentionally, by actions from the private sector. For example, the torrent of investment into the residential real estate sector since the Global Financial Crisis has been flagged as a contributing factor to the crisis in affordable housing in cities from Atlanta to Los Angeles and from Paris to Toronto.

Although some workers have been rendered a temporary reprieve in income inequality resulting from higher wages as a facet of the pandemic-induced tight labour market, the number of factors which contribute to deepening inequalities in wealth, opportunity, skills and education are unlikely to vanish any time soon. Said another way, even with bolstered incomes, some workers may still experience various forms of economic inequality and may not have the means to live a dignified life.

Accordingly, the private sector is likely to be tasked with greater responsibilities to deliver upon the ‘S’–or social component – of ESG. The need to shoulder this burden may be amplified by rapid technological change, including the acceleration of AI, in addition to the demands of hyper-transparency, social media and lightning-fast communication. Thus, in tandem with their growing responsibilities, investors and executives need a framework for constructively tackling social vulnerabilities within their reach, while consistently building their own enterprise value. Crucially, in light of entrenched polarisation in our political and business ethics environment, such a framework must stand the test of balance: of not succumbing to an extreme side of a political divide, as well as making common and practical sense.

Three key concepts offer business executives a way of instilling stewardship in the societies in which they operate, with the potential to reach across political divides, as well as across generations. These are: solidarity, subsidiarity and the dignity of work. Emanating from a theological and philosophical examination of the challenges posed to human labor by the Industrial Revolution – and latterly, by the pace of technological advancement in the 20th century – these three concepts form the bedrock of Catholic Social Teaching (CST) on economic life. In fact, these concepts have a wider resonance and potential applicability to provide investors and executives with a framework with which to tackle or mitigate social vulnerabilities.

Solidarity
Implicit in an understanding of solidarity is the need to stand shoulder-to-shoulder with one’s fellow workers in society. It recognizes the necessity to ‘move beyond an individualistic culture,’ endemic in our post-modern societies. A sense of solidarity was exhibited during the COVID-19 pandemic with support for essential workers. In the corporate world, solidarity also underpins the concept of co-ownership of businesses; affording employees the opportunity to own a share in the ‘great workbench’ on which they operate. Such an opportunity to blend labour with the ownership of capital exhibits a way in which a business can become a ‘community of solidarity.’

Subsidiarity
Intrinsically related to solidarity, the principle of subsidiarity acknowledges that each person and each segment of society matters – no matter how weak. Thus, the initiative, freedom and responsibility of the ‘smaller’ but ‘essential’ cells of society should be upheld and respected. A well-functioning society would support the development of the capabilities ‘present at every level of society.’ Those in positions of power and leadership have a responsibility to respect and support each person’s dignity, private initiative and right to participate in economic life.

Dignity of work
Implicitly connected to this is the principle of dignity of work: that is, that all people have the right to participate in economic initiative, and have the right to productive work, living wages, and to fair working conditions. Thus, even in an age of ‘automation anxiety’ – and fear of technological unemployment – the implication is that each person has a unique set of skills, gifts, and talents to bear in economic life. Vocational training, and continued ‘learning for working’ – might also be intrinsic to the dignity of work in an age of technological acceleration.

A key architect of CST, Pope John Paul II - was quite prescient in analysing the ‘fluid’ and ‘unpredictable’ ‘economic context’ at the end of the twentieth century, which necessitates an educational system to support the ‘ever more widespread necessity of changing jobs many times in one’s lifetime.’ This involves vocational training, re-training and new forms of training for the unemployed – forms of education which might begin to be considered as social investments by companies in the private sector, rather than just a public outlay.

Connected to this – and amidst the sensationalism over generative AI – the principle of the dignity of work rests upon a clear relationship between the human person and work. Accordingly, the human is the subject of – rather than an object – of work. The acceleration of AI has the potential to invert that relationship, even rendering capital holders the potential to become the object – rather than the subject – of their own work. Upholding the dignity of work amidst the replacement of tasks with technology is likely to become ever more important and a topic for reflection for CEOs and for boards.

As employers navigate an exceptionally tight labour market and, in particular, as Western economies combat high inflation and labour shortages, some companies have become creative in how they attract and retain talent. Meaningfully, such incentives have gone beyond traditional wage increases: indeed, boosting income is only one way of reducing inequality, whilst other socio-economic inequalities might remain. In the US, even as real incomes for the bottom 50% of the distribution rose 20% in 2021 vis-a-vis 2019 levels, some workers may not have the means to live a dignified life. Primarily, the costs of housing, childcare, education and healthcare can remain out of reach, placing employees at a disadvantage in terms of productivity, as well as in building wealth.

As the housing affordability crisis persists, companies are finding new ways to help their employees. One consumer company is paying the closing costs for its employees to purchase their first home, while a tech company is working with a lending platform to provide mortgage assistance. Even despite the options for remote working, tech companies continue to develop workforce housing – as well as affordable housing – in clusters near their campuses.

Recognising the crucial need to make childcare more widely available and affordable, successive US governments continue to offer companies incentives for such a provision – most recently, in President Biden’s CHIPS act. Looking beyond the semiconductor realm, consumer, hospitality and retail companies are all increasing the availability of childcare at work. Rather than offering greater flexibility as a way of addressing caretaking obligations, this allows employees the chance to connect in person – while ostensibly bolstering levels of productivity and happiness.

Although supporting college education is nothing new for some US companies, the provision of management training for lower-wage workers marks a notable advancement in the labour market. Some employees may not opt for college degrees and may wish to pursue their own career path, but might lack the requisite management training to progress. By investing in such skills – including soft skills – forward-thinking companies implicitly recognise that education may cease to be a public outlay and the private sector may need to step in. Such investments in human capital are consistent with a theme of dignity of work discussed above: that of the need to support vocational training and re-training, amidst changes in career characteristics of our economic environment.

Lastly, in the wake of shortfalls within the public sector, one employer in London is wooing potential talent with the provision of private healthcare. As is the case with offering housing, childcare and education, equipping workers with an appropriate level of healthcare is yet another way of improving productivity within one’s company, as well as offsetting potential inadequacies with the supply of public goods.

It should be noted that these efforts – deployed against the backdrop of a labour shortage – evidence the use of classical economic incentives. However, by adopting practical measures to mitigate inequalities – and potentially delivering the means for workers to live a dignified and more productive life, the private sector is stepping in where the market is rendered inefficient. By providing support for housing, childcare, education and healthcare, private employers – although perhaps unknowingly – are implementing the three interrelated principles of solidarity, subsidiarity and the dignity of work. These efforts have the potential to erode various forms of economic inequality, including those of wealth, skills and opportunity. As such, this offers investors with a focus on fulfilling the ‘S’ in ESG criteria clear opportunities to deploy capital to companies that are making durable changes. Crucially, such efforts make practical sense and offer a potential way to address social vulnerabilities without falling prey to the polarisation of business ethics.

Lastly, looking beyond labour market dynamics – and an eventual rebalancing in employment – forward-thinking public sector officials might look to fiscal policy as a way of supporting such measures. While many governments have been adept at using such levers to tackle the ‘E’ or environmental components in ESG, they might also take a cue from the private sector in how to effectively address social vulnerabilities, in methods unbeholden to extreme sides of political divides, but rather, rooted in the need to amplify dignity, at all levels.