It's Time We Paid Attention to the "S" in ESG

By Simon Moss, CEO, AyasdiAI

When the concept of Environmental, Social and corporate Governance (ESG) was originally introduced, it was technically a corporate credit score to evaluate companies based on their efforts in these areas. Progress has been spotty, with environmental sustainability and impact taking precedence over social impact. Some firms use it more for brand improvement and marketing, rather than part of the true tone of how critical financial institutions are to the overall health of modern societies. Companies, as the primary organizing groups for many of our lives, need to recognize their shortcomings in this regard and understand the crucial role they play in overlooking the social aspect and repercussions of their inactivity.

Considering our current social landscape

The juxtaposition of the environmental and social impact of the world’s industries cannot be ignored. As our environment unravels, so does our social contract. So why is it that? When capital and shareholders take precedence over all else, responsibility starts to be undermined. When human capital is categorized as fungible units rather than key elements to the success of an institution, as of the social balance, then capitalism begins to metastasize into feudalism. A great depression and world war halted this progress in the 20th century. The question is, what will slow this negative capital to social stability feedback this time around?

The polarization of wealth – otherwise known as the wealth gap or wealth inequality – has reached new heights. According to the Federal Reserve, as of Q3 2019, the top 10% of U.S. households held 70% of the nation’s wealth with the bottom 50% having just 2%. And from a global perspective, 45.8% of global household wealth is held by just 1.1% of the world’s population. That means those 56 million individuals control the staggering sum of $191.6 trillion.

This COVID-19 pandemic has shone a bright spotlight on these global inequities, and in many ways, exacerbated existing gaps. So then, what does this all mean, and what needs to happen?

Defining “social”

What does the S in ESG really mean? With the “E” for instance, it’s a lot easier to pick a cause or project to focus on; maybe it’s deforestation in the Amazon or protecting coral reefs. With the S, it’s not quite as straightforward; it’s a much larger definition and one that can be much harder to wrap our head and arms around. So, to move from the theoretical to the practical,

you can break down the S into three main components: education, protection from exploitation and health.

Education: Education is hugely important in the social scheme of things. Recent studies reveal that U.S. test scores are now below the global average, for instance. The United States – and the west in general – is investing less in human capital than other developed countries are, leading to loss of significant competitive advantage especially in mission-critical STEM categories.

In addition, disinformation is rampant – we’ve seen that in elections, and we’ve clearly seen it with the COVID-19 pandemic. Dr. Anthony Fauci has called disinformation one of the biggest enemies of public health. Disinformation isn’t new, but social media has driven it to a whole new level. Social media companies shouldn’t hide behind the facade of free speech, and perhaps should take a lesson from Spiderman’s Uncle Ben and understand that “with great power, comes great responsibility.” Their social responsibility is metastasizing digital narcissism, stimulating an undercurrent of aggression (the right) and melodrama (the left) across society and a wholesale decline in the collective intelligence of many societies. This seems counterintuitive to having the collective intelligence of humanity in the palm of our hands.

Exploitation: This includes human trafficking in all forms – slavery, child exploitation, immigrant exploitation and more. Due to the financial transactions underlying it, what exploitation has done is made people fungible components of a system. They’re nothing more than dollar signs to traffickers, and this has served to dehumanize enormous populations of this world. Here the banks and financial industry really must step up. These aren’t “compliance” or regulatory issues, but moral conduct challenges that the upper echelons within the industry must address. The tools to add transparency into the markets are becoming increasingly available therefore social impact should not be a “rule of law” expectation. It should be a mission executing the spirit of the law to protect increasingly vulnerable populations exploited by those that arbitrage the financial system to facilitate their crimes.

Global health: It’s all over the press of course and the talking heads are making no progress to prepare us for the next time. Overall strong mental and physical health of the population is essential, and it’s clear that it’s in dire straits. For instance, a sampling of statistics from last year reveal the effect of pandemic-related isolation on mental health. Suicides tripled in Los Alamos, New Mexico during the first eight months of 2020. In Fresno, California, suicides rose 70% in June 2020 compared to June 2019. And, the Centers for Disease Control and Prevention (CDC) reported a 31% increase in the number of emergency room visits for mental health reasons among 12- to 17-year-olds between March and October last year, compared to 2019. This goes beyond the reach of economic institutions, and into the domain of supra-national entities, so we’ll leave this for a different conversation.

The choice

Education, exploitation and health are the social pillars that support everything else. A well- educated, engaged, healthy and respectful society can take environmental issues seriously. This is obviously not a situation with an easy solution. We’re talking about years and years of systemic, institutional misfocus.

It’s profoundly complicated, and so many of us wish we could snap our fingers to solve it. So what happens is that we end up doing things piecemeal. We support a couple of schools, or we hand out a few scholarships, but we’re not fundamentally solving the problems. There’s no substantial increase in an individual’s ability to be prosperous, educated and to contribute to the larger whole. Instead, we’re relying on other countries to manufacture our goods and build us the latest iPhones, even if the people doing the work are children. Those providing cheap labor become mere servants to our materialistic needs, and in parallel we turn industrial and manufacturing powerhouses in the west into mere consumers.

Corporations need to take these pillars seriously and wield their influence to create positive change. Some have revenues equaling the gross domestic product (GDP) of reasonably large nations. They have a material influence over the direction of the species on this planet. They can use their power for socially important causes, or they can abdicate their responsibility, citing the need to align with their regulators and shareholders.

True "S"ocial responsibility

Despite entrenched beliefs on this topic, organizations don’t have to choose between profit and a corporate conscience. It’s a balance for sure, but one that is both achievable and hugely beneficial if got right. Discovering how corporations can truly support social pillars isn’t an easy conversation. It’s not a comfortable conversation, usually, because it requires change. But it’s one that business leaders must have so that the responsibility of ESG and the huge impact it can make to the planet and its inhabitants welfare can become a reality.

Simon Moss

Simon Moss

About the author

Simon Moss is the CEO of Symphony AyasdiAI with strategic and P&L leadership responsibility. He brings three decades of market-recognized business experience in financial crime, risk, and compliance, and patented leadership in financial services technology innovation in network and edge computing, cognitive analytics, and AI. Previously, Simon led Mantas, a firm that defined the founding phase of anti-money laundering (AML) and compliance behavior detection, led multiple other firms as founder, CEO, or board director, and most recently was global head of AI and automation for Infosys Consulting. He delivers a unique balance of strong leadership, deep subject expertise, and focused technology knowledge. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.