The social impact is perhaps the most sensitive aspect of ESG. It takes into consideration: human rights, modern slavery, child labour, worker pay, employee relations and working conditions.
Western businesses have commonly practised outsourcing to suppliers in developing countries. The benefits largely come down to reducing the production costs of their goods and services.
Fast fashion brands have regularly used offshore suppliers to reap the benefits of: high volume manufacturing, low cost raw materials and cheaper labour. This allows them to offer the consumer a vastly reduced price point (after all the other margins have been worked in).
Sweatshop workers in Bangladesh can be paid as little as 3 US cents per hour. The cost of labour for a $60 shirt is roughly 10 US cents per shirt. Working conditions can be extremely poor with 100+ hours a week spent working in the extreme heat. Also, 250 million children between ages 5 to 14 were found working in sweatshops for an average working day of around 16 hours.
But if clothing manufacturing equates to 80% of Bangladesh’s exports and 40% of its industrial workforce, what would happen if these fashion brands sourced locally instead of using these offshore suppliers?
Many of the lower/underpaid workers would lose their income entirely. The child workers may be depending on these incomes to support families and parents that are unable to work. So while the social impact of these companies could be considered exploitative, they’re offering labour opportunities in areas of deprivation that might not have been there before.
Executive pay, board diversity, tax strategy, bribery and corruption are some of the challenges within the “G” of governance in ESG. In many ways, this serves to grey the areas of ESG even further.
BigTech is an interesting case in this respect. Tech companies in general have been a favourable option in regards to ESG-based investment. Their products and services tend to use relatively less natural resources and they can promote a greener image than say, the fuel industry or agriculture.
And yet on closer inspection, Bigtech giants such as Amazon, Google and Facebook come under fire for their tax strategies and board diversity. Amazon reported a sales income of 44 billion euros in 2020 by doing its corporate filings in Luxembourg; thus avoiding a higher tax bill for its European operation.
Facebook and Google have structured their companies in such a way that allows them to retain a majority of board voting rights. Google’s founders would actually retain their board superiority even if they sold all their stock. Mark Zuckerberg owns a little over a quarter of Facebook’s stock but controls 60% of the shareholder votes.