The Neglected “S” in ESG
Why Social Factors Demand Equal Footing with Environmental and Governance Priorities
Environmental, Social, and Governance (ESG) frameworks have rapidly evolved from niche investment considerations to core business imperatives that shape corporate strategy, investor decision-making, and regulatory policy worldwide. However, despite the balanced nomenclature that suggests equal weight across all three pillars, a troubling asymmetry has emerged in both institutional frameworks and public discourse. The "S" in ESG - encompassing social considerations such as wages, living standards, economic inequality, access to education, and societal cohesion—routinely finds itself relegated to secondary status, overshadowed by the more immediately quantifiable environmental metrics and the well-established governance structures that have long governed corporate oversight.
This imbalance represents more than mere organizational oversight; it constitutes a fundamental misunderstanding of what sustainable development truly requires. While environmental concerns rightfully demand urgent attention given the accelerating climate crisis, the systematic deprioritization of social factors undermines the very foundation upon which lasting environmental progress must be built. Moreover, the failure to adequately address social dimensions within ESG frameworks risks creating a two-tiered approach to sustainability - one that may achieve carbon neutrality while exacerbating inequality, displacing vulnerable workers, and fracturing the social cohesion necessary for long-term environmental stewardship.
The Structural Marginalization of Social Factors in ESG
Quantification Challenges and Measurement Gaps
The fundamental challenge facing the social dimension of ESG lies in its inherent complexity and resistance to standardized measurement. Unlike environmental factors such as carbon emissions, which can be quantified using established protocols like the Greenhouse Gas Protocol, social outcomes often defy simple numerical representation. The absence of universally accepted social impact measurement frameworks has created what researchers describe as an "oversupply of tools and frameworks" that paradoxically makes meaningful measurement more difficult rather than easier.
Academic research has consistently identified this measurement divergence as the primary driver of ESG ratings disagreement, accounting for 56% of discrepancies between rating agencies. While environmental metrics benefit from decades of scientific standardization and regulatory frameworks, social indicators remain fragmented across different cultural, legal, and economic contexts. This fragmentation has practical consequences: investors and corporate managers struggle to develop coherent strategies for social impact when the very definition of success remains contested and contextually dependent.
The complexity extends beyond mere measurement to encompass fundamental definitional challenges. Social impact measurement must account for both direct effects—such as employment practices and community relations—and indirect consequences that ripple through complex social systems. Unlike carbon footprints, which follow relatively predictable patterns of cause and effect, social interventions operate within intricate webs of cultural norms, political structures, and economic relationships that vary dramatically across regions and communities.
Corporate and Investor Bias Toward Environmental Metrics
The corporate world's pronounced tilt toward environmental factors reflects both practical considerations and strategic miscalculations. Environmental initiatives often align more readily with cost-reduction strategies and regulatory compliance needs, making them attractive to financially-focused management teams. Energy efficiency improvements, waste reduction programs, and renewable energy adoption frequently generate measurable returns on investment while simultaneously enhancing environmental performance.
This apparent alignment, however, masks deeper structural biases within corporate decision- making processes. Research from Funds Europe reveals that while the EU has implemented comprehensive environmental taxonomies, corresponding social taxonomies remain "under discussion," highlighting the institutional lag in developing robust social frameworks. The disparity becomes even more pronounced when considering that 94% of companies report lacking the talent necessary to implement comprehensive ESG strategies, with social competencies representing the most significant gap.
The investor community has similarly demonstrated preferential treatment for environmental metrics, driven partly by regulatory pressures and partly by the perceived risk-mitigation benefits of environmental compliance. ESG-focused funds have grown exponentially, yet analysis reveals that investment flows disproportionately favor companies with strong environmental performance over those demonstrating social leadership . This preference creates feedback loops that further entrench the marginalization of social factors, as companies naturally prioritize areas where capital access depends on measurable performance.
Regulatory and Policy Framework Imbalances
The regulatory landscape reflects and reinforces the structural biases favoring environmental over social considerations. The European Union's Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy for Sustainable Activities provide comprehensive frameworks for environmental reporting while offering relatively limited guidance on social metrics. Similarly, the Securities and Exchange Commission's climate disclosure rules focus primarily on environmental risks and opportunities, with social factors receiving secondary consideration.
This regulatory imbalance has cascading effects throughout the business ecosystem. Companies naturally direct resources toward areas subject to mandatory reporting and regulatory scrutiny, creating an organizational dynamic that systematically underinvests in social initiatives. The absence of mandatory social due diligence requirements in most jurisdictions means that companies can achieve regulatory compliance while largely ignoring their social impacts, particularly in their supply chains and community relations.
The international dimension compounds these challenges, as different regulatory regimes emphasize different aspects of ESG performance. While some jurisdictions prioritize labor standards and human rights, others focus primarily on environmental compliance, creating a fragmented global landscape that allows companies to engage in regulatory arbitrage - meeting minimal requirements in some areas while neglecting others entirely.
Regional Disparities and the Fallacy of Universal ESG Application
The Developed-Developing World Divide
The assumption that ESG frameworks can be uniformly applied across different economic and social contexts represents one of the most problematic aspects of current sustainability discourse. Policies and standards developed primarily in high-income nations - such as Germany or Sweden - often prove not merely inappropriate but counterproductive when transplanted to countries like Indonesia, India, or the Philippines, where basic living standards, informal labor markets, and weak institutional capacity create fundamentally different challenges.
This divide becomes particularly acute when examining the social costs of environmental transitions. While wealthy nations can afford to provide generous retraining programs, unemployment benefits, and alternative economic opportunities for workers displaced by green transitions, developing countries often lack both the fiscal resources and institutional infrastructure to implement such support systems. The result is a form of environmental colonialism where global climate goals are pursued in ways that exacerbate poverty and inequality in the world's most vulnerable regions.
Research from emerging markets reveals that ESG compliance costs can be prohibitively expensive for companies operating in resource-constrained environments. These costs manifest not only as direct expenses for reporting and monitoring systems but also as opportunity costs that divert scarce capital from basic development needs such as infrastructure, education, and healthcare. The irony is stark: the pursuit of global sustainability goals may inadvertently slow the economic development that these countries need to build the institutional capacity for long-term environmental stewardship.
Cultural and Institutional Context Dependencies
The cultural dimensions of ESG implementation represent another significant challenge that universal frameworks struggle to address. What constitutes fair labor practices, appropriate community engagement, or acceptable governance structures varies dramatically across cultural contexts. Research from Ipsos demonstrates that sustainability priorities differ markedly between regions, with developed countries emphasizing environmental concerns while developing nations prioritize poverty reduction and basic service provision.
These cultural differences extend beyond mere preferences to encompass fundamental differences in social organization and economic structure. In many developing countries, informal economic relationships, extended family networks, and traditional authority structures play crucial roles in social and economic life. ESG frameworks developed in Western contexts often fail to recognize or account for these alternative forms of social organization, potentially undermining existing support systems while failing to provide adequate replacements.
The implications for ESG implementation are profound. Standardized approaches to worker rights, for example, may inadvertently harm workers in informal sectors who depend on flexible arrangements that formal employment structures cannot accommodate. Similarly, Western concepts of corporate governance may conflict with traditional decision-making processes that prioritize consensus-building and community consultation over shareholder primacy.
Case Studies in ESG Misapplication
The concrete consequences of inappropriate ESG application become evident in specific country contexts. In Cambodia, international pressure on multinational garment companies to improve labor standards led to factory closures rather than improvements, resulting in job losses for thousands of workers without providing alternative employment opportunities. This example illustrates how well-intentioned ESG initiatives can produce perverse outcomes when they fail to account for local economic realities and institutional constraints.
The Philippines presents another instructive case, where the government faces significant challenges in convincing poverty-stricken populations of the need for green transitions. As Sustainable Fitch notes, "a large swathe of people in the Philippines live in poverty and depend on brown-industry jobs to survive," making environmental transitions particularly challenging without comprehensive social support systems. The lack of clear policy direction and institutional capacity constraints further complicate efforts to implement balanced ESG approaches that address both environmental and social needs.
Indonesia's experience with ESG implementation under OJK guidelines reveals similar tensions. While mandating comprehensive ESG disclosure, the regulatory framework struggles to address the practical challenges faced by businesses operating in contexts where basic infrastructure, educational systems, and social safety nets remain underdeveloped. The result is often superficial compliance that meets reporting requirements while failing to address underlying social and environmental challenges.
The Social Costs of Environmental Transitions
Employment Displacement and Economic Disruption
The transition toward low-carbon economies, while environmentally necessary, generates significant social costs that are often inadequately addressed in ESG frameworks. Corporate executives anticipate substantial workforce disruptions, with research indicating that 30% expect some positions to become redundant during decarbonization processes, while only 34% believe adverse impacts can be adequately addressed through retraining and reskilling programs.
These employment effects are not distributed evenly across the workforce or geography. Workers in carbon-intensive industries often possess specialized skills that may not readily transfer to green economy sectors. Research from the OECD demonstrates that displaced workers from polluting industries frequently experience "particularly long and significant income losses" compared to workers in other sectors, reflecting both the specialized nature of their skills and the concentrated geographic distribution of these industries.
The temporal and spatial disconnects between job destruction and creation represent particularly challenging aspects of green transitions. Low-carbon industries may not emerge in the same locations where traditional industries decline, forcing workers to choose between unemployment and relocation. Similarly, the timing of green job creation rarely aligns perfectly with the pace of traditional job destruction, creating periods of economic vulnerability that can persist for years or even decades.
Regressive Distributional Effects
Climate policies often exhibit regressive distributional characteristics, imposing proportionally higher costs on lower-income households while providing disproportionate benefits to wealthier segments of society. Carbon pricing mechanisms, for example, consume a larger percentage of disposable income for poor households, who typically have limited ability to invest in energy- efficient technologies or alternative transportation options.
The European Union's second Emissions Trading System (ETS2), covering emissions from road transport and buildings, exemplifies these regressive effects. Analysts forecast potential fuel price increases of 50 cents per liter when the system takes effect in 2027, disproportionately affecting low-income households that spend larger portions of their income on transportation and heating. While the Social Climate Fund was designed to mitigate these impacts, critics argue that its scope and funding levels are insufficient to address the scale of potential social disruption.
These regressive effects extend beyond direct costs to encompass broader patterns of economic opportunity and social mobility. Wealthy households can more easily adapt to environmental regulations through technological upgrades, behavioral changes, and geographic mobility, while lower-income families often lack such flexibility.
The result is a form of green gentrification where environmental improvements become associated with economic exclusion and social displacement.
Regional Economic Vulnerability
Regions heavily dependent on carbon-intensive industries face particularly acute challenges during environmental transitions. These areas often exhibit characteristics that make adaptation especially difficult: limited economic diversification, weak institutional capacity, aging populations, and geographic isolation from emerging green economy centers. The closure of coal mines or fossil fuel refineries can devastate entire communities, eliminating not only direct employment but also the economic multiplier effects that support local businesses and services.
The Chinese experience provides stark illustrations of these regional impacts. The government's plan to close thousands of coal mines affected an estimated 1.3 million jobs in the coal sector and 500,000 jobs in steel production - equivalent to 20% and 11% of the national workforce in these sectors respectively. While these closures advance important environmental objectives, they concentrate social costs in specific regions and communities that may lack alternative economic opportunities.
Similar patterns emerge across developed and developing countries undertaking green transitions. Germany's coal phase-out has required massive public investment in alternative economic development for affected regions, while countries with less fiscal capacity struggle to provide adequate support for displaced workers and communities. The absence of comprehensive just transition policies often leaves these regions to manage economic transformation with inadequate resources and support.
The Moral Imperative for Social Prioritization
Human Dignity and Rights-Based Approaches
The marginalization of social factors in ESG frameworks raises fundamental questions about the moral foundations of sustainability initiatives. Human rights organizations and labor advocates argue that ESG should be grounded in rights-based approaches that prioritize human dignity and social justice rather than treating social considerations as secondary to environmental goals. This perspective emphasizes that environmental sustainability cannot be achieved at the expense of basic human rights and social well-being.
The United Nations Guiding Principles on Business and Human Rights provide a framework for integrating human rights considerations into corporate decision-making, yet research indicates that these principles remain inadequately integrated into mainstream ESG practices.
Companies often approach human rights as a compliance issue rather than as a foundational element of sustainable business practice, resulting in superficial policies that fail to address underlying power structures and social inequalities.
The rights-based approach demands particular attention to vulnerable populations—including children, elderly persons, persons with disabilities, indigenous peoples, and marginalized communities—who often bear disproportionate costs from both environmental degradation and climate policies. ESG frameworks that fail to explicitly address these vulnerabilities risk perpetuating or exacerbating existing inequalities while claiming to advance sustainability goals.
Intergenerational Equity and Social Justice
The temporal dimension of sustainability requires balancing present social needs with future environmental imperatives, a challenge that current ESG frameworks often resolve by prioritizing long-term environmental goals over immediate social concerns. However, this approach may be both morally problematic and strategically counterproductive if it undermines the social foundation necessary for long-term environmental protection.
Intergenerational equity demands consideration of how current policy choices affect both present and future generations' capacity to meet their basic needs and aspirations. Climate policies that impoverish current generations or undermine social cohesion may inadvertently compromise future generations' ability to maintain environmental gains or continue sustainability efforts. Research on social movements demonstrates that environmental protection depends on broad-based social support, which is difficult to maintain if environmental policies are perceived as unfair or socially destructive.
The moral complexity deepens when considering global equity dimensions. Developed countries' historical responsibility for greenhouse gas emissions creates obligations not only to reduce their own emissions but also to support just transitions in developing countries. ESG frameworks that ignore these equity considerations may inadvertently perpetuate global inequalities while failing to achieve their stated environmental objectives.
Corporate Social Responsibility and Stakeholder Obligations
Modern stakeholder capitalism theories emphasize corporations' obligations to multiple constituencies beyond shareholders, including employees, communities, suppliers, and society at large. These obligations extend beyond legal compliance to encompass broader responsibilities for social well-being and community development. However, ESG implementations often prioritize measurable environmental improvements that generate positive publicity while neglecting less visible but equally important social investments.
The concept of corporate social responsibility has evolved from charitable giving to strategic integration of social considerations into core business operations. Leading companies increasingly recognize that sustainable business success depends on healthy communities, educated workforces, and stable social institutions. However, this recognition has not consistently translated into ESG frameworks that give appropriate weight to social investments and outcomes.
Research on corporate sustainability demonstrates that companies with strong social performance often outperform their peers in long-term financial metrics, suggesting that social investments generate returns that may not be immediately apparent in quarterly financial statements. This finding reinforces arguments that ESG frameworks should treat social factors as strategic imperatives rather than regulatory compliance issues.
Toward Balanced ESG Implementation
Integrated Policy Frameworks
Achieving balanced ESG implementation requires integrated policy frameworks that explicitly recognize interdependencies between environmental, social, and governance factors.
Rather than treating these dimensions as separate categories, effective frameworks should emphasize their interconnected nature and potential synergies. For example, renewable energy investments can simultaneously advance environmental goals while creating employment opportunities and strengthening energy security, provided they are designed with explicit attention to social outcomes.
The International Labour Organization's Guidelines for a Just Transition provide a model for integrated approaches that balance environmental objectives with social protection. These guidelines emphasize the importance of social dialogue, stakeholder engagement, and comprehensive planning that addresses both the pace of environmental change and the capacity of workers and communities to adapt. Implementation requires coordination across multiple government agencies, private sector actors, and civil society organizations.
Successful integration also demands recognition that environmental and social objectives may sometimes conflict, requiring explicit trade-off analysis and stakeholder engagement to develop solutions that minimize adverse impacts while maximizing co-benefits. This approach acknowledges that perfect alignment between environmental and social goals is not always possible, but insists that conflicts be addressed transparently rather than resolved by default through social dimension neglect.
Stakeholder Engagement and Democratic Governance
Meaningful stakeholder engagement represents a crucial component of balanced ESG implementation, particularly for addressing social dimensions that affect diverse community interests. Traditional corporate governance structures, focused primarily on shareholder interests, often lack mechanisms for incorporating broader stakeholder perspectives into decision-making processes. ESG frameworks should mandate comprehensive stakeholder consultation processes that give voice to affected communities, workers, and civil society organizations.
The concept of stakeholder capitalism requires institutional innovations that go beyond consultation to include meaningful participation in governance processes. Some progressive companies have experimented with stakeholder representation on corporate boards, community benefit agreements, and participatory budgeting for social investments. However, these innovations remain exceptions rather than standard practice in most ESG implementations.
Democratic governance principles suggest that communities affected by corporate environmental and social impacts should have formal roles in decision-making processes that shape their lives and livelihoods. This approach challenges traditional notions of corporate autonomy while potentially generating more sustainable and socially acceptable outcomes through inclusive planning processes.
Regional Adaptation and Contextual Sensitivity
Effective ESG implementation requires frameworks flexible enough to accommodate different regional contexts while maintaining core principles of environmental protection and social justice. This balance demands moving beyond one-size-fits-all approaches toward differentiated strategies that reflect local economic conditions, cultural values, and institutional capacities while advancing universal human rights and environmental goals.
Regional adaptation should include explicit recognition of different development stages and corresponding capacity constraints. Developing countries may require longer timeframes, additional financial support, and alternative pathways for achieving ESG objectives compared to developed nations. However, differentiation should not become an excuse for lowering standards or perpetuating inequalities between regions.
International cooperation mechanisms should support capacity building and technology transfer that enables all regions to participate in global sustainability transitions without compromising basic social development needs. This approach requires developed countries to provide financialandtechnicalassistanceforjusttransitionsindevelopingnations,recognizingtheir historical responsibility for climate change and their greater capacity to support global sustainability efforts.
Measurement and Accountability Systems
Robust measurement systems for social factors require significant methodological innovations that go beyond adapting environmental measurement approaches. Social impact measurement must account for qualitative factors, cultural context, and complex causal relationships that resist simple quantification. However, the difficulty of measurement should not excuse the absence of systematic monitoring and evaluation systems for social outcomes.
Promising approaches include participatory monitoring systems that involve affected communities in defining indicators and collecting data about social impacts. These systems can capture qualitative dimensions that formal metrics might miss while building local capacity for ongoing monitoring and evaluation. Technology platforms can facilitate data collection and analysis while maintaining community ownership of monitoring processes.
Accountability systems should include both internal corporate governance mechanisms and external oversight by regulatory agencies, civil society organizations, and affected communities. Regular auditing of social performance, public reporting requirements, and grievance mechanisms provide multiple channels for ensuring that corporate commitments translate into measurable social improvements.
Recommendations for Rebalancing ESG
The evidence examined throughout this analysis points to an urgent need for fundamental reforms in how ESG frameworks conceptualize, measure, and implement social sustainability. The following recommendations provide concrete steps toward achieving more balanced and effective ESG implementation:
Establish Mandatory Social Impact Assessment Requirements that parallel environmental impact assessments, requiring companies to evaluate potential social consequences of major decisions and demonstrate mitigation measures for adverse effects. These assessments should include consultation with affected communities and consideration of cumulative impacts across multiple corporate decisions and industry activities.
Develop Standardized Social Metrics that can be applied across different contexts while maintaining sensitivity to local conditions. These metrics should include both quantitative indicators (such as wage levels, employment quality, and access to services) and qualitative measures (such as community satisfaction, worker empowerment, and cultural preservation) that capture dimensions resistant to numerical representation.
Implement Just Transition Requirements for all major environmental initiatives, ensuring that climate policies include comprehensive plans for supporting affected workers and communities. These requirements should mandate stakeholder consultation, alternative economic development, retraining programs, and income support during transition periods.
Create Social Taxonomy Systems comparable to environmental taxonomies that clearly define social objectives and activities that contribute to positive social outcomes. These taxonomies should guide investment decisions, regulatory requirements, and corporate reporting while providing clear frameworks for distinguishing genuine social impact from superficial initiatives.
Mandate Stakeholder Representation in corporate governance structures, ensuring that social impacts receive appropriate consideration in strategic decision-making processes. This representation should include workers, community members, and civil society organizations with formal roles in oversight and planning processes.
Establish Regional Adaptation Mechanisms that allow ESG frameworks to reflect different development contexts while maintaining universal human rights standards. These mechanisms should include differentiated timelines, capacity-building support, and alternative pathways for achieving social and environmental objectives.
Strengthen International Cooperation for supporting just transitions in developing countries, including technology transfer, financial assistance, and capacity building programs that enable global participation in sustainability transitions without compromising social development needs.
The systematic neglect of social factors in ESG frameworks represents more than a technical oversight, it reflects fundamental misunderstandings about the nature of sustainable development and the interdependencies between environmental, social, and economic systems. Addressing this imbalance requires not merely adding social metrics to existing frameworks, but reimagining ESG as an integrated approach that recognizes human dignity and social justice as prerequisites for, rather than obstacles to, environmental sustainability.
The path forward demands courage from corporate leaders, investors, and policymakers to move beyond narrow metrics and embrace the complex, contextual, and inherently political nature of sustainability challenges. Only through such fundamental reorientation can ESG frameworks fulfill their promise of creating a more sustainable and equitable world for all.
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