Investors worldwide are increasingly recognizing that success is measured by more than financial returns alone. The “S” in ESG—Social responsibility—offers a lens through which we can evaluate how corporations affect workers, communities, and society at large.

By delving into the social dimension, we uncover opportunities to drive meaningful change while mitigating risks and unlocking sustainable value.

Understanding the Social Pillar in ESG

ESG investing integrates environmental, social, and governance factors into traditional financial analysis. Within this framework, the social pillar is often cited as the least understood and most overlooked aspect. Yet, it encompasses crucial considerations that shape corporate resilience and reputation.

Socially responsible investing (SRI) and impact investing share related goals but differ in approach. ESG is a risk/return-oriented, metric-based decision-making framework, whereas SRI and impact strategies are more values-driven, typically screening companies based on ethical criteria or seeking explicit social outcomes alongside returns.

To illustrate the distinctions, consider an investment fund focused exclusively on green energy projects—it may score high on the environmental pillar but overlook workforce diversity or community relations. By comparison, a social bond fund channels capital into affordable housing and healthcare, exemplifying impact investing’s explicit pursuit of measurable social benefit.

Key Social Factors and Their Impact

When evaluating the social dimension, investors examine how companies manage their relationships with employees, suppliers, customers, and communities. Core areas include:

• Workplace Practices: Labor rights, health and safety standards, fair compensation, and anti-discrimination policies.
• Human Rights & Supply Chains: Due diligence to prevent forced labor, child labor, and exploitative practices in global value chains.
• Diversity, Equity & Inclusion: Representation targets, inclusive hiring, and gender pay equity initiatives.
• Customer Welfare: Product safety, data privacy, and responsible marketing to vulnerable populations.
• Community Impact: Local engagement programs, economic development, and infrastructure investment.
• Controversial Products: Screening or exclusion of alcohol, tobacco, weapons, and fossil fuels.

By addressing these themes, companies demonstrate a commitment to community engagement and social impact and fortify their ability to navigate stakeholder expectations.

Emerging Social Risks in Technology

As digitalization accelerates, social risks in technology gain prominence. Algorithmic bias can perpetuate discrimination in hiring platforms, while insufficient data privacy measures expose millions of customers to breaches.

Companies that undervalue these dimensions may face fines, litigation, and erosion of customer trust. Integrating social criteria into tech investments ensures alignment with evolving societal expectations and ethical standards.

Why Social Responsibility is Financially Material

Social issues are not merely ethical considerations; they have direct implications for a company’s bottom line. Operational disruptions from labor disputes or supply chain interruptions can erode profits and damage brand value.

Consider a global automaker that suffered a week-long strike after workers protested unsafe conditions. Production delays cost millions in lost revenue and triggered supply chain ripple effects for parts suppliers. This scenario highlights how social neglect can translate directly into financial losses.

A financial firm experienced a major data breach due to weak cybersecurity and poor training. The resulting fines and remediation efforts exceeded $150 million, not to mention the long-term damage to customer loyalty.

Moreover, consumer boycotts, data breaches, and discrimination lawsuits pose significant operational and reputational risks alike. For example, a major retailer faced a global backlash and hefty legal settlements after reports emerged of unsafe factory conditions in its supply chain, resulting in a steep drop in share price.

Regulators are also increasing scrutiny of social practices. Fines for data privacy violations and labor infractions have become more common, reinforcing that strong social metrics can be a source of measured positive social or financial performance.

Market Trends and Investor Attitudes

The scale of ESG investing has exploded in recent years, with the social component gaining prominence. Sustainable investing assets grew by 143% between 2016 and 2020, and global ESG assets are projected to reach $33.9 trillion by 2026.

In the United States, 90% of S&P 500 companies now publish sustainability reports, and 81% of sustainable investment strategies integrate ESG metrics, according to the latest surveys.

Community Development Financial Institutions (CDFIs) have become a cornerstone of social investing, channeling capital to underserved communities. From 2014 to 2023, CDFI assets soared from $64 billion to $458 billion, reflecting a growing belief that purpose-driven capital can deliver returns.

According to the US Sustainable Investment Forum (SIF), exclusionary screening and ESG integration dominate the strategies of institutional and retail investors alike. Nearly 75% of respondents use negative screens to avoid controversial sectors, while 81% employ ESG integration in portfolio construction.

A Story of Impact and Return

Meet Jane, a portfolio manager who reoriented her fund to prioritize social metrics. She engaged directly with company leadership to improve labor standards at a major apparel manufacturer. Over two years, the company reduced workplace incidents by 40% and saw a 12% increase in employee retention.

This improvement not only enhanced brand reputation but also bolstered financial performance, underscoring the truth that social responsibility and profits can go hand in hand.

Practical Steps to Integrate Social Metrics into Your Portfolio

Incorporating social factors into your investment decisions can feel daunting. Here are actionable steps to get started:

• Assess your values: Identify the social issues that matter most to you, whether labor rights, diversity, or community development, and align them with your financial goals.
• Review ESG reports: Analyze corporate disclosures, focusing on social metrics, targets, and year-over-year progress to spot leaders and laggards.
• Engage with companies: Use shareholder votes, dialogues, and proxy resolutions to advocate for stronger social policies and transparent reporting.
• Diversify with social-themed vehicles: Consider social bonds, community development funds, or impact ETFs aligned with UN SDGs to spread risk and impact.
• Partner with community organizations: Support local NGOs and nonprofits to identify high-impact opportunities and validate social outcomes.
• Monitor outcomes: Track both financial returns and social impact data to ensure alignment with your objectives and make adjustments over time.

By adopting these practices, you can build a portfolio that reflects your principles while pursuing sustainable growth.

Looking Ahead: The Future of Social Investing

The social pillar is set to become even more critical as investors, regulators, and stakeholders demand greater accountability. Advances in data analytics and AI will improve the quality and comparability of social metrics, helping to bridge current reporting gaps.

In 2025, ESG regulations will intensify, especially in Europe, driving standardized disclosures and combating greenwashing. Meanwhile, emerging themes like AI ethics, digital privacy, and social infrastructure—such as affordable housing and healthcare—will open new avenues for impactful investments.

Aligning strategies with the UN SDGs—No Poverty, Good Health and Well-Being, Gender Equality, and Reduced Inequalities—will also gain traction, offering a framework for measuring social outcomes at scale.

Embracing the social dimension is not just a moral choice; it is a strategic imperative. Investors who lead on social responsibility will be better positioned to manage risks, unlock growth opportunities, and contribute to a more equitable world.

As you refine your investment approach, remember that the “S” in ESG represents the power of finance to foster positive change. By integrating social responsibility into your portfolio, you can drive value for both society and shareholders, ensuring sustainable success for years to come.