Risk Perspectives ESG: S -The Social Contract

The attention given ESG most significantly focuses on Energy (Carbon Foot-printing, etc.) issues. There is more to consider, especially for leaders of Community Banks and Credit Unions. Let’s talk a few minutes on a very viable and valuable part of ESG that is often overlooked: The Social Contract.

When we talk about the social contract we are including:

• Labor standards
• Wages and benefits
• Workplace and Board diversity
• Racial justice
• Pay equity
• Human rights
• Talent management
• Community relations
• Privacy and data protection
• Health and safety
• Supply chain management
• Executive compensation
• Political contributions and lobbying
• Bribery and corruption

That is a lot to have on our plate. The good news is that most community banks and credit unions are already addressing most of these items. Labor standards, wages and benefits, talent management and health and safety are often key focal areas for Human Resource department.

There are also many community relations officers in community banks that facilitate to flow of ideas and support to our local communities. Internal Audit will often include reviews of executive compensation and privacy and data protection in their annual audit plans.

The challenge for management typically lies within areas that are more difficult to define and to recognize. Racial justice, pay equity, human rights, political contributions and lobbying all fall within this “challenging” area.

One approach that can help management assure that nothing is missing in its social contract with the community or with their own employees is in governance controls. By capturing all of the aforementioned topics in an overarching governance context under “Social Risk Management” and then implement the typical risk management processes to oversee the organizations efforts, leaders will better manage social risks.

For example, completing a risk assessment on the social contract will provide a baseline on the complete and holistic organizational approach to this very important risk area. The completed risk assessment can then provide management with directional information on strengthening existing controls or even provide insights to developing a plan addressing weaknesses in the organizations social contract.

Additionally, by strengthening Board reporting on the social contract, management will assure the board that all applicable aspects of the social responsibility of the organization is considered, managed and weaknesses addressed. Regulators, investors, customers and members will react positively to the attention, effectiveness and results of good governance process