Family businesses form the cornerstone of the global economy. Their ability to create employment, drive innovation and enhance social cohesion also makes them a key player in the transformation toward a more sustainable world.
That said, the social dimension of ESG (environmental, social and governance) in family-owned firms remains a challenge both in terms of its implementation and measurement.
How can family businesses effectively integrate the “S” in ESG and turn it into a competitive and sustainable advantage over time?
The social dimension: more than an obligation, a strategic commitment
Social commitment is deeply ingrained in the identity and values of family firms, unlike large corporations, where ESG adoption is often driven by regulatory or investor pressures.
This gives family-run companies a distinctive advantage: their long-term vision allows them to build sustainable strategies that not only respond to external expectations but also generate a real positive impact around the world.
Social practices within ESG are a reflection of the firm’s organizational culture. Businesses with a strong culture tend to better integrate social factors into their strategy, while those with weaker or less defined cultures often show deficiencies in this area.
In this regard, family businesses have the opportunity to consolidate their leadership by formalizing their social commitments and actively managing them through the board of directors.
Responsible labor conditions and talent development
One of the most relevant aspects of the “S” in ESG is talent management. Family businesses must ensure fair working conditions and foster employee well-being through:
- Competitive salaries and benefits that promote economic and social stability
- Continuous training and professional development opportunities
- Policies that reinforce human dignity, promoting diversity and a sense of belonging
- Work-life balance and flexibility measures that ensure a positive work-life balance
Among its myriad ripple effects, the COVID-19 crisis changed employee and social expectations regarding the role of companies in protecting workplace well-being. Job security, flexibility and the commitment to mental health are now considered critical factors in ESG strategy.
Family businesses can stand out by prioritizing these policies and creating sustainable work environments.
Community commitment and the creation of shared value
Family businesses are often profoundly rooted in their communities, allowing them to create a positive impact in their surrounding environment. Some ways to strengthen this commitment include:
- Investing in education and technical training for young people and local entrepreneurs
- Supporting small and medium-sized enterprises (SMEs) in the supply chain
- Developing corporate volunteer programs and partnerships with social-outreach organizations
Ethics in the supply chain and new regulations
Social commitment in family firms is not limited to its employees and communities–it should also extend to its supply chain.
In this regard, companies should strive to establish business relationships with suppliers who share values of social responsibility and business ethics. Some best practices include:
- Implement audits to ensure compliance with fair labor practices
- Require transparency in the traceability of products and materials
- Encourage collaboration with sustainability-focused local suppliers
The 2024 implementation of the Corporate Sustainability Reporting Directive (CSRD) required more than 50,000 companies in Europe to report their social and environmental impacts under stricter criteria.
Following the recent EU Omnibus package, the CSRD application threshold has narrowed to only include companies with over 1,000 employees. While this change reduces the number of companies required to report, the CSRD remains highly relevant for family businesses as they will continue to be indirectly influenced.
Large companies subject to the directive will require their suppliers–including many family businesses–to comply with certain social and environmental impact standards in order to continue operating within their supply chains.
For many SMEs, this will entail steps to improve their sustainability and transparency practices in order to ensure their competitiveness in the market.
Adapting to these new standards will be key to family firms’ businesses in the coming years, entailing stronger ESG governance, enhanced sustainability data and rigorous ESG reporting ratified by the boards of directors.
Metrics and transparency: the remaining frontier
The absence of standardized metrics is among the biggest hurdles in integrating the “S” in ESG. Truth be told, most ESG frameworks are not aligned in how they assess the social impact of companies.
Experts generally agree that the leading ESG frameworks lack consensus on which social aspects should be measured, making it difficult to define comparative benchmarks and identify best practices.
To address this issue, family businesses are advised to adopt a net impact approach, evaluating both the positive and negative effects of their operations. This will provide a more realistic assessment of their social contribution and help minimize “social washing”–the practice of claiming social responsibility without making meaningful changes.
Measuring social impact should not be viewed solely as a regulatory obligation, but as a strategic tool for decision-making. Some key indicators to consider include:
- Gender pay gap
- Employee satisfaction and retention
- Training hours delivered
- Investment in social-impact initiatives
Integrating this data into business planning help drive profitability and long-term sustainability, strengthening the trust of investors and other key stakeholders.
Embracing a socially responsible leadership model
In a world where transparency and business ethics are increasingly valued, family-owned firms are uniquely poised to serve as leaders in social transformation and forge stronger relationships with their employees, customers and communities.
To achieve this, it is essential to adopt a structured approach, measure their social impact and bolster their commitment to the well-being of people and sustainable development.
Beyond being a trend or regulatory requirement, the “S” in ESG becomes a competitive advantage and a key pillar for the future of the family business. With social responsibility in the spotlight, family businesses not only ensure their continuity, they become engines of positive change in their communities, markets of operation and beyond
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