Measuring ESG is nothing new. Companies have been measuring and reporting on environmental and governance topics for decades. These aspects are relatively straightforward to measure. The G is often bound to governing structures and management policies already considered as business practice, and the E is predominantly quantitative. By comparison, the S is more often perceived as an ambiguous minefield. However, recently, the pandemic, human rights violations in Xinjiang, overturning of Roe v Wade, the cost of living crisis and the war in Ukraine have put corporations’ responses to social issues in the spotlight. Pressure from stakeholders is mounting, and companies are increasingly expected to measure, manage and report on the S of ESG.
Why do stakeholders care?
51% of investors find the S to be the most difficult area of ESG to analyse and embed into investment strategies. A recent report by BNP Paribas concluded, “data is more difficult to come by and there is an acute lack of standardisation around social metrics. Investors have been willing to accept data that does little to assess the social performance of the companies in which they invest.” For most investors, the S was merely a tick-box exercise.
However, the attitude of investors is changing.
Research by the Business & Human Rights Resource Centre, has shown that companies that score highly on environmental issues, can still have serious social issues, notably related to human rights, in their supply chains. Electric carmaker Tesla was recently removed from the S&P 500 ESG Index (explored in more detail in a separate instalment of this series) because of social issues; including claims of sub-par working conditions, racial discrimination and a general lack of transparency. Like environmental impacts, social issues are financially material. For example, Boohoo lost £2bn of its market value, after poor labour practices and low pay were exposed in its supply chain.
Keeping an eye on legislation
Legislation related to social issues is increasing; companies should be tuned into regulatory announcements.
Double materiality (more on this later!): A materiality assessment is an evaluation and analysis of the ESG issues that matter most to a business. Traditionally, materiality assessments have focused on the financial risks posed to the company by ESG issues. However, the EU’s Non-Financial Reporting Directive recently stipulated that companies should also disclose information necessary to understand the impacts that companies have on society and the environment. The double materiality methodology is also now endorsed by the EU’s Green Taxonomy, Guidelines on Reporting Climate-Related Information and the EU’s Corporate Sustainability Reporting Directive (CSRD).
EU’s social taxonomy: While there are delays in official adoption, the EU’s Platform on Sustainable Finance presented its final report on the social taxonomy, suggesting that a future social taxonomy should consider three objectives: decent work along the entire value chain; adequate living standards and wellbeing for end-users; and inclusive and sustainable communities. The social taxonomy is the classification of activities that contribute to the EU’s social goals. If adopted, it will represent a common code for investors, businesses and regulators regarding what is, and what is not, sustainable from a social perspective.
Human rights due diligence: The European Commission adopted a proposal for a due diligence law for company supply chains. It could require large companies to integrate human rights due diligence into their core processes. The Japanese government is currently drafting similar guidelines. Germany has already introduced a similar law, obligating companies to establish human rights due diligence (including identifying and preventing issues) across the supply chain,
So, what exactly do we mean by the S anyway?
While companies are beginning to understand that they should measure the S, many practitioners feel unsure where to start. Often, the S is seen as a “waifs and strays” corner – for issues that don’t quite fit into the “governance and business ethics” or “environment and climate change” box.
It is defined in a myriad of ways and covers issues including (but not limited to): labour standards, human rights, pay equity, workplace diversity, talent attraction and retention, health and safety, consumer rights, data protection and cyber-security, community impact activity and social justice.
Simply put, the S is vast.
The breadth of issues often leaves practitioners feeling overwhelmed. Not only is there an array of issues to consider, but the approaches to measurement can also vary hugely. For example, the way we consider community investment impact is very different from how we’d go about considering workplace diversity, or health and safety within the supply chain. When we think about measuring the S, we are immediately met with questions such as: How do we quantify such innately qualitative issues? Which area of the S is a priority? How do we even start?
Three ways to get started
As established, the S covers a dizzyingly broad field and it overlaps and connects with E and G issues . Because of this, it is important to firstly identify the social issues that are most impactful; that way, issues at the top of the list can be prioritised. Feeding these issues into consideration within strategies, ensures that they can be identified, measured and dealt with appropriately.
Conduct a double materiality assessment
A double materiality lens enriches a materiality assessment, by considering not only the financial impacts on the company, but also the impacts of the company on ESG dimensions. It is only once a full picture of societal impacts (both positive and negative, and on the business and society at large) has been revealed, that we can then understand what should be measured. A double materiality assessment will help prioritise which of the S issues should be focused on. Outputs of the assessment should be considered strategically – those S issues that are identified as material, are then fed into both a company’s sustainability strategy and – crucially – its core business strategy.
Improving community impact measurement
Once upon a time, community impact was seen as the heart of corporate citizenship. Mention corporate responsibility, and people would think of charitable donations and corporate volunteering days. While the definition of the S has expanded, most companies still engage in forms of community impact. To maximise impact, measurement should go beyond “cash donated” or “hours volunteered”. Companies should also be measuring the impact of these activities. The B4SI Framework is a great starting point for any company that wishes to improve its community impact measurement and reporting.
Consider the role of technology
As technology improves, the volume and granularity of “social” data increase. For example, the increased use of satellite images has monitored the prevalence of illegal labour in fields, construction sites, quarries and forests. Although there are obstacles in adopting scalable solutions, given the complexity across value chains, innovative technologies are allowing companies to collect and analyse granular data, conduct ongoing monitoring, and prioritise action where the risks of human rights violations are most prominent. Innovative technological solutions could soon become your friend – exploring this early will set you ahead of the pack.
“The best time to start was yesterday. The next best time is now…”
One thing is for certain: we can no longer ignore the once overshadowed S. Stakeholders are expecting more: investors need meaningful data to help them consider financially material issues, employees want to work for socially conscious firms, and consumers are increasingly using brands to externally reflect their values. Trends strongly indicate that measurement, management and action in the social dimension is here to stay.