Environmental, social and governance (ESG) policies allow customers, investors and other stakeholders to evaluate a company’s impact on its employees, local communities and the natural world.
Some studies show that high performance on ESG criteria correlates with greater profitability, customer satisfaction, investment and ability to attract and retain talent.
Unlike its now less fashionable predecessor, corporate social responsibility (CSR), ESG provides reporting frameworks for tracking compliance.
However, the ability to share best practices and benchmark ESG performance has so far been stymied by the absence of a gold-standard framework that enables like-for-like comparisons.
The issue is particularly acute for ‘social’ metrics, which one expert has argued are “10 years behind” the ‘environmental’ pillar in terms of sophistication and data gathering.
Mutually reinforcing ESG metrics
The growing urgency of climate change and biodiversity loss has seen sustainability – with metrics around carbon footprint, water consumption and air pollution – dominate the ESG conversation.
And the corporate exodus from Russia in the wake of the war in Ukraine, as well as evidence of corporate malfeasance emanating from leaks like the Pandora Papers, have given greater impetus to the ‘governance’ dimension, as measured by the rectitude of directors, regulatory compliance and so on.
But the conflict in Ukraine also demands attention to ‘social’ metrics, which refer to how a business manages relationships with its employees, customers, suppliers and partners.
And Covid-19 too, which raises additional governance questions over supply chain resilience, has highlighted the value of ESG social metrics around keeping employees safe and treating them ethically.
More generally, having a motivated, skilled workforce – a key goal of ESG social criteria – is pivotal to any business goal worth pursuing.
Further, environmental, social and governance metrics are often mutually reinforcing. Consider how, for instance, making industrial processes less air-polluting addresses social criteria around health and wellbeing as well as being an environmental benefit.
‘Objective standard’ for ESG social metrics
Writing in the Stanford Social Innovation Review in February 2022, Jason Saul, executive director for the Center for Impact Sciences at the University of Chicago, said “the ESG field needs an objective standard for reporting social outcomes”.
Promisingly, the World Economic Forum (WEF) has developed ESG metrics consolidated from the profusion of hundreds of existing frameworks and standards that it claims has shown signs of yielding positive social outcomes.
Developed in collaboration with corporate giants including IBM, Nestlé, and Sony, the ‘Stakeholder Capitalism’ criteria comprise four pillars – people, planet, prosperity and governance – and include 21 “well-established, universal, industry-agnostic” metrics and 34 expanded metrics and disclosures.
A white paper (PDF) published in September 2020 sets out the metrics, declaring “near-term objectives of accelerating convergence among the leading private standard-setters and bringing greater comparability and consistency to the reporting of ESG disclosures”.
The WEF reported in September 2021 that more than 50 companies had begun including the Stakeholder Capitalism Metrics in their mainstream reporting materials, and the first 45 reports showed “how companies are building skills for the future, with over $1.5 billion invested in training”, and “contributing to their communities and social vitality with nearly $140 billion in taxes”.
Early reporting has also apparently informed the IFRS Foundation’s International Sustainability Standards Board (ISSB), established in November 2021 to “deliver a comprehensive global baseline of sustainability-related disclosure standards”.
Dignity and equality
The WEF’s ‘people’ metrics comprise three subsections: dignity and equality, health and wellbeing, and skills for the future.
By ensuring “equitable opportunities” and “fair treatment” to employees regardless of “gender, race, age, ethnicity, ability and sexual orientation”, dignity and equality compliance on Stakeholder Capitalism Metrics means companies “become a better reflection of society and also deepen the pool of talent that a more diverse workforce can bring”, argues the white paper.
Health and wellbeing
Health and wellbeing compliance, meanwhile, is said to boost employee productivity and “is increasingly required by law”.
ESG criteria in this area cover the number and rate of fatalities resulting from work-related injuries; high-consequence work-related injuries (excluding fatalities); recordable work-related injuries; the main types of work-related injury; and number of hours worked.
The organisation must also score progress in facilitating workers’ access to non-occupational medical and healthcare services.
Skills for the future
Finally, the white paper says upskilling the workforce is given greater urgency by 2020 WEF findings that we need to reskill more than one billion people by 2030.
The ‘skills for the future’ metrics include average hours of training undertaken per employee over the reporting period by gender and employee categories, and average training and development expenditure per full-time employee.
Expanded ESG social metrics
The expanded metrics, which are suggested as a longer-term reporting goal, purportedly move beyond “reporting outputs alone to capturing the impacts of their operations on nature and society across the full value chain, in more tangible, sophisticated ways, including the monetary value of impacts”.
They will also apparently help “address urgent emerging issues – such as nature loss, resource circularity, and gender and ethnicity pay gaps – that are not yet well-represented in formal reporting standards”.
One expanded skills-for-the-future metric gauges investment in training as a percentage of payroll and the effectiveness of training and development through increased revenue, productivity gains, employee engagement and/or internal hire rates.
Addressing the data deficit
Jason Saul wrote that most of the few attempts made to create frameworks for reporting social impacts “have fallen short”.
He cited a 2021 ESG survey by BNP Paribas that revealed 51% of global institutions found social to be the most difficult to incorporate ESG element into investment strategies because “data is more difficult to come by and there is an acute lack of standardization around social metrics”.
He prescribes “three practical steps” to remedying the situation. “Most importantly, companies should start reporting S impact data consistently” and immediately, which will give them “a lot more influence over what standards are set”, he said.
“Second, ESG investors should start asking for S impact data and making it a requirement,” he added. “Finally, ESG rating agencies, standard-setting bodies, and data providers should align with a specialized S data provider to up-level the value of their data.”
It’s clear that, despite becoming the dominant model for measuring organisations’ impact on society and the environment, ESG – and the ‘S’ part in particular – still has some maturing to do.
Thankfully, evidence is growing that academics and ESG strategists are grappling with the need for universal, effective ESG standards and to elevate social metrics to the sophistication of their sustainability counterparts.
Advice and support from ESA Risk
For futher advice and support on all areas of ESG, particularly compliance and making ESG part of your risk management strategy, contact Mike Wright, Risk Management and Investigations Consultant at mike.wright@esarisk.com, on +44 (0)343 515 8686 or via our contact form.
