The Social Component in ESG Reporting Presents Challenges for Businesses
Before seeking the answer to this question, it is essential to clearly define what is meant by the social impact of a business. In the context of ESG and sustainability, the social aspect pertains to people and all the impacts and interconnections that companies can influence. Social factors are numerous and diverse, encompassing a wide range of relationships. Managing these relationships requires different approaches, and despite established processes and policies, the dynamics within these relationships and the needs of people are constantly changing. While measuring environmental and governance indicators has been practiced for years, companies now need to measure social impact but face challenges due to a lack of metrics. This results in uncertainties about what socially meaningful information should be collected. Some activities are more easily explained by qualitative indicators, but these do not yet exist or are still in the process of being formulated for reporting purposes.
Compliance with Requirements
Let’s now look at an ESG report that includes standard social indicators such as diversity and inclusion, equal pay, employment practices, employee engagement, skills development, safe working conditions, and respect for human rights. You probably already have enough information to fill out this table, and investors also ask questions that can be answered with a yes or no. For compliance purposes, let’s consider an example of a company that surveys employees to determine their needs in terms of “wellbeing.” Calculate the number of respondents, and break this down by gender, age, and other indicators. This may be quite sufficient for a good rating or compliance. For qualitative metrics, one can look at what programs were developed after the survey, how many employees participated, and how it impacted them. It’s hard to find evidence of the impact you’ve made from a survey or how the information you’ve gathered has improved your engagement with your employees and why that’s important to you. It’s difficult to measure whether it has impacted employee retention or attracted new hires, but the information in the report contains a combination of quantitative and qualitative metrics that enable you to extract qualitative insights. Qualitative indicators contain subjective information that requires more in-depth analysis and more resources. This is why companies will choose the easier measurement option. This can lead to the sharing of best practices that do not show depth, but rather create so-called or good PR without sufficient justification.)
Impact and Risk
Measuring the social impact of business on people is not an easy task, but it provides a comprehensive understanding of both positive and negative impacts. The principles of double materiality assessment not only measure financial impact but can also help prioritize the social aspects that are important to companies. In the human rights field, there is talk of so-called ‘salient human rights’—the rights most at risk of being violated by companies’ impacts. While companies conduct due diligence when assessing financial risks, human rights due diligence is the process of identifying, preventing, mitigating, and informing how companies address adverse human rights impacts. Practice often shows a drive to implement quantitative indicators, but respect for human rights is a universally accepted standard for ethical, responsible, and transparent business conduct, not just a quantitative indicator in an ESG report. Therefore, it is difficult to describe how we treat people in a report. Commitment to people is seen through policies and responsibility for risk assessment and care for people. There is a drive to tick compliance boxes, which is normal given increased requirements and regulations.
In Conclusion
The question is whether to include information and data on the social aspect that will satisfy a quantitative indicator, or to include information that can also be presented qualitatively. The decision varies for everyone, depending on the resources and direction of the management team. ESG aspects are viewed holistically, and while we now talk about high ratings and metrics, they ultimately show how a company is managed and what measures and steps are taken to care for the planet and for people. There are already enough tools like the Wоrld Benchmarking Alliance Social Benchmark and KnowtheChain that you can start with to see where you stand and what the meaningful or social impact of your business model is. There has been a push for companies to present clear metrics, but even the implementation of regulations is a work in progress. Change is happening at all levels, and it will take time. We are part of that change and we are learning. “Measure what is significant, not what is easy to measure” – Prof. John Ruggie.
Author: Olya Peneva