By Catherine Douglas, director of ESG Consulting at Morrow Sodali
This AGM season, climate issues have taken centre stage in meetings around the world. Decisions taken at COP26 and increased scrutiny from investors, shareholders and employees have led many companies to focus their efforts on climate-related targets. This spring also saw the first set of mandatory Task Force on Climate-Related Financial Disclosures (TCFD) reporting in the UK from listed companies.
But a new word has crept into investor parlance – the ‘just’ transition has pulled up a chair alongside ‘green’ adding new dimensions to how companies think about positioning and reporting their social impact. Covid and the Ukrainian conflict have helped catapult issues of health and social inequalities to the front of investors’ minds.
In boardrooms, social impact is fast assuming the same risk profile as combating climate change. The niceties of Corporate Social Responsibility and corporate philanthropy are giving way to gritty business issues such as modern slavery in supply chains, indigenous land rights and workers’ rights. Reskilling workers whose fossil fuel linked livelihoods are disappearing or helping the world’s poorest recover from the effects of failed crops due to the climate emergency are just two examples of how social issues can translate into corporate action.
Alongside these challenges, social issues within companies are increasingly under scrutiny. Executive remuneration is being compared and contrasted in relation to wider salaries and living wage initiatives by shareholders and the general public.
This action is encouraging and commendable, but it is not enough. If we’ve learned anything from the delayed response to the climate crisis, it is that businesses, regulators and investors need to take decisive action on the ESG-related issues proactively, not reactively. If we postpone acting on Social issues until we are at crisis point, companies risk alienating even more people than they have to date.
The challenge for businesses and investors is that there are currently few established frameworks for measuring and valuing the merits and effectiveness of social policies. Indeed, the United Nations-supported investors network the Principles for Responsible Investment says “the social element of ESG issues can be the most difficult for investors to assess”.
That is about to change, with the European Commission laying the foundations for such an assessment methodology. And just as they have sought to comply with the environmental requirements of ESG standards, firms should engage with emerging new social criteria, otherwise they risk alienating both their customers and, increasingly, activist shareholders, whose ESG-related campaigns are on the rise.
In the UK, the publication Employee Benefits reported in May that an analysis of FTSE 100 employers by benchmarking platform HR DataHub revealed that the median gender pay gap had decreased by just 1% since legislation necessitating disclosure was introduced in 2017. And in April, the UK regulator of auditors, accountants and actuaries the Financial Reporting Council (FRC) revealed that it had found serious deficiencies in the quality of statements major companies must submit on the steps they are taking to address the risk of slavery in their operations and supply chains.
The FRC, which sets Britain’s corporate governance and stewardship codes, concluded that its research suggested “modern slavery considerations are still not a mainstream concern for many boardrooms”. Yet in recent years, we have seen that they are critical to corporate sustainability and reputation, and the Modern Slavery Act was reintroduced to parliament last year with key changes which will impact boardrooms around the world.
Recently, top international brands with operations in China were thrust into a political storm over their sourcing of cotton from Xinjiang following allegations of state persecution of the province’s Uighur population. When the brands expressed concerns over forced labour, they were hit by Chinese consumer boycotts.
Covid has further raised these concerns, with workers in the developing world vulnerable to human rights abuses as businesses struggle to recover from the pandemic. Indeed, research by Sheffield University suggests deteriorating living and working conditions in the garment supply chains of countries such as Ethiopia, India and Myanmar have increased the risk of forced labour.
Companies must invest more in due diligence to meet the demands of investors and consumers for abuse-free suppliers. In fact, some governments are now compelling them to do so. According to law firm Ropes and Grey, over the last year, several jurisdictions have proposed or adopted mandatory human rights due diligence legislation “that requires a more robust corporate response to human rights risks and adverse impacts”.
While the social pillar of ESG has put a spotlight on supply chains, it relates of course to a much wider gamut of issues around the workplace, customers and broader society. But these need to be more clearly defined and measurable to enable companies to set out robust policies to address them.
For instance, as firms roll out post-Covid hybrid employment practices, they will face serious duty-of-care challenges, and would value criteria and goals that help them ensure they are providing remote workers with optimal support. Similarly, as we emerge from the pandemic, companies understand the importance of social purpose and will want to fulfil expectations – but they need guidance and parameters.
These are on the way. The European Commission has made significant strides in developing what it describes as a social taxonomy, which gives businesses and regulators a better sense of what the social pillar in ESG amounts to. The Corporate Sustainable Reporting Directive is also set to improve reporting standards and requirements to help companies track their progress against promoting equality, ending discrimination and protecting end-users through safe manufacturing and service procedures, as well as responsible marketing practices to ensure we don’t see 'social washing’ from businesses.
It’s encouraging to see these incoming benchmarks for measuring and reporting on social impact issues, but companies must act before these frameworks are put in place if they are to meet current and future shareholder demands around social impact and business practices. Indeed, the UK Sustainable Investment and Finance Association would like the government to consult on the merits of introducing such a classification, which, it says, could help investors assess company performance.
Boardrooms need to keep across the emergence of new social criteria and examine whether they need to develop new policies to refine existing ones to meet them. Once ‘nice to have’, they will soon be commercial imperatives.
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