This post was also published by CDSB.
The pandemic has accentuated the important interconnections between our social and environmental systems, and the deep inequalities that exist across society.
As researchers have emphasised, the likelihood of diseases like Covid-19 increases with environmental degradation and climate change, factors which are driven in large part by an unsustainable and extractive model of growth.
There are an estimated 500 million smallholder farming households globally, these people comprise a large proportion of the world’s poor living on less than $2 a day. These farmers produce 30% of the world’s food supply and are forced to adopt unsustainable farming practices to make ends meet. As health impacts and climate change continue, those communities least resilient and least able to adapt are also the most socially and economically vulnerable.
Inequalities have been highlighted and exacerbated by the pandemic. In the UK and the USA, the data is clear that the impact of the virus has been far from indiscriminate, following lines of race, class and social deprivation. The huge social movement for Black Lives Matter and calls of racial equality on either side of the Atlantic can be seen as an indirect result of this stark inequality. The pandemic also highlighted the undervalued and precariously employed workers in healthcare, education, transportation and logistics, while the global vaccine rollout has exacerbated the already significant divide between the developed and developing world.
However, the pandemic has also created a greater openness to change. This reality is being recognised by a growing number of corporate leaders. There is a burgeoning understanding not only of the contribution of businesses to these glaring social problems, but also, of the benefits that such transformation might bring to companies, their investors and wider stakeholders.
Progress, though, is hard for companies to demonstrate – and even harder for investors, regulators and others to measure and reward. We need clarity on what constitutes quality information on companies’ social performance, which is comparable and consistent.
Development is clear when it comes to the mainstream reporting of environmental information. The international support and uptake of the Task Force for Climate-related Financial Disclosures (TCFD) Recommendations is evidence of this, as is the climate-first approach of the IFRS’s recently announced International Sustainability Standards Board. The same, however, cannot be said for corporate reporting on social issues, nor the connections between the ‘E’ and ‘S’ of ESG, which are largely absent from present mainstream reporting practices. This makes it hard to reach effective and impactful decisions on capital allocations towards social sustainability.
As a starting point, it is important to recognise that the categories of ‘social’ issues usually considered in ESG reporting are largely about human rights impacts: that is, impacts on people that reach the level of affecting their basic dignity and equality. For instance, diversity and inclusion addresses discrimination, while health and safety and privacy are themselves human rights. Too often the centrality of human rights issues to companies’ ‘social’ risks and opportunities is neglected to the detriment of reporting quality, being lumped together with philanthropic projects and staff volunteering, which distract from focus on how the business is run.
Indeed, the problems we encounter are not a lack of reporting on ‘social’ issues, but the limited usefulness of the most common corporate disclosures. Reporting is still frequently focused on case studies designed to cast companies in a positive light or boilerplate statements about human rights policies and processes. The social metrics reported by companies are often detached from the risks and issues identified elsewhere in their reporting. They focus largely on inputs, activities and near-term outputs, while offering little insight into how well the issues are managed and what results are achieved – for the people affected and for the business. Such disclosure appears more as a tick-box exercise than an important means of monitoring key business concerns and communicating with investors.
Investors need coherent and meaningful insight into a company’s identification, management and monitoring of social risks, as set out in the kind of human rights due diligence process that has appeared in international standards for nearly ten years, and which looks set to appear in major new EU regulations within the next two or three years. They need to know whether a company has the business model, strategy, leadership mindset and risk management processes necessary for it to get ahead of the kinds of risks to people that could end up being tied to their business – risking reputation, resilience and revenues – if they don’t pay attention.
mainstream social reporting does not lie solely with companies. It is also that of regulators who have yet to set clear expectations for companies to meet, and of mainstream investors, who have themselves lacked clarity on what they need from corporate reporting on these issues. And, importantly, responsibility lies with standard setters and framework providers as well: the present ecosystem of guidance has to date not provided companies with sufficient support to deliver effective mainstream reporting.
Yet there is hope in what we are starting to see through developments in reporting regulations such as in the EU with the evolution of corporate sustainability reporting and the US with the SEC’s rules on human capital reporting and larger market actors driving in the same directions, as seen in BlackRock’s most recent letter to CEOs, which highlighted some priorities for social reporting, alongside expectations for climate disclosures.
In its upcoming position paper, CDSB will set out a roadmap for the inclusion of social issues into its mainstream financial reporting framework and technical work. Building on CDSB’s TCFD-aligned reporting framework and will respond to issues noted above. The inclusion of social issues will offer companies a framework for reporting comprehensively on financially material sustainability risks and opportunities.
As the the leading center of expertise on the UN Guiding Principles on Business and Human Rights, Shift’s primary focus is on the materiality of a company’s impacts on people. However CDSB and Shift recognise the critical value to be offered by a robust framework for assessing and reporting on financially material social issues. Indeed, CDSB and Shift believe this will help companies in understanding the increasingly dynamic relationship between these two concepts of materiality, as well as the crucial links between environmental and social risks and how companies respond to them. Building these connections will provide decision makers with important information on social, environmental and climate issues, necessary for the transformation to a just and sustainable future.