The rise of social metrics in ESG reporting
Author: Aman Singh
The rise of social metrics in ESG reporting
Thu, 03/11/2021 - 12:00
Reprinted from GreenFin Weekly, a free weekly newsletter. Subscribe here.
For years, companies have focused voluntary social reporting on metrics that are, let’s say, comfortable: government-mandated data, such as occupational health and safety or certain hiring metrics, that has been measured and managed for years. Add a few more nuanced data points, such as the results of an annual employee engagement survey or number of volunteer hours, and you get a bit more of a company’s approach to internal and community engagement.
However, these data points — splintered and unwieldy — rarely have given investors the metrics needed to confidently evaluate risk and impact.
Now, as we make our way slowly past the worst of the pandemic and face a consistent and ongoing call to action for racial justice and equity, things finally might be shifting.
For years, companies have struggled to report on their social impact in a financially meaningful way — and taken solace in reporting efforts vs. impact. Along the way, multiple reporting frameworks have helped bring objectivity on some data points, including the Global Reporting Initiative (GRI), the U.N. Guiding Principles on Business and Human Rights and the more recent — and perhaps the most detailed yet in scope — Corporate Human Rights Benchmark (CHRB).
Yet, there has been little consistency in corporate disclosures as adoption rates varied and as the focus deepened on easier quantified risks that have felt more urgent and actionable: greenhouse gas emissions; waste to landfill; diverse hiring/retention; etc. For instance, Unilever’s inaugural Human Rights report, published in accordance with the U.N. Guiding Principles in 2016, included multiple data points at the macro level, perhaps to make up for sparse company-specific data.
For years, companies have struggled to report on their social impact in a financially meaningful way. That's changing.
Fast-forward to 2021, and Unilever’s third Human Rights report is a study in how social strategies and disclosure are evolving. The report offers a wealth of company-specific data such as the number of workers affected by discrimination, fair wages and working hours across the company’s supply chain. Direct impact numbers such as these more easily can be translated into measuring risk, making the disclosure more useful and implementable.
Data that drives decisions
Similarly, on the internal end, corporate reporting on diversity and inclusion — and lately, equity — performance across industries has been sporadic at worst and uneven at best.
In 2020, this began to change: Global fashion house PVH released new data on living wages across its factories and benchmarked it against the rest of its beleaguered industry to show a clean, comparable view in 2020. For the first time, the company also disclosed diversity performance by store level, uncharted territory for most retail companies, which for years have focused instead on reporting the diversity of their boards of directors and leadership.
Meanwhile, evidence is mounting on the correlation between good human capital management and financial performance. For example, the NYU Stern Center for Sustainable Business looked at more than 1,000 academic studies published between 2015 and 2020 on the correlation between financial and ESG performance. Just about 33 percent of the studies on investor portfolios found a positive correlation, while 26 percent found that companies with good ESG performance performed as well as conventional companies.
I also posed the question to Erika Karp, founder of Cornerstone Capital and new chief impact officer at advisory firm Pathstone, who offered cautious optimism: "We are most definitely seeing a concerted effort to recognize the critical nature of governing with a social conscious,” she told me over email. “While the measurement of these factors is particularly challenging given lack of standardization, we do know that the interrelationships between the S, the E and the G are profound."
Context is everything (but hard to measure)
At the GreenBiz 21 conference last month, I hosted a roundtable discussion along with Amanda Cumberland, senior manager for CSR strategy and insights at Cisco, and more than 50 attendees on how to make this growing surge of social data meaningful. According to Cumberland, measuring social impact at Cisco has been an evolving effort. With a public goal of "positively impacting one billion people through social impact grants and signature programs by 2025," the team repeatedly has tweaked its measurement tactics, even developing a detailed Impact Framework along the way. As of Dec. 31, Cisco had reported 527 million people positively affected.
However, herein lies a dichotomy.
Efforts vs. outcomes
Reporting frameworks such as GRI make it easy to overly rely on reporting efforts rather than impact by accommodating disclosure of actions vs. mandating. As a result, most companies have found little motivation to make the leap from intention to impact in their disclosures: from reporting volunteer hours to the number of lives affected; from diverse hiring to evidence of inclusive behavior, and so on. And for investors, intentions or volume of actions versus tangible results hold little value in assessing performance.
This is where Tensie Whelan, director of the NYU Stern Center for Sustainable Business, sees a new level of seriousness beginning to emerge. "2020 shone a spotlight on the S in ESG, and corporate leaders and investors responded by beginning to get more serious about their social metrics," she explained over email. "For example, many are beginning to report EEOC data publicly, which will enable accountability on diversity issues. More companies are increasing wages for their lowest-paid workers and many [companies] support an increase in the minimum wage as well, which will also improve their performance on social metrics."
With increased investor pressure sparking a quiet revolution in the expansion of measurable and meaningful environmental disclosure, perhaps with everything that 2020 threw at us, social reporting will see the same wave of maturity and transparency. After all, real progress — whether it is on inclusion or climate change — requires us all to do a better job at connecting the dots between people and planet.
Or as Karp reminded me, "You can’t achieve women’s equality without access to water, education, healthcare, capital, broadband, etc. We need to impact the entire system."
This story was originally published by GreenBiz and can be accessed here.