July 29, 2020
Just a few years ago, much of what fell into the “S” in ESG (environmental, social and governance) was deemed too soft for many investors, Boards, data-driven ESG analysts, researchers and pundits. The “E” and “G” were where the hard data and real risks appeared to be. In company reports, the “S” content was assumed to be for employees and communities, who, we thought, might be satisfied with “success stories” and not demand a full strategy and extensive data.
Then 2020 happened. Investors, Boards and ESG ratings organizations are now gravitating toward a greater interest in Social topics – driven by the novel coronavirus (COVID-19) pandemic, and the social justice movement that aims to expose and address systemic racism in all areas of society.
ESG reporting, and how it’s viewed by a variety of stakeholders, may never be the same.
In the last two quarters, thousands of companies have highlighted their enhanced safety and health protections in response to COVID-19. You can find frequent mentions in earnings releases, earnings calls, investor presentations, media statements and employee and customer communications. I have followed occupational safety and health topics for more than 30 years, and it has become more of a mainstream corporate communications topic than ever before.
Meanwhile, in the last two months, thousands of organizations have pledged to improve their own diversity and inclusion, and to help their communities, schools, law enforcement and nonprofit groups ensure social justice and create opportunities for all. Systemic racism has come to the fore as a crisis with public health, economic, education and human rights implications.
The impact of these two issues has been far-reaching and transformational for many organizations. And, yet, the hardest part for many public companies is still to come – backing up the words with actions, goals, metrics, progress reports and ongoing stakeholder engagement on these topics. Organization-specific materiality assessments will become more important than ever – to fine-tune what topics, Social and otherwise, are most important to your business and your stakeholders. It’s even possible that some Social topics will surpass existing Environmental priorities.
Here are some Social thought starters for your next ESG report:
- Employee safety and health, training, protective equipment – what programs did you put in place in response to the pandemic, what does your 2020 data say about the effectiveness of those efforts, what did you learn, and what might you commit to for the longer term?
- Human capital management – what have you done to retain key people during the pandemic, handle unavoidable pay cuts, furloughs and layoffs in a thoughtful way, position the company and its people to recover from the upheaval, facilitate remote working arrangements and effectively manage and engage a remote workforce?
- Human rights – do you have a published human rights policy, is it relevant and applied across all regions in which you operate, how do you evaluate its effectiveness, how do you deal with non-compliance, and how well are you monitoring your supply chain?
- UN SDGs – if the UN Sustainable Development Goals have not been part of your reporting to date, might now be the time to lend your support to UN goals such as No Poverty, Zero Hunger, Good Health and Well-Being, Quality Education, Gender Equality, Reduced Inequalities, Peace, Justice and Strong Institutions?
- Diversity, equity and inclusion – do you have a policy, what are your goals and metrics, what are you going to do differently, how much change is needed, and how fast will you move?
- Board diversity – many companies have made progress on gender diversity on the Board (with at least two female Directors, for example), but how are you going to address racial and ethnic diversity (which is not nearly as well developed)?
- Environmental justice – with both environmental and social angles, are you ready for this to become a prominent ESG topic? (We rarely see it addressed in current reports, but we think it will receive more attention going forward.)
Many of those stories will need to be told in the next round of ESG reports, and major ESG investors, ratings organizations and standards-setters are already paying attention:
- Influential investor organizations such as Ceres, BlackRock and FCLT (Focusing Capital for the Long Term) Global are doubling down on socially responsible investing, long-termism, and the impact of Social risks on a company’s investment value proposition.
- ISS recently sent a letter to thousands of U.S. public companies asking for information on the race and ethnicity of their Directors and Named Executive Officers.
- As You Sow, a nonprofit organization that promotes environmentally and socially responsible investing, is building a database of companies that have made recent public statements on racial equality and it plans to hold those companies accountable for following through on their commitments.
- Social topics are generally under-represented in the Sustainability Accounting Standards Board’s (SASB) 77 industry-specific standards. We would not be surprised if SASB moves to enhance its guidance on Social topics that are relevant across industries and within sectors.
ESG reports on 2020 performance will need to be quite different from their recent predecessors. Dix & Eaton offers a free report assessment to help you identify the best ways to evolve your reporting strategy, including addressing the increased focus on social topics and data. Contact me for more information.