Environmental, Social, Governance. Why is the S in ESG so hard?
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As businesses increasingly prioritise sustainability and shape their strategy around an ESG framework, its common to see an imbalance between their various commitments and initiatives. Environmental and governance issues are at the fore, but when it comes to the S or the ‘social’ pillar, maturity often lags. But why is the S in ESG so hard?
The S in ESG – Environment vs Social Aspects
Reaching a high level of social performance and human rights standards can be more complex and intangible for an organisation than say, achieving net zero greenhouse gas emissions. Under the ‘E’ or environment pillar greenhouse gas (GHG) emissions can be quantified, baselines set, reduction methods implemented, and the remainder offset. Using science-based targets, we can calculate each country, industry, and organisation’s carbon budget to keep the world from heating beyond recoverable levels.
But for human rights, the acceptable threshold is zero violations. No organisation is allocated an acceptable budget of human rights abuses. No country can systematically enslave a people group and say it is within their science-based threshold. To add to the challenge, there is no “unit of human right” to quantify the issue. And even if there was, human rights abuses by their nature tend to be hidden.
Yet people are denied their most basic rights every day in every country, and many companies are linked to this reality either directly or through their supply chain. For Australian companies, a common link to human rights abuses is the issue of modern slavery. There are an estimated 12,000 people trapped in slavery in Australia, and the country’s supply chains are exposed to imported risk. Nearly 60% of what Australia purchases from abroad comes from Asia, and Asia is where 60% of the world’s estimated 40 million slaves are trapped. Moreover, four of the top 15 countries Australia buys from are also among the 15 countries most exposed to slavery by prevalence. Supply chains reaching China should be of particular concern for Australian business, especially those involving the Xinjiang Uygur Autonomous Region (XUAR) and/or products including cotton, tomatoes, and solar panels.
Given the scale and complexity of the human aspects to sustainability in Australia and abroad, it should not be surprising that many organisations stumble when they get to the S in their ESG strategy and reporting. Beyond counter-modern slavery, many organisations are also unsure how to approach indigenous rights, freedom of association, harassment, grievance and remediation, health and safety, wages and working hours, equality, diversity and inclusion, and other key social issues.
However, we are starting to see this gap close and social sustainability become more sophisticated.
Sustainability Reporting Increasingly Sophisticated on Human Rights
One of the clearest measures for organisational maturity in handling the S in ESG is the sustainability report, which serves as a window into the issues an organisation considers most material. Traditionally, sustainability reports focus on the environment and governance, while only touching on a few social issues such as health, safety, and diversity. These topics are important, but they are only a subset of the broader human rights issues most organisations should consider material.
A key reason for this human rights “blind-spot” in sustainability reporting is that leading frameworks used for sustainability reporting have under-prioritised social issues, including the world’s two most used sustainability reporting frameworks, the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). Both have acknowledged this shortcoming and are overhauling their treatment of human rights to better align with authoritative intergovernmental instruments, namely the UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidance for Responsible Business Conduct.
In October 2021, GRI completed a nearly four-year revision to its Universal Standard to bring it up to speed on human rights. Using the new standard for sustainability reporting is optional now, but will become mandatory on 1 January 2023 for organisations reporting in accordance with GRI. Moreover, GRI is also updating and expanding their human rights-related Topic Standards.Similarly, SASB looks set to follow suit after initiating a research project and hosting in-depth stakeholder consultations. Their aim is to design changes which will address human rights issues such as collective bargaining, forced labour, mental wellbeing, workplace culture, and diversity and inclusion.
GRI and SASB’s added prioritisation on human rights will have significant impact on how organisations conceptualise and report upon the S in ESG. KPMG’s Survey of Sustainability Reporting 2020 found that 80% of the world’s largest 5,200 companies are now reporting on their sustainability performance (up from 18% in 2002), and 83% of those use GRI’s Universal Standard to do so, meaning that many of the world’s biggest companies will soon need to be more sophisticated with their human rights disclosures.[3]
And to be clear, GRI’s 2021 re-focusing on human rights has been significant. The three updated GRI standard documents reference “human rights” 102 times more than the older 2016 versions, a 536% increase. The most changed is the General Disclosures standard that defines what information should be reported on: “human rights” is referenced 63 times throughout the updated version, up from four in 2016. In reference to these changes, GRI said that “human rights [is now] a broad subject area, like the environment” and will “require all organisations to report basic information on how they meet their responsibility to respect human rights.”
Next Steps for ESG Reporting
Regulations and stakeholder expectations around human rights are intensifying, and leading sustainability reporting frameworks are catching up to global best practice around these issues. As a result, many organisations are moving to better balance their ESG strategies to include robust treatment of human rights equal to environment and governance. Because social indicators can be harder to quantify, this can be a challenging initiative for many organisations, but those who work to get this right early will reduce risk and attain more opportunities.
This is the first in a two-part publication on this topic. In the second instalment, we will go into detail about how organisations can begin strengthening their ESG strategy’s ‘S’ elements. We will advise on properly conducting materiality assessments that factor in social sustainability, setting better social indicators and targets, and linking these issues in with corporate strategy and regulatory obligations.
[1] Current GRI human rights related topic standards include those on child labor (408), forced or compulsory labor (409), non-discrimination (406), freedom of association and collective bargaining (407), the rights of indigenous peoples (411), and security practices (410).
[2] GRI is an independent entity of the Global Sustainability Standards Board (GSSB) which develops the GRI standards using a formally defined due process.
[3] (67% of N100 = 3484) / (80% of N100 = 4160)