What Kind Of 'S' Disclosures Should Companies Expect?
At the current stage of global ESG acceptance and implementation, meaningful change will necessarily come from increased regulatory change. Regulations from government bodies increase overall acceptance as new procedures and reporting weave into business awareness as regular workplace responsibilities. But with climate change being the most pressing issue right now, it’s likely that a lot of countries, as far as reporting their ESG metrics is concerned, will tend to focus on the 'E', companies' environmental impacts and responsibilities.
While mandatory reporting is a necessary step, the possible bias towards environmental reporting misses the overall mark of what ESG truly represents. Yes, initiatives to reduce waste and clean up supply chains will improve productivity through better resource use. However, the environment and the topics surrounding it only cover a third of what this entire movement is all about, and shouldn't be treated as siloed solutions.
Just as it’s important to look at environmental reporting, it’s wise for companies to be looking at the social pillar of ESG as well. In the past few years this has only gotten more attention from the public due to the COVID-19 pandemic, where many social safety nets and systems were severely strained. The challenges of maintaining effective organization have been key for business leaders too, to create remote communications access and meaningful change in terms of functioning, distributed leadership.
However, fundamentally creating social change requires employee well being. If we do not have robust employee engagement then we cannot realistically encourage employees to develop a sense of true participation and personal investment in organizations' growth.
Because of this interest from all parties, businesses should expect the following with regard to 'S' disclosures.
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Social In ESG - Many Topics
Broadly speaking, businesses should anticipate social issues covering a wide spectrum. This is a stark comparison to previous years' views of social matters, which were often considered niche issues. But as ESG is growing in popularity, the rise of other issues along with it is attracting the interest of many groups.
Ultimately, it’s led companies, investors, regulators, and stakeholders to realise that company performance in dealing with social matters is, in turn, connected to a company's overall operational performance. This includes their reputation and, at the bottom line, their financial performance.
This does make a lot of sense when you think about it. In extreme cases, we know that the stock prices of companies and their valuations drop when a company is caught committing fraudulent activity. But now, investors are considering other factors well beyond whether a company is fraudulent or not.
Some of the obvious topics under the social pillar are:
Employee well being
Companies are expected now to have specific stances on these things and have goals working towards them. However, the reach of social matters extends beyond these topics. For example, a company’s own cybersecurity is another consideration. Depending on the data that’s being handled, data privacy can play a big part.
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Measurements Will Be Tricky And Will Take Time
Unlike environmental disclosures, social measurements might take longer, primarily because these issues are qualitative. Yes, companies can provide percentages of women (or people of colour) on their boards of directors or in leadership positions, but we don’t exactly have a metric for what’s considered good enough or strong in those situations. These are largely subjective definitions that can see diverse variations in different organizations, so are often defined by the goals and dynamics in each workplace.
What this means is that while there needs to be a standardized process for all of this so people can quantify the numbers and compare them appropriately, it's still a challenge to do so. Without some formal standard, the reporting we are getting from companies right now on social issues doesn’t really hit as hard as, say, the quantitative environmental impacts.
The International Sustainability Standards Board (ISSB) announced in February 2023 that it had made a final decision on two standards. Between now and September 1st, 2023, the ISSB is looking for feedback on its priorities for its next two-year work plan. What this means is that, in terms of solid measurements of reporting, we won’t have official reporting for a few more years.
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But even with that long wait time, it’s still important to consider delving into these social issues today. What ESG brings to the table is a new form of competitiveness among corporations. Yes, we’re all working towards the same goals and have to work together. But business has always thrived with a little bit of competition along the way. A friendly rivalry, as it were.
The lynchpin of this 'rivalry' is the ability to attract and retain top talent. Workforce diversity creates measurable growth, and in recent years managers have finally begun to engage and address the issue via a growing body of research around how examples of diversity, inclusion and education are key benefits for future growth.
ESG allows companies to be more distinct, even when they’re in the same industry. The reason is that the various issues revolving around these three pillars can offer a higher level of distinction. As long as each company is working towards the issues they care most about and is genuine in solving these issues, these can serve as differentiating factors in the eyes of investors and stakeholders.
With that in mind, some things to keep in mind with social pillars are:
Again, make sure you have processes in place that allow you to identify and prioritise the social issues the company cares about. Even with no standard disclosure, clarity on this issue and showing your work can make a big difference. Don’t be afraid to disclose stakeholder interviews, the tools used to measure them, and peer reviews revolving around these issues.
Always be looking for improvements. Begin with the quick wins and then start scaling up from there. Also adopting best practices would be ideal as other companies are likely to work on the same kind of issues. Take note and actually implement what works.
As a general rule, align your reporting with ESG reporting frameworks. It works as a good foundation but you can begin to expand on it by considering if other frameworks enhance the social issues the company prioritises.
Right now, environmental regulation is ramping up and getting the most focus, but that doesn’t mean social issues don’t matter as much. A company that is able to balance both of these would be further ahead than those that decide to get into the disclosures later.
To get started, one of the best places would be to use established voluntary frameworks for developing your own disclosure process. Education is also key, and it's worth looking at ESG courses to see where you can effectively upskill either management or the workforce to be better positioned with knowledge and solutions to tackle future social challenges. Social issues are inherently people-focused, so employee engagement initiatives at all levels as early as possible are critical.
By no means will it be perfect at the start. It takes time to develop processes and systems that ultimately churn out reliable and high-quality disclosures. But the sooner that gets started, the easier it’ll be and the more advantageous the company will be when the 'real thing' is better regulated and implemented.
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