Social criteria in ESG reporting refers to how a company interacts with employees, suppliers, and society at large.
Over the past five years, how a company addresses social criteria has evolved from a sign of good corporate citizenship to a requirement to satisfy growing demands from governments, shareholders, investors, and the public for more transparency.
Companies are encouraged (and in more and more countries are legally required) to report on how they manage supplier relationships and the interests of other stakeholders, charitable giving and working conditions of employees throughout their supply chains, which include fair employment, respect for human rights and the health and safety of employees. In this way, companies, investors, stakeholders and consumers can verify if company’s corporate behaviour is consistent with their values.
Growing pressure from shareholders, investors, regulators, and the public have created demand for more structured, standardised reporting on social issues. For example, investors may wish to know specifics on how rigorously a company audits supplier – are they operating in an ethical manner? What policies has a company implemented to promote a safe and healthy workplace? What has the company done to ensure transparency of its supply chain, implementation of fair labour policies along its tiers or remediation of any non- conformances with globally recognized social and environmental standards? Does the company work to create a more diverse and inclusive workforce? Does it pay fair wages? What is the extent and frequency of a company’s charitable giving? Does the company encourage employees to perform volunteer work?
These are only a few of the questions that could be relevant. Determining the right social criteria to measure and report involves asking your key stakeholders what is important to them.
Business risks
To meet these demands, companies must not only have robust internal and external policies in place, but the tools and systems to measure and track results. Companies that do not prioritise a proactive approach to good corporate citizenship may risk reputational damage. In today’s interconnected world, bad news travels fast, so a company perceived by the market as a “bad actor” will pay a steep price. For example, press reports on unsafe working conditions or relationships with suppliers that use child labour may have a negative impact on company’s reputation but also profits, share value, product quality and employee turnover.
Business opportunities
To manage this risk, a growing number of companies have already implemented internal business processes, to guard against negative outcomes and invested in (and sought publicity for) charitable giving to strengthen their brand equity. At the same time, research suggests that that ‘intangible assets’ represent a growing percentage of future enterprise value, which may help explain why assets under management held by signatories to the to the UN-backed Principles for Responsible Investment (PRI) reached USD 100 trillion in 2020, an increase of 75 per cent on 2015. In short, how a company interacts with its employees, suppliers and society at large has become a key metric in shareholder evaluations.
Managing complexity
While companies tailor their approach to social criteria to fit their business, reporting on social criteria requires that companies consider a broad range of issues. These include compliance with international laws (e.g. UN and International Labour Organization conventions) and local laws (e.g. UK’s Modern Slavery Act or Norway’s equality and anti-discrimination act), voluntary obligations on human rights (e.g. the UN Global Compact’s principals on human rights), industry standards (e.g. the Responsible Business Alliance Code of Conduct), market indices (e.g. the Dow Jones Sustainability Index, etc.), diversity and inclusion targets, training requirements and HSE compliance, among others.
How DNV helps DNV is working with multiple stakeholders to help develop industry standards and processes to manage social criteria reporting. DNV works to address legally binding and voluntary measures, each with their own unique reporting requirements, as defined by international organisations, governments, industry initiatives, NGOs, international standards, and best practices. These services can be divided into three main categories:- Global obligations on human rights, which from a foundation for industry and national standards to shape the behaviour of international corporations overseas and across global supply chains
- Stakeholder obligations, which are a set of reporting mechanisms required by investors or consumers which extend to sourcing,
- Business process obligations, which are based on UN and ILO conventions on human and labour rights, OECD guidance on responsible sourcing, business integrity and ethics, and customized protocols that assess the compliance of suppliers regarding human rights and employee working conditions.
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