Some of the most prosperous companies in the world recognized a long time ago that embracing environmental, social, and/ governance (ESG) business principles are fundamental to their long-term success, surpassing industry peers lower on the maturity curve. It is the ESG reporting and disclosure part of it, however, that has many companies befuddled.
At its core, the “social” in ESG is simply about doing right by doing good. Corporate social responsibility (CSR) is at the very foundation of ESG, which is to say each organization – as its own collective culture – has a right and, indeed, an obligation to determine for itself what it means to be an ethical and socially responsible corporate citizen.
Addressing the social in ESG is where chief ethics and compliance officers, in particular, can play a leading role by engaging directly with employees, customers, consumers, and the communities in which the business operates. Questionnaires, town halls, and philanthropic events are all ways to listen to their ideas, thoughts, concerns, and the issues they value most as a way to gain strategic direction for the business – such as how to improve employee retention and productivity and/or repair any underlying reputational damage that may have been caused by past misconduct, for example. Let them be that moral compass for the business.
Social responsibility is inextricably linked with good corporate governance, because it requires buy-in and commitment from the C-suite. As BlackRock CEO Larry Fink stated in his 2022 letter to CEOs, “Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.”
When CEOs don’t care about their stakeholders – when outreach is done to appease certain parties – people see right through that, which only breeds distrust and, ultimately, damage to the brand and the bottom line. Fundamentally, at both the individual and organizational level, showing dignity and respect toward others only requires effort if it is coming from a place of insincerity.
CSR vs. ESG
CSR and ESG are not one in the same. ESG is often discussed in the context of social investing and essentially seeks to put quantitative metrics around the qualitative aspects of CSR.
What makes social investing an inherently controversial topic is the historical lack of proof that ESG business practices necessarily drive profit and competitive advantage. Many investors and senior executives still approach ESG with this mentality of, “I’ll believe it when I see it.” ESG metrics are the proof they seek.
The double-edged sword there, however, is that ESG metrics must follow, not precede, belief in social responsibility. There cannot be metrics without action, and there cannot be action without acknowledgement that doing right by doing good will add value and bring about competitive advantage.
One source of inspiration is Fortune’s “Change the World” list, which annually spotlights companies around the world whose profit-making, innovative business strategies are making a positive social and environmental impact. Just 18 out of the 54 total companies on this year’s list have less than $1 billion revenue, according to Fortune.
Choosing a reporting framework
Historically, getting investor and senior executive buy-in has been exacerbated by a lack of comparable reporting on ESG metrics on a global scale. As ESG business practices and principles become more commonplace, reporting frameworks are becoming more aligned as well. In the future, improved consistency in ESG reporting frameworks may help silence the argument that social investments divert from, rather than contribute to, profit-making.
The United Nation’s Guiding Principles on Business and Human Rights, for example, establish at a high level the foundational and operational principles for protecting human rights and how to prevent or remedy adverse impacts that are “directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts,” the Guiding Principles state. At the operational level, the Guiding Principles describe what policies and due diligence processes businesses should have in place “appropriate to their size and circumstances.”
Other reporting frameworks build upon the Guiding Principles at a sector-specific level. One of those frameworks is the widely adopted Global Reporting Initiative (GRI), which in October 2021 announced the most significant changes to its Universal Standards since its first iteration in 2016, which just took effect for reporting from January 1, 2023.
“Built around the concepts of impact, material topics, due diligence and stakeholder engagement, these updates make it clear how companies can provide transparency and accountability in what they report,” said Judy Kuszewski, chair of GRI’s independent Global Sustainability Standard’s Board, in announcing the new standards. In addition to the newly added sector standards for oil and gas, other industries covered include coal, mining, agriculture, aquaculture, and fishing.
The World Benchmarking Alliance’s (WBA) Corporate Human Rights Benchmark (CHRB) also revised its methodology in 2021 to focus more acutely on the “actual performance of companies” and further integrates “the types of stakeholder engagement undertaken at the various stages of a business’s operations,” according to the WBA.
According to the WBA, the CHRB provides a “comparative snapshot” of 127 of the world’s largest companies, assessing their policies, processes and practices “to systematize their human rights approach and how they respond to serious allegations.” The five sectors assessed are apparel, automotive manufacturing, extractives, food and agricultural products, and ICT manufacturing.
Another third popular framework, the Sustainability Accounting Standards Board (SASB) standards, identify the top material ESG issues in each of the 77 industry sectors it covers – albeit, not as comprehensively as the GRI and CHRB frameworks.
Sharing the organization’s ESG journey through storytelling is an effective way to connect with stakeholders. That involves getting better at ESG reporting and disclosing relevant material metrics. To achieve that, consider the following measures:
Work with what you have. With so many reporting frameworks, it may seem daunting to decide which to follow. Some companies prefer to incorporate multiple reporting frameworks into their disclosures to present a more holistic ESG picture, while others prefer to stick with just one. If your business falls under the latter category, choose a reporting framework that, ideally, overlaps with the policies, procedures, and data tracking technologies that are already part of the fabric of the organization. This will help make the road to implementation less daunting and an easier ask of all internal stakeholders.
Collaborate across functions and departments. Whichever reporting framework the company chooses to follow, cross-functional collaboration – for example, between compliance, risk, legal, finance, supply chain, health and safety, and communications – will help to make ESG reporting a more seamless process. Which key stakeholders to involve may vary by company and sector.
Be truthful, transparent, and accountable. For some companies, following a reporting framework may serve as a wake-up call to the business that it is not doing enough, or that it is doing poorly, in certain areas. Let the framework be the business’s source of truth on where its social investing efforts need improvement.
Speak the same ESG language. Many of the reporting frameworks include very technical and specific definitions around various key metrics and topics as they apply to each sector. Whatever reporting framework the company chooses to use, it’s prudent to rely upon the language in that framework to ensure all internal stakeholders are not only speaking the same ESG language, but also have a unified vision of the strategic direction in which the business wants to move.
Start small. It is not realistic to expect that the business will have all the ESG metrics that it needs at the start, or even in the middle, of your ESG reporting journey. Some may not have any metrics at all. Those just beginning their ESG reporting journey may find inspiration from the disclosures of industry peers as a starting point. Even if you begin the ESG reporting process with reporting just a couple of key metrics, it’s important to just start somewhere. Practice makes progress.
For more information on how to start or mature your organization’s ESG journey