Defining The 'S' In ESG And Navigating Disclosures
Jul 6, 2022 by Eric D. Reicin, President & CEO, BBB National Programs
Last year, I wrote about the need for a widespread commitment to accountability in the business community for ESG (environmental, social, and governance) best practices, not just to investors, but also to consumers.
In 2022, demand continues to grow among consumers for companies to demonstrate measurable ESG best practices. According to a recent PWC survey, 83% of consumers think companies should be actively shaping ESG best practices, and 91% of business leaders feel their company has a responsibility to act on these issues.
Though the demand is clear, ESG performance reporting—to investors and consumers—remains confusing and inconsistent. According to a recent survey by GaiaLens, investors signaled that ESG indices that do exist are not focused on the areas of ESG that investors are most interested in, and that “nearly one in five [investors] made it clear that a more evenly balanced indexing of all ESG factors was needed; declaring 'there is a lack of variety, i.e., too many focus just on climate change' today.”
For businesses looking to get ESG right, what standards and principles should they look to? How can businesses make sense of the somewhat murky standards for the “social” or “S” portion of ESG?
- Global Reporting Initiative (GRI): The comprehensive and widely used GRI standards help businesses quantify and report on their impacts on the economy, environment, and society. Companies do not have to report on all topics covered; a more popular option is to identify topics that may substantially impact how stakeholders assess and make decisions about the business. Many multinational companies, such as Hilton, incorporate this reporting standard into their ESG strategy and reporting.
- Sustainability Accounting Standards Board (SASB): SASB publishes standards for 77 industries. Blackrock recommends that corporations look to frameworks such as those identified by SASB in disclosures as part of their responsible business practices.
- World Economic Forum International Business Council Stakeholder Capitalism Metrics and Disclosures: These are largely drawn from existing standards, such as the GRI and SASB, among others.
- In addition, several investors have developed scorecards/rankings on diversity, pay, and other employment-related standards such as Arjuna Capital’s racial and gender pay scorecard.
For some, a logical inference to draw on the “S” in ESG is an emphasis on diversity and compensation matters. In 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to Regulation S-K that began requiring public companies to reveal more information on their “human capital resources,” however, this amendment to the rule has been criticized, even among SEC Commissioners, for its omission of diversity.
The SEC recently proposed rules on climate-related disclosures (the "E" in ESG), and I expect new proposed rules around human capital disclosures later in 2022 or early 2023. SEC Chair Gary Gensler said, "Investors have said that they want to better understand one of the most critical assets of a company: its people. To that end, I’ve asked staff to propose recommendations for the Commission’s consideration on human capital disclosure," adding that this could include metrics like "workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety."
Challenges With The Current Landscape
So, for businesses interested in making robust ESG disclosures, not only can the sheer number of frameworks and standards make ESG performance reporting seem overwhelming, the frameworks themselves can be a bit fuzzy on how they define and measure the "S" of ESG. PWC found that a lack of reporting standards and the complexity of regulations is one of the top barriers to ESG progress, with 37% of business leaders citing this.
Navigating The 'S' In ESG Disclosures
We know that ESG disclosures matter to all stakeholders: companies, investors, consumers, employees, and regulators. We also know that the SEC is active in ESG disclosure issues, though we do not yet know what expected enhanced human capital SEC disclosures might look like.
Before regulation around ESG performance reporting is finalized, companies would be wise to get their ESG house in order.
Be proactive: Position yourself for success by assessing any ESG reporting you are doing, and identify what standards you are using to demonstrate success. If you are just beginning to think about the "S" in ESG disclosures or improving them, consider whether you should begin with voluntary disclosures of certain demographics, similar to more than half the Russell 1000.
Be consistent across all messaging: Even if you have formal channels for ESG disclosures, be careful about other disclosures made by the organization through different channels (e.g., through DEI, recruiting, brochures, talent management, best places to work surveys, EEO-1, etc.).
Consider starting a U.S.-focused conversation: In addition to the complexity of the current landscape, many of the current standards and frameworks are internationally focused. Discuss with other U.S. companies in your industry the gaps, opportunities, and challenges you face in ESG reporting.
Focus on continual improvement: If you are leading an organization that has a robust ESG program, consider how to continually improve ESG disclosures as the data and rating providers and standards are evolving. Consider all stakeholders, not just the investors.
It has always been my experience in business that where some companies see only problems, others are able to seize opportunities. Now, before the SEC finalizes new rules around ESG disclosures, there is an opportunity for industry to lead the way. You can help map out the principles and standards businesses are currently using, identify where those seem confusing in scope, and collaborate with industry peers on a more robust solution. In doing so, you can begin to fulfill the principles and standards of ESG and, in the process, start to help shape a better definition of the “S” in ESG.
Originally published in Forbes.