Commentary

Crystallising Social Value: The Next Frontier of ESG Reporting 

Social impact tailored by company and sector can create real competitive advantage, says Catherine Douglas, Director of ESG Consulting at Morrow Sodali, creating opportunities increasingly on the radar of active investors.

Social risk, as an ESG factor, was arguably less well understood than climate risk or governance before the Covid-19 pandemic when workforce mental health, staff retention and productivity issues moved mainstream. The current energy and inflation crisis is sharpening the focus on the risks presented to employers by the rise in the cost of living. This is spiking fair and living wage issues, which in the case of Amazon recently turned into a walkout by staff in multiple markets in protests against working conditions and unfair pay.

Although these risks are now better understood, sitting in the middle of the ESG acronym, the letter S is still too easily overlooked. A KPMG report finds that less than 50% of the world’s largest 5,000 firms report on social issues. This lack of reporting can have far-reaching consequences, for opportunity as well as for risk.

Regulation and the growth of mandatary reporting will play its part in increasing the focus on social issues, particularly since the on-off rollout of the EU Social Taxonomy finally happened in November. The European Parliament’s Corporate Sustainability Reporting Directive requires companies to report on wider societal impact, including human rights issues.

Auditing supply chains for social risk as part of an ESG strategy means looking for possible human rights abuses, exploitation and even modern slavery. But rather than only presenting a downside, investors are seeing progressive purpose-led companies turning a potential risk into an opportunity to tackle an issue head-on, attracting consumers looking to buy ethically.

Leading with purpose

Challenger brands like Tony’s Chocolonely are leading with purpose, taking every opportunity to share its mission ‘to make all chocolate 100% slave-free’. The keyword here is ‘all’ as it seeks to have an impact beyond its own brand on the wider industry. The company focuses its efforts on the key cocoa producing countries of Ghana and Cote d’Ivoire where children are sometimes forced to help grow and harvest cocoa. Although this is an issue that all the major chocolate companies and producers have grappled with, Tony’s has made its efforts central to its positioning in the market and has been successful, despite premium pricing relative to direct competitors. 

The company has seen revenue grow 100-fold in 10 years, topping £100 million, success that it links with its ability to stand apart from other brands by putting its social mission front and centre in a highly competitive market.

French food producer Danone has also set its sights on improving its ESG metrics, following active engagement from 26 of its investors. Working with the Global Access to Nutrition Index, which evaluates food and beverage manufacturers’ policies against the world’s most pressing nutrition challenges of obesity and undernutrition, the investors called for change.

They met with Danone to discuss linking the inclusion of ESG metrics related to health and nutrition to the CEO’s pay and the implementation of salt targets in its products. They also discussed the labelling of products and the reduction of marketing to children. The challenges that Danone is facing in this area underline the need for sector-specific social impact thinking and advice: the potential for a food company to use its expertise to benefit wider society is very different from that of a construction company, for example.

On the flip side of retailing, Christmas TV advertising in the UK is always a highly-anticipated media talking point that creates additional amplification for leading supermarket brands.  It is significant perhaps that this year, amid the cost-of-living crisis, one of those big names, Marks and Spencer, has chosen to focus its story telling on the support it provides to local communities with the theme ‘Treat People with Kindness’. Is this a sign that social value is moving mainstream as a strategic imperative or just a sign that M&S is adept at reading the current national mood?

Either way, by recording and reporting social impact data robustly to back up advertising claims, organisations can confidently promote narratives about their social value without fear of ‘social washing’. The benefit is in building stakeholder trust; amongst employees and their wider communities as well as with customers.

French supermarket group Carrefour is another retailer that has faced investor scrutiny in the last 12 months, particularly around gender diversity. At the end of 2020, only 18% of its executive committee were women, yet 58% of its employees were female. Carrefour developed and implemented action plans to address this with the help of one of its active asset management investors. Gender equality is now taken into consideration when it comes to executive compensation and the company has conducted gender equality audits in key business areas. By 2025, it plans to have women in 40% of its key positions and 35% in the top 200 management positions.

Improving social metrics

In its 2022 Trends in ESG Reporting research, KPMG notes that “in general, the description of these [ESG] risks are overwhelmingly narrative-driven and do not quantify the financial impact of these risks on companies or on society”. While there is nothing wrong with social impact story-telling, initiatives like the example highlighted in M&S’ Christmas community advert need quantifiable underlying metrics to help investors see the value being accrued to the business.

Measuring the impact of social policies and purpose led activity is not a one-time, tick box exercise. Viewed only through the risk lens, the tendency is to favour compliance as the framework for reporting which makes the data one dimensional.

The now ubiquitous employee satisfaction survey is a case in point. Carried out annually by many companies, the questions that inform the data points can often be skewed by recency of events and associated sentiment, masking underlying issues.

ED&I considerations such as inclusivity of culture that help retain staff and unlock innovation can be hard to quantify in comparison with simple metrics on workforce diversity which don’t give a complete picture.

The challenge for all sectors starts with benchmarking their current level of activity against competitors and developing metrics that are relevant to the business and able to show improvement over time through careful design and consistency of collection.

Some sectors have had more experience than others. Construction stands out when dealing with public sector contracts. The social investment that is very often a pre-requisite of any contract award or planning condition means that companies have had to develop ways of not only reporting on their social value performance over time, but also being able to put a monetary value against it. Mining is another sector that has a lot of hard-won experience to share, much of it from investing in local communities in order to earn a social licence to operate.

In conclusion, we see the social agenda levelling up with environmental issues as the understanding of its potential to be a strategic differentiator gains traction with leaders and investors alike. Crystallising its contribution to competitiveness could well be the new frontier in ESG social impact reporting.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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