ESG social actions found lacking in ‘real world’

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Environmental concerns have dominated the conversation when it comes to ESG risks, but the growing focus on the “social” component is prompting a search for ways to better assess corporate performance on issues ranging from diversity to employee mental health to human rights.

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A new report called The State of Social in ESG, based on a survey of North American companies and employees, found that there is a gap between what companies are setting out to do and what can be measured in the real world.

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For example, the report found that close to half the participating organizations have a human rights policy, but only half within that group extend the policy to their supply chain.

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In another instance, while 68 per cent of firms have established a formal diversity, equity and inclusion policy, only 21 per cent are conducting third-party audits on their DEI practices.

There are “gaps in actions that generate tangible outcomes, such as those related to hiring, procurement and supply chain,” said Dustyn Lanz, senior adviser at ESG Global Advisors, which led the survey alongside public relations firm Argyle.

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As with other forms of ESG, there are perceived risks associated with not making changes, or not doing enough.

“Social issues can pose material financial risks, if not proactively identified and managed,” the report warned, adding that businesses “should not wait until risk events occur as the reputational and brand impacts alone can be significant and long lasting.”

A positive finding of the report, which the authors referred to as an inaugural benchmarking study, was that most organizations are either adopting or considering formal oversight of social risks at the board level or through enterprise-wide risk management frameworks.

However, despite organizations taking action — and employees noticing —“real-world impact is lagging,” the report said.

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Public companies that participated in the research represent a combined market capitalization of $3.34 trillion, while the institutional investors and financial institutions represent $2.04 trillion in assets under management and administration.

The study mined employee data through a survey of 1,000 Canadian and 1,000 U.S. employees by Leger in August 2022.

A separate report released last month, titled From Story to Scrutiny, looked at how Canadian companies including Telus Corp., Cenovus Energy and financial services institutions Toronto-Dominion Bank, Bank of Nova Scotia, and Royal Bank of Canada are managing their performance when it comes to social factors, which “are rarely captured or reported on, let alone audited.”

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The Canadian-focused report found companies tend to prioritize social factors that are internal to their organization, but that there is greater impact when investments are made to bolster the wider community.

LGB Canada and SiMPACT Strategy Group, the organizations behind the report, noted that there was an uptick in companies seeking audit services in 2022.

“By approaching social and community investment reporting with the same rigour as financial reporting, companies are offering more credible ESG data and, more importantly, making progress toward their desired social impact,” the report said, adding that this will fill a growing need for “investment-grade” data on environmental, social and governance performance that can withstand the scrutiny of auditors and investors.

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Stephanie Robertson, founder and chief executive of SiMPACT, said she believes companies that submit to such audits will get a leg-up because they will be able to demonstrate progress to their investors and employees.

“People are using terms like the DEI … or employee wellness or social human capital, but we haven’t really come to the table and agreed what we mean by each one of those terms,” she said in an interview. “And until we know we’re talking about the same thing we actually can’t compare it. We can’t compare performance.”

Robertson said some firms are reluctant to itemize spending on social priorities because they want the focus only on outcomes, but both are important.

“One of the things which I think is fundamental is that companies need to be transparent about what they’re prepared to invest in order to achieve these objectives that they say that they have prioritized,” she said.

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