ESG industry view – Morrow Sodali
Catherine Douglas is director of ESG at Morrow Sodali, a consultancy
REPORTING SOCIAL IMPACT IS DAUNTING, BUT CANNOT BECOME A ‘HEAD IN THE SAND’ MOMENT
In the grand scheme of things, ESG is still a new area of focus for investors and stakeholders, and social impact, in par- ticular, can be hard to define. This leads to a suspicion of under-reporting and inac- curate disclosures from companies of all sizes. Social and governance issues are also inexplicably linked though challenges such as executive pay and living wage commitments, and boards worldwide are realising they have serious work to do to bring the S in line with the E and the G. As we have seen with environmental reporting demands, disclosure require- ments and frameworks are evolving rap- idly. Companies and investors now know they not only have a mountain to climb, but they must also climb it at speed. Even forward-thinking firms are in danger of falling into familiar traps along the path- way to transparency and compliance. One such pitfall is the production and publica- tion of large amounts of data without a clear narrative, which can lead to confu- sion among investors and stakeholders. This is often a knee-jerk reaction to stake- holder demands. While detailed data can offer real value, it can often confuse and turn stakeholders off when presented in an unorganised way without a clear narrative and roadmap. Equally, firms opting for concise report- ing methods can create different concerns for stakeholders. Short reports without
high level insights and disclosures can be mistaken for a reluctance to engage and share the inner-workings of an organisa- tion. This is especially true in relation to social reporting – a broad field containing issues magnified during Covid-19. As we emerge from the pandemic, con- sumers and investors are more motivated than ever to support companies they believe are committed to a ‘just and green’ transition. Social impact commitments and reporting around topics like working conditions, pay, sick leave and supply chain transparency are under more scru- tiny than ever. There’s no shortcut here – this is a huge challenge. Even defining what falls under social impact is difficult. Social factors affect a business’ employees, customers and suppliers, and are often considered to be less tangible than environmental and governance issues where clear frame- works are in place. This lack of precision contributes to why social impact is often poorly measured, and without measure- ment it’s impossible to implement, track and, most importantly, make improved social impacts. In a 2019 paper, MIT labelled the lack of standardisation in ESG scoring ‘aggre- gate confusion’. In the three years since it was published, the world of environmen- tal reporting has been rightly turned on its head as companies seek to curb their carbon emissions. Social, however, has been left behind. Pro- gress has been slow and a lack of cross-industry consensus on reporting means many companies are unsure of what progress looks like.
These factors have conspired to create a confusing quagmire with no clear path out – companies need to report data quickly but are also under pressure to adhere to a framework which has not been built and are wary of the perils of ‘washing’ – falsely reporting positive pro- gress. Data needs to be robust but con- cise, conveying a strong narrative and reassuring stakeholders that claims and
goals have been built on the strong foun- dations of accurate data. There are positives, however. Thanks in part to industry-wide efforts on environ- mental reporting, investor relations are changing for the better. Now more than ever, companies are willing to engage openly with investors, regulators and stakeholders to define these frameworks. The companies now leading the way are engaging with activist shareholder groups – something which would have seemed surprising just a few years ago. An event hosted by Morrow Sodali saw panellists from the FRC, Rio Tinto, the Church of England Pension Fund and ShareAction discuss how to establish clear reporting requirements for compa- nies. I was struck by the frank and open discussion and collaborative approach. Efforts to improve environmental report- ing has shown what can be achieved through cohesive action in short periods of time, and it’s heartening to see this spirit being applied to social reporting, too.
As the net tightens around how social impact is measured and assessed, some companies may fear the additional scrutiny and avoid putting real thought into how they report their efforts in the field. That would be a mistake. Forward- thinking companies are using this moment to play an outsized role in how their sector defines the social in ESG. Pol- icy red lines are being drawn by regula- tors now, and any new legislation will only increase the importance of actiona- ble social data. What’s more, a better understanding of this data will help com- panies make better strategic decisions.
Issue 115 | July–August 2022 | portfolio institutional | 27
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