With Covid-19 continuing to scar economies, businesses must accelerate performance on the ‘S’ in ESG

Could the ‘S’ in ESG mean increasing social impacts performance, stewardship, or stakeholder engagement? Under the GRI’s Revised Universal Standards 2021, it means a focus on human rights.

By Ping Manongdo

The ‘S’ in ESG suffers a syndrome akin to the middle child predicament.

Unlike its siblings ‘E’ and ‘G’, ‘S’ is more difficult to define, analyse, and embed in investment strategies, according to a 2019 report by BNP Paribas, a bank. The lack of a consensus on what constitutes S, the qualitative nature of its metrics, and scanty social reporting from companies add to this difficulty.

COVID-19, however, has quickly given the “S” in ESG substantial visibility. In Asean, for example, where the pandemic is causing economic scarring—a situation where prolonged economic recession is threatening long-lasting damage to individuals’ economic situation, and the economy more broadly—national governments and corporate leaders are called upon to put “S” front-of-mind in investment and policymaking decisions.

The pandemic pushed 4.7 million more people into deeper poverty in the region in 2021as 9.3 million jobs disappeared. The Omicron wave could cut Southeast Asian countries’ economic growth by as much as 0.8 per cent this year, reported the Asian Development Bank (ADB).

Can the situation still be reversed? With a healthy population — plus various mechanisms to reinvigorate the economy— ADB says yes. The saying health is wealth is no longer cliché – investing in healthcare delivery is at the crux of long-term pandemic recovery. ADB’s senior economist James Villafuerte said at the symposium that launched the report, “Growth in the region in 2022 could increase to 1.5 percentage points higher if money—about 5 per cent of gross domestic product (GDP)—is invested in healthcare systems.”

This, Villafuerte said, is how Singapore is continuing to be least affected by the pandemic compared to its Asean neighbours. The country was quick to adopt policies that enabled businesses to continue and kept most of its workforce in their current jobs. The country also already had a strong healthcare infrastructure in place pre-pandemic and implements among the strictest contact tracing protocols.

Rethinking the ‘S’ in ESG

Delivering healthcare is just one aspect of the ‘S’ in ESG.

Responding to the challenge of measuring and reporting corporate performance on social impacts, standards body Global Report Initiative (GRI) has included reporting human rights due diligence in its Revised Universal Standards 2021, which represent the most significant update since the body first set its standards in 2016.

GRI Chief of Standards Bastian Buck explained that respecting human rights in the conduct of business was first articulated in 2010 under the UN Guiding Principles for Business and Human Rights, and later adopted by the Organisation for Economic Cooperation and Development (OECD), although the application has been broad-based.

But are companies, especially multinationals with complex supply chains riddled with human rights abuses, ready to disclose such realities to the public? Buck admits this could be pushing companies outside their comfort zones.

“Of course, for very many companies, multinationals, and national companies, it is somewhat of a stretch to be in the public domain and to be discussing human rights-related issues, and so GRI is certainly raising the bar, but not doing this in a way that is going beyond what is actually part of the intergovernmental instruments,” Buck told Eco-Business.

He said GRI is leveling with stakeholder expectations for corporate disclosure on human rights performance and has provided a reporting infrastructure for companies to use.

A 2020 KPMG survey identified that up to 73% of the world’s largest 250 companies, and 67% of 5200 companies comprising the largest 100 firms in 52 countries, use the GRI standards. Now that human rights reporting has been included, could this mean an increase in human rights performance among businesses as well?

“What we hope that happens is that more companies are confronted with these expectations. The litmus test of whether GRI succeeds is if this leads to more comparable and consistent information being available in the public domain. We do hope that by building the human rights requirements into the core of the GRI Standards, that we see more of this information being disclosed when the Revised Universal Standards become effective for next year,” Buck said.

But is there an economic motive for businesses in telling the public how they uphold human rights in their supply chains and operations—or fail to do so? Or is this is going to be like washing dirty linen in public?

Ratings company Sustainalytics said that action on the ‘S’ in ESG is one of the key ESG trends this year, keeping pace with climate change and biodiversity conservation.

As the pandemic and social justice movement have shone a light on the interrelatedness of these three unrelated topics and increasingly, society is demanding from businesses to take action to avert the risks associated with climate change, biodiversity loss, and the failure to make meaningful social change happen.

“With continued biodiversity loss, the risk for future pandemics increases, and our societal inequities highlighted by the pandemic cannot be eliminated or reduced without considerable intervention. One of the ways to get this process started is by engaging with companies and voting,” Sustainalytics’s Ruthan Bartello said in an article.

For GRI, transparency in the conduct of business needs to happen regardless of whether there is an economic motive for a company or not.

“The practice of reporting on the impacts of business activity to human rights should be commonplace and should be on equal footing with financial reporting, where also financial reporting has an underlying driver of access to capital”, said Buck.

“You have to think about the economic motive from access to capital and also future-proofing access to capital perspective. But you could of course also say that we are hopefully finally entering a day and age where you cannot, in the medium to long term, scale a business model that exploits people, that infringes on their rights.”

For ASEAN developing economies, reporting on human rights could well establish a strong link to global supply chains, a key strategy for pandemic recovery efforts.

For instance, GRI 2 under the revised Universal Standards questions whether companies allow workers throughout their entire value chain to organise and be part of collective bargaining agreements.

The world’s biggest investors are also keeping their eyes out on how businesses they fund perform in this aspect. The Norwegian Pension Fund, the second-largest pension fund globally, has publicly announced that it expects companies to comply with the UN Guiding Principles.

“And to do that, you have to use the GRI Standards. There is no other framework that is doing that job for you,” Buck said.

“Countries and companies on a national level can differentiate themselves by offering an environment in which international norms they adhere to. That’s our strong belief and that directionally, we will move there, although there is, of course, a lot of pressure on costs and with all the intended and unintended consequences that really nobody would like to see or accept for far too long, but this will change with increasing pressure,” Buck said