CFOs: How you can address the “S” in “ESG” (WBCSD and Shift)

Our key takeaway: CFOs, if you haven’t been paying attention to the social impacts and risks of your business on people, now is the time to start! CFOs have a natural role to play in integrating human rights considerations into their role as monitors and managers of risk across the company. This information can feed into better internal decision-making and overall risk management. CFOs have a role to play in both helping to embed standards, policies and processes to address social issues, as well as measuring the effectiveness and robustness of outcomes. While many current reporting standards aren’t yet strong enough to assess these topics, CFOs can prepare for stronger standards and oncoming regulations by: (1) focusing on the actions and culture set by senior leaders and the board to embed commitments into practice; (2) improve the quality of risk identification and assessment, where there are gaps; (3) assess the extent to which identified risks and corresponding actions are actually driving real behaviour change; (4) setting robust and credible targets and KPIs, both quantitative and qualitative; (5) focusing on on inequality-related metrics when evaluating outcomes in the workplace; and (6) seeking to integrate perspectives of workers and other affected stakeholders into risk monitoring and measurement.

The World Business Council for Sustainable Development (WBCSD) and Shift published Advancing the “S” in ESG: A Primer for CFOs (March 2023):

• Why do CFOs need to play a role in the “S” of “ESG”?: WBCSD and Shift developed this report as a primer to help CFOs understand their role in addressing social issues linked to their business—including human rights risks and impacts. As reporting standards and disclosure regulations increase, there is less doubt than ever that CFOs play a crucial role. The report points out some key areas where CFOs and their teams are likely to be called on in the near future: they will need to understand the links between a company’s impacts on people throughout its full value chain and how this interrelates with financial performance. They may also become responsible within their companies for ensuring that “that ESG considerations are meaningfully integrated into enterprise risk management, statutory compliance, reporting requirements and the CFO’s own strategic guidance to the CEO and board.” When engaging with investors, regulators and standards setters, they will also need to “guide how ’S’ performance and progress is evaluated internally and by external stakeholders. In addition, CFOs play a fundamental role in catalysing “the integration of the company’s financial and non-financial data, analysis, decision-making and reporting in ways that meet international and regional standards, including those related to social disclosures such as the European Sustainability Reporting Standards.”
  

• Six focus areas for evaluating social performance: The report offers guidance on the types of indicators and metrics that can be tracked to improve a company’s social performance and address potential adverse impacts on people. This information “enables better internal decision-making while also providing robust insight into company performance to investors and other key stakeholders.” One category of focus areas is evaluating the company’s “S” conduct. The report indicates that a challenge for companies is the overreliance on “indicators that offer little insight into how a company is actually performing,” reducing insight and potentially missing concerns. To address this CFOs should “[f]ocus on board and senior leaders’ actions to embed commitments into practice and corporate culture” by demonstrating how these commitments are integrated in the company. CFOs should also “[c]onsider the quality of risk identification and assessment,” for example by conducting robust human rights due diligence and engaging with affected stakeholders. CFOs should also “[a]ssess whether actions are driving sustained behavior change,” for instance by ensuring that internal audit teams are equipped to understand and evaluate risks to people, by investing in collaborative, system-wide action with peers to address systemic human rights issues, and whether the company has adapted its practices over time in response to risk assessment findings. On the other end, CFOs also need to be able to evaluate the company’s “S” outcomes. This can be challenging because there is a lack of “standardized methods to meaningfully measure and compare companies’ contributions to improved outcomes for people across diverse contexts.” CFOs should “[s]et targets and KPIs that meet robust and credible design criteria,” focusing on outcomes for people. They should focus on KPIs that prioritise the most severe risks to people, and identifying sophisticated metrics that are "either a direct measure of outcomes for people or a measure of progress in addressing root causes of risk to people (e.g., targets that reflect the achievement of rights-respecting purchasing practices, the exclusion of exploitative labor recruitment agencies, or improved laws protecting indigenous peoples’ rights).” CFOs should also “[f]ocus on inequality-related metrics when evaluating outcomes in the workplace,” for example gender balance, CEO to median worker pay ratios, gender pay gaps, living wage levels and how many workers are covered by a collective bargaining agreement. Finally, CFOs can “[u]se sentiment or ‘voice’ data to gain insight into stakeholders’ experiences.” The report offers two examples: Nike has worked with suppliers to deploy worker well-being surveys in 64 factories across 13 countries; and Gold Fields has created indicators to measure trust, support and compatibility of interests to assess the quality of relationships with local communities.
  

• Six initial questions for CFOs to ask themselves: The report offers some initial guiding questions that CFOs can ask themselves to better understand their company’s social performance: “1. Does my company look across our operations and value chain to make sure we are aware of any impacts on people’s human rights, in particular those that significantly exacerbate inequalities? Do we understand how these issues may relate to business risks or opportunities?”; “2. Are we testing with others, in particular affected stakeholders or their legitimate representatives, whether we have any blind spots or false assumptions that would lead us to miss something?”; “3. Do we have the necessary controls, culture and relationships to manage risks to people such that we are contributing to better outcomes for affected stakeholders, tackling systems-level inequalities and driving positive results and resilience for the company?”; “4. Do our internal audit function and external assurance providers have the expertise they need to provide this evaluation?”; “5. Are we gathering the quantitative and qualitative information needed to evaluate the effectiveness of our actions? How are insights we gain factored into decision-making?”; and “6. How is our social performance impacting the implementation of our business strategy? How does our business strategy impact our ability to improve our social performance?”