Strengthening the S in ESG through better metrics and indicators (cont.)

Our key takeaway: Metrics and indicators that merely show whether companies have policies and training in place may look good on paper but says very little about the effectiveness of companies’ human rights efforts in practice. It is a bit like buying a beautiful multicoloured dress only for the colour to wash out after a few washes. All look and hardly any substance. So what does Shift recommend? Shift recommends that policy and training indicators should include references to follow-through actions, and that companies proactively monitor how policies and training translate into changed behaviours. Likewise, governance indicators that speak to the board-and-senior-level involvement with social sustainability issues is crucial. Without robust governance structures in place to give adequate attention and resources to human rights, it really doesn’t matter what training or policies you have in place. The impact that they foster will collapse like a house of cards without the necessary structures in place.

Shift published Part 3 and Guideline 1A of its Strengthening the S in ESG series (June 2024). This guideline follows on from Part 1 and Part 2 of the series, which we summarised here. The series focuses on developing stronger social indicators and metrics to measure the S in ESG:

• Avoid indicators that offer insight into a company’s intentions but no insight into whether these are followed through in practice: To strengthen the S in ESG reporting and metrics, Part 3 of the series recommends that data providers and standard-setters “avoid indicators that offer insight into a company’s intentions but no insight into whether these are followed through in practice.” For instance, metrics that assess whether companies have policies, commitments or training activities in place say nothing about whether they are putting these into practice. Based on its research, Shift concluded two findings: 1) “[m]ore than 10% of the 700 ESG data providers’ indicators assess the existence of policy commitments that give no insight into follow-through actions” ; and 2) “[t]raining indicators typically used by ESG data providers offer no insight into the results of training.” One reason is that training activities typically lead to mixed results and, in some cases, backfire and activate biases. It is recommended that companies use policy indicators that include a reference to follow-through actions and use indicators that recognise the value of training in the fulfilment of a wider strategy rather than an end in of itself.
  

• Use indicators as strong predictors of business decision-making and behaviour: To strengthen the S in ESG reporting and metrics, Guideline 1 of the series recommends that data providers and standard-setters “use indicators that are strong predictors of business decision-making and behavior.” So why is it important to evaluate board-and-executive level engagement? Because “where the board pays attention to these issues, it is likely that leaders’ attention, motivation, and allocation of resources to address risks to people and related business risks will be higher.” The importance of board level engagement on sustainability issues is recognised in standards such as the European Sustainability Reporting Standards (ESRS), the Global Reporting Initiative (GRI) and the IFRS Sustainability Disclosure Standard (IFRS). Based on its research, Shift concludes three findings: 1) “[o]nly a small number of S in ESG indicators in use evaluate board-level scrutiny and oversight of sustainability commitments or programs. None offer insight as to the level of attention to social impacts and risks”; 2) “[t]here is evidence that it is feasible, though not yet common, to evaluate whether there is board oversight of risks to people typically impacted by the company’s industry; some existing ESG indicators do address board attention to specific sustainability issues”; and 3) “[d]ata providers are not evaluating board members’ “S” competence, nor evaluating the existence of efforts to inform the board of the company’s management of social risks.” It is recommended that companies use indicators that show whether and how many times boards meet to discuss companies’ sustainability performances, and whether boards have a holistic oversight of the most severe risks across companies’ operations and value chains.
  

• Recommendations for companies: While the reports are geared towards data providers and standard-setters, companies can use the following recommendations to tailor their own metrics and KPIs to ensure that they are effectively monitoring their efforts to address their adverse impacts on people. Recommendations include avoiding using indicators that show the existence of policies and training and move towards those that provide a more holistic picture of a company’s social performance. For example, “assessing evidence of follow-through actions or using this data as part of a more multi-faceted assessment of a company’s social performance on a specific issue.” It also includes having indicators to show whether and how the board and senior management are involved in overseeing companies’ sustainability risks and impacts.