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Using TCFD as the foundation for the ‘social’ in ESG

In the past 12 months, attention has shifted towards the 'S' in ESG as governments prioritise sustainability like never before. But more needs to be done to enhance the social information being provided, writes Mardi McBrien, managing director of the Climate Disclosure Standards Board.

The Climate Disclosure Standards Board wants more to be done to recognise the ‘S’ in ESG. (Photo by Lightspring/Shutterstock)

Recently, the UK government’s Department for Work and Pensions announced a call for evidence on the ‘social’ element of ESG investing, to gain an understanding of what is being done by trustees to assess the risks and opportunities presented by the social issues inherent in investing.

This is an encouraging step, and one that is sure to advance the agenda, but it is also a question that we already know the answer to: not enough.

Deliveroo’s poor performance at IPO is perhaps the most recent example of how focused institutional investors are on the social aspect of ESG, with Aviva, Legal & General and BMO Global all announcing that they would not be participating in the IPO due to concerns over Deliveroo’s treatment of workers.

Benchmarking social data

Companies have been reporting, to one extent or another, on social issues for years, with board diversity and health and safety being a part of company reports well before climate reporting entered the scene. Most recently, the Corporate Human Rights Benchmark has made a meaningful contribution to providing guidance on reporting with a comprehensive set of human rights indicators.

Despite this progress, companies still struggle to provide financially meaningful data that investors can use to compare performance and assess risk.

There are too many case studies, too many arbitrary metrics, and too few disclosures that are coherent, verifiable and responsive.

While industry leader Unilever has produced its third report on human rights, which provides investors with meaningful data points on working hours in the supply chain and fair wages, the majority of businesses report on the low hanging fruit of greenhouse gas emissions and avoid social information entirely, due in part to the lack of an industry standard on social data points. There are too many case studies, too many arbitrary metrics, and too few disclosures that are coherent, verifiable and responsive to the identified risks and opportunities of companies.

The Covid-19 pandemic has, like no other event, demonstrated the globally important interconnections between environmental and social issues, highlighting the highly dynamic and material feedbacks that exist between them.

A recent meta-study, using more than 1,000 studies, from the NYU Stern Center for Sustainable Business, found a positive relationship between ESG and financial performance for 58% of “corporate” studies focused on operational metrics such as ROE, ROA or stock price. The crisis of the past year has underscored the undervaluing of the workers and jobs that really provide the foundation of the global economy.

Definitive reporting required

By not fully integrating the disclosure of material environmental and social issues, businesses are missing the essential factors necessary to fully understand the risks and opportunities they face.

There is a lack of a definitive mainstream reporting approach to material social issues, which is complementary to existing management frameworks and indicator standards. It is not only consolidation that is needed, but an evolution of reporting for social matters. While it has always been possible for companies to report on social issues, using systems already in place, there is now a clear demand and need from businesses for further guidance on how this should be done.

CDSB action plan

The Climate Disclosure Standards Board (CDSB) will publish a position paper in May on the ‘S’ in ESG, in which we explore present reporting frameworks and standards, current reporting quality, key limitations, and broader concerns. We also set out a roadmap for the inclusion of “social” in the CDSB Framework. In the run-up to the release of the position paper, we will be releasing a series of blogs that address Covid-19, disparities in risk reporting, and a just transition for both climate and workers.

The CDSB will publish a position paper in May on the ‘S’ in ESG, in which we explore present reporting frameworks and standards.

From our thorough review, we believe that the approach offered by the CDSB Framework, and its principles and requirements, could certainly be beneficial to report preparers and users for material social as well as climate and environmental issues. The evolution would benefit disclosure of financially material social information, using the Task Force on Climate-related Financial Disclosures (TCFD) as its foundation.

As the CDSB participates in the formation of the IFRS Foundation’s Sustainability Standards Board (SSB), we will be taking the learnings and perspectives of this environmental and social work to the table to further this important evolution in international reporting.

A key ask for the CDSB will be a roadmap that clearly sets how the SSB will broaden beyond climate to encompass other key environmental and social issues central to value creation for companies around the world, such as labour practices, water, human rights, and biodiversity.