Executive Summary
Much attention has been paid to measuring companies’ impact on the environment. But when it comes to impacts on people, there has been far less scrutiny, standardization, and innovation in the data used to evaluate which businesses are ‘getting it right’ than we see in the environmental field. The current state-of-the-art involves just scanning for words in corporate-issued documents. This is inadequate. Instead, we should use more solid metrics such as proportions of the workforce that are employed rather than on temporary or limited-hour contracts, ratios of CEO to median worker pay, as well as data on gender and race pay gaps. We should make this shift quickly — and not assume that “something is better than nothing.” If we move quickly to force companies to report meaningful data, shareholders, employees, NGOs, and other stakeholders can then assess year-on-year progress. Investors will be better positioned to identify and reward companies that are taking meaningful action. In short order, we will learn which indicators and metrics are most robust when applied within or across industries and can build those into future iterations of our reporting (and accounting) models.
The Covid-19 pandemic has thrust into the limelight the far-reaching impacts that business has on vulnerable people in workforces and communities across the world. It has raised the imperative of tackling inequalities onto a political par with climate change, recognizing also the many inter-relationships between the two. But what will this mean in practice?
Efforts are already underway to develop a single, coherent reporting system that would allow investors and other stakeholders to assess a company’s impact on the environment. These efforts are worthy: We need less competition and choice in what companies should report regarding their impacts on the world, and more clarity and consistency so better decisions can be made by managers and investors alike. However — and this caveat matters — we must balance the enthusiasm for this ambition with attention to an important reality: when it comes to impacts on people, there has been far less scrutiny, standardization and innovation in the data used to evaluate which businesses are ‘getting it right’ than we see in the environmental field. This must be reflected in the systems we build if we are not to amplify the mistakes of the past.
In 2018, Shift, a nonprofit dedicated to promoting the UN Guiding Principles on Business and Human Rights which one of us (Caroline) co-founded in 2011, reviewed the so-called ‘social’ indicators and metrics in the reporting of nearly 500 companies and in 8 major ESG (environmental, social and governance) rankings, ratings and benchmarks. What we found was revealing: in both sets, around 70% of the indicators were based on words in documents, stated activities and their near-term outputs. For example, they looked at whether certain human rights were named in policies or supplier codes, the number of social audits or impact assessments completed, and the number of non-compliances found or of complaints received.
These can all be useful data points for managers inside a company to raise awareness of issues and build good practice. Moreover, the absence of relevant human rights related policies, processes or grievance mechanisms can be an indicator of a company that is failing to recognize and address various risks to people. However, the presence of these things is often not a good indicator of whether a company is managing risks to people effectively and thereby delivering positive impact in their lives.
Research has long since shown the inadequacy of relying on social audit data as a metric of progress in improving the daily realities of vulnerable workers. Moreover, certain metrics can mislead. In some situations, a high number of complaints can be a good sign that people trust that they can raise concerns and get them addressed, while a low number may signal a lack of such confidence, rather than a lack of problems. And we see repeatedly that the more companies are rated on the basis of words in their policies, the more some of them insert those words to win points. So this information becomes an ever weaker indicator of which companies are serious about tackling the issues.
The other 30% of the indicators we reviewed were about outcomes for people — which seems a promising proportion. Yet closer scrutiny showed that they were dominated by well-established types of data about health and safety and workforce diversity. Both are important reflections of company impacts on their workforce. However, they are narrowly focused within the workforce itself and do not offer a wider understanding of how the business may affect people within and beyond the workplace, let alone across value chains.
As we now turn to the important task of building a coherent corporate reporting system that addresses business impacts on people as well as planet, we must not confuse the availability of metrics with their capability to provide insight. Instead, we need a three-fold approach that captures what we have that works, discards what doesn’t and dares to think differently about how we address the gaps.
First, we can and should recognize those metrics that have proven sound indicators of how companies treat people. Even if not perfect, they can help company managers, investors and others assess how well the business is embedding respect for people. In addition to certain data on health and safety and workforce diversity, examples include measures of freedom of association, proportions of the workforce that are employed rather than on temporary or limited-hour contracts, ratios of CEO to median worker pay, as well as data on gender and race pay gaps. The investor-backed Workforce Disclosure Initiative is a leading source of such metrics.
Second, we should pay attention to indicators of whether a company is hard-wired in its business model, governance and leadership to act with respect for people’s human rights. These are critical leading indicators — a “canary in the coal mine” — for impacts on people. No large business will ever be free of involvement with negative impacts on people — operations and value chains are far too complex for that, and companies are often not the sole player in events that lead up to harm. But where leaders embed risk to people into their business model, it’s a fair bet that people will be hurt — again and again — because it’s a result of how the business is designed to operate. Similarly, where the actions of the board and company leaders are not geared to foster a culture that treats people with respect, it is predictable that vulnerable workers, communities or customers will suffer negative impacts.
Shift is now stress-testing a set of business model red flags, and leadership and governance indicators that point to whether a company’s culture is fostering respect for people inside and outside the workforce. We have developed these over two years of consultation with business, investors, civil society and other experts around the world. Indicators like these should be a valuable addition to the human-focused provisions of a corporate accounting and reporting system.
Third, when it comes to human rights impacts for which current indicators are known to be inadequate, we should not assume that “something is better than nothing.” For instance, measuring the proportion of a supply chain at risk of forced labor or child labor, or the numbers of incidents found, offers little insight into whether or how that company’s actions and decisions are affecting outcomes for the people concerned. Nor do these numbers enable comparison between companies since they lack meaning without context. Moreover, metrics like these can generate perverse incentives not to find problems or not to label them in terms that would require their disclosure. This undermines the very behaviors we need to encourage if we are to make progress.
Instead, we must dare to create the space to learn what’s truly effective in improving people’s lives. A coherent reporting system could promote clear and robust criteria for companies — individually or through industry groups — to develop targets and indicators that are tailored to their operating realities, and then to report transparently on their progress. Such targets should be time-bound, tied to specific improved outcomes for people affected by the business, capable of evidence-based evaluation, and informed by inputs from stakeholders (including affected groups).
As companies report against their targets, based on clear evidence (including feedback from affected groups themselves, wherever possible), shareholders, employees, NGOs and other stakeholders can then assess year-on-year progress. Investors will be better positioned to identify and reward companies that are taking meaningful action. And it will be possible to compare company trajectories without pretending their operating contexts are the same. In short order, we will learn which indicators and metrics are most robust when applied within or across industries and can build those into future iterations of our reporting (and accounting) models.
When it comes to the human impacts of business, we need new thinking and new approaches even while we preserve and strengthen the foundation blocks that have proven reliable. Let us move fast — time is pressing and this opportunity will not repeat itself. But let us also move wisely, informed by the errors of the past, so we construct systems that are up to the task of reversing today’s unsustainable inequalities.
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