The significance of companies’ social performance is coming swiftly into focus, with increased scrutiny of topics from living wages to forced labour to inequality.
Most recently, the International Sustainability Standards Board (ISSB) has indicated that it will likely include social issues in its future agenda priorities. This is excellent news. The ISSB has the chance to set strong foundations for sustainability reporting on financially material social issues. However, its current plans look set to miss the mark and perpetuate confusion in the marketplace. We propose an alternative way forward.
Evidence of the financial materiality of social issues is all around us in the form of lawsuits, new regulation, operational disruptions and costs, and reputational harm. Examples include forced labour and child labour in factories and fields, workers on poverty wages, safety failures or poor community relationships at mining operations, data privacy breaches, dangers of algorithms in social media platforms, or the systemic risk of inequality.
Yet there is currently no global standard that would help companies and their investors understand how different “social” issues interrelate. Topics have proliferated on the back of media scrutiny, public campaigns, growing regulation and other evidence of their generally perceived relevance. There is no workable structure for companies, investors and others to make sense of them and their likely materiality.
The ISSB is now considering research projects on both “human capital” and “human rights”. While it recognises that the two categories overlap, it proposes to address this by considering human capital in relation to the workforce and human rights in relation to workers and communities in the value chain. They suggest they would leverage their future research to identify the boundaries and connections between them.
But the fact is that the connections are so extensive and the boundaries so few that such a division is unworkable in practice. Fair wages, social benefits and health and safety – whether in a company’s workplace or in their supplier’s workplace – are human rights issues. They are equally factors affecting human capital. The composition of a workforce, use of contingent labour or child labour similarly affect both human rights and human capital, wherever a worker works.
In short, looking for the boundary between human capital and human rights is to chase ghosts. So the ISSB’s current consultation on its proposed plans is timely and welcome. It has a one-time opportunity to chart a clear path forward on social issues that aligns with its own goals and foundations by:
- Building incrementally on its General Requirements standard S1, with a cross-cutting social standard. This would contain disclosures that show how well a company’s governance, strategy, and risk management are geared to identifying and addressing the particularities of social risks.
- Including a clear architecture for social issues, on which the ISSB’s future work, including the enhancement of SASB indicators, can then build.
- Integrating a few key metrics related to the workforce that are typically material for any company, such as workforce composition, costs and investment, the use of alternative workforces and diversity, equity, and inclusion (DEI).
This approach would fulfil the ISSB’s ambition to set global building blocks for sustainability reporting by providing a single, solid foundation for disclosures on social risks and opportunities.
It could be grounded in the ISSB’s founding documents, notably CDSB’s Framework for Reporting Environmental and Social Information. The ISSB’s survey already notes the relevance of this framework for disclosures on social information but misstates that it centers on the human rights of groups of people in an organisation’s value chain. In fact, the CDSB Framework provides a comprehensive four-part architecture for social reporting, including “own workforce”, “value chain workers”, “affected communities” (at operations or in value chains) and “consumers and end-users”.
It would go beyond the ISSB’s S1 standard on General Requirements, building on elements in the CDSB Framework to focus on factors that are particular to social risks. This includes the significance of human rights due diligence standards and legislation globally; of direct engagement with affected stakeholder groups and their representatives; of external-facing grievance mechanisms that can identify and address problems before they become campaigns or lawsuits; and of the expertise in governance bodies to oversee these risks, including where their roots lie in the business model.
Pursuing this kind of standard on social issues would also support interoperability with other reporting standards, notably the European Sustainability Reporting Standards (ESRS). The ESRS social standards follow the four-part architecture reflected in CDSB’s Framework. The first five disclosures of each of those four social standards are largely identical, providing the same kind of common foundation that an ISSB thematic standard could offer from a financial materiality perspective.
In short, the ingredients are all there for the ISSB to pivot away from the idea of two research projects on human capital and human rights towards one cross-cutting and less granular project for a standard on social issues. Approached this way, it should be no more resource-intensive than either of the proposed projects.
The B Team, Shift, and the World Benchmarking Alliance have joined forces to make the case for the ISSB to move in this direction. We have been heartened by the many positive reactions we have received.
We hope the ISSB will come to share the view that a single thematic standard on social issues is the logical starting point for its future agenda: one that will provide the sound building blocks for financially-material social issues that the market sorely needs.
Caroline Rees is president and co-founder of Shift, a non-profit organisation driving business respect for human rights by leveraging the power of the UN Guiding Principles on Business and Human Rights
Namit Agarwal works as the social transformation lead at the World Benchmarking Alliance (WBA). He aims to influence the world’s most influential companies to respect the rights and entitlements of people in the workspace, supply chains and communities