Are current disclosure trends antisocial? Synopsis The current focus is on Environmental but Social disclosures are a fundamental part of Sustainability reporting. Our database shows Social as the most important aspect for most industries’ ESG disclosure, highlights good and less good performers, and reveals significant reporting gaps. However are such distinctions helpful? The two aspects can be closely interrelated so a full understanding of impacts, risks and opportunities requires knowledge of both. We look at linkages between Climate Change and Human Rights as an example. CEN News and About CEN Group Should it be ESG, SEG or SGE? Outside of US politics much of 2023’s ESG focus has been on the quality of Environmental disclosure. However, Social metrics represent a major component of Sustainability and are necessary to understand a business’s true costs. The regulatory focus on Environmental reporting, although necessary to achieve the Paris Agreement, may have had the unintended consequence of creating an unbalanced sustainability report.
Measuring Social disclosure Our CEN-ESG database currently covers over 450 companies. The latter analyses over 400 datapoints measuring a company’s ESG disclosure score. Of these E and S are the most significant as together they represent up to c.64% of the available points. Other areas are largely consistent across all industries with slight differences in Governance weightings.
Variation between industries but Social most important in majority E and S weightings are different in that there can be a variation in points awarded dependent on industry. For instance, S is over 50% of the expected disclosure in the Communications and Financials sectors falling to under 30% for the Materials and Utilities sectors which see a greater focus on E (see Chart 1 below).
Chart 1 Variation of Social Scoring between industries (CEN-ESG)
There are even greater extremes at the subsector level (Cascade has 77 subsectors). It has the most significance in the Media & Entertainment and Education sectors (Chart 2 below).
Chart 2 Subsectors with highest focus on Social disclosure (CEN-ESG)
At the other end of the spectrum, the Oil & Gas Refining & Marketing and Chemicals sectors have the lowest impact from Social factors (see Chart below).
Chart 3 Subsectors with the lowest focus on Social disclosure (CEN-ESG)
Who is doing well and where is there room for improvement? As discussed above the amount of possible points awarded to Social factors vary from industry to industry. To make intracompany comparisons we look at the percentage of Social points achieved as a percentage of the maximum possible Social points available. Using a sample of 180 companies predominantly with December 2022 year ends, the percentage of potential Social scores range from a high of 65% to a low of 2%. For more detail on underlying company scores please contact William Marshall (William@cen-esg.com). More Social scores are covered in the following article (Chart 4). Closing the information gap CEN-ESG collects absolute ESG data. For Social that covers topics such as Human Rights, Health & Safety, Diversity and Discrimination, Political Influence and Labour. However, our analysis shows that despite the rhetoric of good intentions significant progress on data disclosure still needs to happen. For example we have looked at the disclosure on four standard questions relating to a business’s own workforce. Our analysis of c.300 companies with 2022 year ends reveals a low disclosure rate. In many cases, over 80% of the companies have yet to provide the relevant information.
Disclosure | % companies |
Percentage of workers with a disability in the workforce | 5% |
Percentage of workers from a minority ethnic group in the workforce | 18% |
Annual employee turnover | 29% |
The more this ‘information gap’ is highlighted the greater the likelihood of its closing. Those companies still withholding the information without reasonable mitigating factors run the risk of becoming a minority and facing sanctions from investors and other stakeholders. As a result, we continue to advocate the best reasonable data disclosure possible so businesses do not face any unpleasant surprises.
CLIMATE AND HUMAN RIGHTS LINKAGES SUPPORT BROADER COVERAGE
Valentina Barbacci, Associate Director. Valentina joined the team in 2022. She has broad ESG experience having worked at a number of NGOs and advised institutions in their due diligence research. She has a certificate in International Human Rights Law and practice from the London School of Economics and BA in International Relations and Journalism from Boston University. She is also a Term Member of the Council on Foreign Relations headquartered in New York.
Companies are increasingly reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD). However, most companies are not addressing social issues as concertedly and many are even neglecting them entirely. This disparity is evident in Chart 4 below comparing the sub-categories of Climate Change and Environmental Supply Chain with Human Rights and Social Supply Chain (Modern Slavery falls under the latter). In 8 out of 11 industries, Environmental disclosure dominates Social.
Chart 4: Median company disclosure scores for 4 ESG topics (CEN-ESG) On the whole, companies are failing to sufficiently address human rights issues within their own operations and modern slavery. In many cases Modern Slavery Statements pass the baton onto suppliers. Only 5% of CEN-ESG covered companies score above 60% on supply chain social disclosures (i.e. modern slavery and human trafficking) with less than 3% meeting this threshold for human rights issues in their own operations.
Chart 5: Distribution of Supply Chain (Social) and Human Rights company disclosure scores (CEN-ESG). The data suggests that companies do not focus on many social issues even though these often stem from the very same environmental issues which are covered. As a result the context behind the Environmental reporting is diminished and businesses risk failing to capitalise on the strategic benefits and efficiencies from tackling both categories simultaneously.
Many of today’s human rights issues can be linked to climate change. The global rise in temperature and increasing frequency and severity of natural disasters has led to increased levels of agricultural disruptions, food insecurity, price volatility, and economic crises – all of which put individual and collective safety at risk. Environmental disasters can impact entire communities of people, disrupting livelihoods, local food supplies, international supply chains and often leading to migration, trafficking and modern slavery. This causes further instability and safety issues in source, transit and destination countries. The International Labour Organization (ILO) estimates that c.50 million people were living in modern slavery in 2021. It is a growing problem, particularly given its highly profitable and complex nature.
One area of significant trafficking is the Mekong Delta in Vietnam. It is also the world’s fifth largest rice producer* and the second largest rice exporter worldwide (after Thailand). However, changing weather patterns are seeing crops partially or fully submerged every year, decimating harvests and profits. Rising sea levels will exacerbate the problem and increase the number of areas at risk. This in turn makes the local population more vulnerable to the traffickers. Some questions for companies and investors are:
How will that impact Consumer Goods companies, supply chains, rice customers, and their stakeholders?
How will this impact local labour in the rice paddy-rich region, where human trafficking gangs are already active?
How can companies investing in climate science for these scenarios use their insights to help communities in Vietnam?
These questions relate to companies’ risk management, climate-related risks and opportunities, procurement processes, and supply chain management as well as community interactions and philanthropic efforts.
Why are companies failing to address human rights and modern slavery, and will this change? At present, companies failing to publish a Modern Slavery Statement are not facing serious sanctions, despite publication being mandatory in the UK. Theoretically, the UK Secretary of State can apply to the High Court for an injunction to require compliance and a failure to comply with a High Court order could result in an unlimited fine. As of 2021 reports, no injunctions or penalties had been applied despite widespread non-compliance. However, this may change with plans announced for a Modern Slavery Bill to strengthen the protection and support for victims of human trafficking and modern slavery, and increasing accountability amongst organisations to tackle modern slavery in their supply chains. This could proceed through Parliament in 2023. At the beginning of this year, Germany introduced the Act on Corporate Due Diligence Obligations. The Act refers to a series of international human rights and conventions protecting human rights, which are incorporated by reference in the Act. These include, amongst others, child labour, fair wages and environmental protection. Initially it covered businesses with more than 3,000 employees and their supply chain. In 2024, the threshold falls to businesses with more than 1,000 employees.** Companies have an opportunity now to implement and/or strengthen policies, set targets, and measure progress that will position them well to meet the impending regulatory requirements and before penalties are imposed. These measures present significant opportunities for businesses to set themselves ahead of their peers and market to a growing consumer base that increasingly makes purchases based on social responsibility factors, including slave labour in the supply chain. CEN-ESG provides guidance and support to companies seeking to improve their ESG disclosure including work on human rights, labour, modern slavery and other related issues.
CEN NEWS CEN-ESG has had a busy summer welcoming a significant number of new colleagues and joining a number of new initiatives. Sally Barrett-Jolley joins us as a Director from Bakkavor plc where she led the Corporate Affairs function, including ESG, Communications and IR. Prior to this, Sally worked at Walgreens Boots Alliance, managing Financial and ESG Communications and also led the Corporate Reporting workstream at Havas/Euro RSCG. She has also worked at Weber Shandwick and FTI Consulting. Abby Wong has been an Associate at CEN-ESG for 5 months. She has a masters and background in Geology, from Imperial College London and experience in the Metals & Mining industry. Ben Hall has rejoined us as a full time employee. A former Bath University, placement student, Ben received his BSc in Economics in the summer. Gina Kapas, joined the team as Executive Assistant to support Chris Dyett and the wider team. Prior to joining, Gina worked as EA to the General Counsel and Legal team members at Melrose. Luke Haughton joined as a Senior Associate. Previously he was at FDM Group where he supported client workforce strategies particularly transformation and diversity initiatives. Lottie Spriggs and Ella Webb joined the Group in July for a one-year placement as part of their undergraduate degrees. This is the fourth year we have welcomed placement students from Bath University. LSEG - CEN-ESG is now a new member of the London Stock Exchange's Marketplace for Issuers. CEN-ESG is proud to already be a trusted partner to over 40 UK-listed businesses as well as c.10 private or private equity businesses. Our Marketplace membership puts us in a curated list of corporate service providers to help listed and to-be-listed entities on the LSE. https://www.lsegissuerservices.com/marketplace/CENESG Finally, CEN-ESG will be at the Net Zero Festival at Business Design Centre in London on 31st October and 1 November 2023. Please come and visit us at our stand or hear our talk on transition plans for businesses on the morning of the first day.
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