What the S in ESG means in relation to the CSRD reporting requirements.

19 Oct 2023

In this blog we explore how the “S” in ESG related to the CSRD helps make sustainability reporting more consistent and comprehensive.

ESG is ultimately a framework that companies and organizations use to evaluate and communicate their non-financial performance. There are many reporting proxies and disclosures available around the world which detail out several categories underneath each of the ESG areas. They're usually similar in nature, just worded differently or some will deep dive into some aspects in more detail. 

Social risks in sustainability

Labor Practices and Human Rights

This is probably one of the most notable because the violations of Labor rights, including child labor, forced labor discrimination and poor working conditions which can lead to reputational damage. 
But ultimately, legal issues and a side effect of that of course is supply chain disruptions.

We've seen a lot of media attention on these matters and rightfully as we continue to educate the world that they're not acceptable and there has been a lot of regulations in the forms of human rights, due diligence acts, modern slavery acts, etcetera. In the last few years, because the reality, unfortunately is that this situation that we have is still large across the globe when it comes to these points. These laws and regulations are designed to make companies ensure fair and ethical labor practices throughout their operations and supply chains. 

Diversity and Inclusion

Failing to promote diversity and inclusion within an organization can result in discrimination lawsuits and employee dissatisfaction and, missed opportunities to grow and innovate within your company. 

There is now a major focus to report on these matters and annual reports, and it gets used during recruitment practices to try and attract and retain the best staff and ultimately impacting the way people decide if they want to work for a company.  Companies must create inclusive workplaces that reflect diverse perspectives that can change industry to industry.

Community relations

Negative impacts on local communities such as environmental pollution or displacement can lead to protests, regulatory actions and, of course, reputational damage. This can be a massive area for some industries for example oil and gas or mining companies, that tend to go into underdeveloped areas. Not only do they need to think of the impact on an environment, for example, and the disruption that will create to that society, but also about providing job opportunities and integrating the locals in the project and also thinking through ensuring any changes that are made don't affect them from a long-term perspective. 

That's very different to for example an IT company working in a city, in a building block. They may take a different approach to perhaps the understanding of how their service could contribute to something virtually for example. So, engaging with and contributing positively to local communities or communities that are indirectly affected by your services is essential if you're to be seen as an employer of choice, but also use part of your profits to give back to society. 

Ethical Marketing and Advertising

There's so much more focus now on misleading or deceptive marketing practices that can lead to consumer backlashes, even regulatory fines or legal action. So companies must ensure that their marketing and advertising efforts are transparent and honest.

We are  familiar with the term ‘greenwashing’, now ‘social washing’ has become another major problem. As people begin to talk about what they're doing in these topics, it's important that you know they're substantiated and honest. 

So the top line is that the S in the ESG, ultimately represents the social dimensions and higher company impacts with people both within and outside of the organization.

How the “S” in ESG relates to CSRD requirements

Understanding and adapting to CSRD is going to be a major task for a lot of companies and even those companies that have previously been reporting or disclosing information on their sustainability goals may find that their current disclosure practices could fall short of the new requirements.

With many metrics, the volume and breadth of reporting requirements has expanded several-fold. When we look at what's been requested and for many companies, current social reporting not for everyone, but for some only covers their own workforce and usually quite limited on their value chains or certainly even we think about and communities it's maybe short lived to just talk about some community activities. 

They do, however, under the CSRD companies now need to report on their own workforce, workers in the value chain, affected communities, consumers and end users. So, these four areas have altogether got about 40 KPIs and which is all related under this Social pillar.

What's expected under each of these areas?

Each subsection all starts with, ultimately, the materiality assessment that's been done to understand the impacts on that section and the aim is to focus the company on understanding what policies, processes, measures and responsible parties that they have in place to ensure that all the risks and impacts are being considered and are being managed now under each of these KPIs. 

Ultimately there is an ask for either a qualitative or quantitative response to explain what simply is today and or what is being worked on or what is not yet considered. So, this in turn is aimed at showing progress the company is making to be a truly sustainable organization.

Work Force

Companies need to report on various aspects of employee relations, including diversity and inclusion, equal pay, employee wellbeing. And I'll just use the broader term ‘labor practices.’

So CSRD requires detailed information in each of these topics. If I take equal pay, for example, they'll have to report on the gender pay gap and they'll have to look at employee turnover and measures that are taken to promote employee health and wellbeing. 

In a recent amendment to the CSRD requirements, only data on non-employees has been made voluntary in this section, so everything else must be reported on and it will be exposing a lot of data on a company's makeup, how advanced they are on these matters and that's significant because that could impact how people view their company, from a being an employer of choice and wanting to work with them. 

If we move on to look at workers in the value chain and CSRD requires companies to report on their efforts to respect and promote human rights, both again, not only within their own operations, but across their value chains. This includes addressing issues like child labor, forced labor and fair working conditions. The supply chain qualitative and quantitative data  is going to be new for a lot of people. For many, they will have gaps on what they know within their supply chain.  And this is a huge exercise to start mapping supply chains, communicating expectations with the supply chains and then validating that data and assessing the risk identified. 

There are smaller number of KPIs listed here and this will be the hardest section for many if they don't have a robust supply chain, risk management program. For example let's take one of the KPIs processes to remediate negative impacts and channels for value chain workers to raise concerns.   So the specific objective says ‘the objective of this disclosure requirement is to enable an understanding of the formal means by which value chain workers can make their concerns and needs known directly to the undertaking and or through which the undertaking supports the availability of such channels in the workplace of value chain workers,’ etc.

Now, as we can see, if you've not mapped your supply chain, you've not reached out to them, then you haven't even got near the point to making sure that there's things like work or hotlines in place or audits for these items to be identified, so that's really where you're going to respond on those KPIs will significantly show how advanced the company is.

Community Engagement

Moving on to Community Engagement, this will vary so much from industry to industry and company to company. As I've already mentioned. And again, that understanding coming from the materiality of risk will be critical to explain how far they should be involved at a community level. Companies should report their engagement with local communities, including contributions to community development might be around the philanthropy efforts or initiatives, maybe to address certain social issues. There's many ways that they can do that, but again it will link back to the risks you see of not being involved in the community or doing more which will determine really how deep you will get on these KPIs.

Customer relations 

And then finally on Customer Relations, the CSRD requirements are asking companies to disclose information related to customer satisfaction, who the business directly or indirectly impacts consumers and how consumers can have a feedback channel. We saw recently the EU bringing in new legislation around the ban of Generic and Emissions Offsetting-Based Green Product Claims - it definitely won't be long until this is extended on social matters. 

So within these 40 KPIs, there is a massive push to ensure that companies are working towards a robust set of policies and goals to tackle a wide range of criteria, both internal within their company and external in their supply chain, while also meeting consumer expectations. 

Is the social section the most critical?

There's no part more significant or important than the other, I would say it is unique and specific to each company and of course sectors will have similar risks but they again can vary and so therefore some might have some of the environmental KPI have more significance and others social more significance depending on the nature of their business.  

So social compliance matters when not managed right, as we know, can lead to a lot of negative publicity.  It is true that it has a lot of media spotlight over the last few years, which I mentioned is an attempt to raise more awareness and of course pressure companies to act and take ownership. So enhanced social reporting under CSRD can have a significant impact on, you know, stakeholder engagement. It's a good thing that it's helping companies really take this to the next stage and investors, customers, employees and other stakeholders are increasingly interested in a company social performance and, by providing comprehensive and transparent information, companies can ultimately build trust, attract responsible investors and meet their customer and employee expectations.

Conclusion

In summary, the “S” in ESG as it's related to the CSRD requirements is about emphasizing the importance of reporting on these factors and these requirements, aiming to make sustainability reporting more consistent and comprehensive. And I think importantly transparent across not just the European Union, hopefully globally and ultimately reporting, and promoting more responsible and socially conscious business practices.