While measures of environmental impact and corporate governance have made great strides in informing and empowering investors, measures of social impact have lagged behind, reports a study from NYU’s Stern Center for Business and Human Rights. In “Putting the ‘S’ in ESG: Measuring Human Rights Performance for Investors,” authors Casey O’Connor and Sarah Labowitz call attention to the shortcomings of the social measures currently in use and propose changes that would give investors more meaningful data about their social return on investment.
Measures Track Convenient Rather Than Meaningful Data
O’Connor and Labowitz find that social measures tend to rely on immediately available data and don’t usually dig deep enough to uncover the most pertinent information. In a survey of social measures, for example, only 39% of measures evaluated companies’ supply chains.
Labowitz explains that it’s important to look beyond a company’s direct employees. “The supply chain is how we get all of these products,” she says. “Most large multinational companies headquartered in the United States or Europe are not production companies. They’re really design, marketing, retail companies because that’s where the higher value added is. But the way you get a tomato or T-shirt is through these globally integrated supply chains, with many different layers of suppliers operating in countries that don’t have things like OSHA to enforce standards. It’s one of the ways that we get such cheap products.”
Investors need to know which companies manage supply chains responsibly and which do not, both to ascertain companies’ social impact and to identify long-term financial risks. “There’s a big difference between a company that is churning through suppliers, seeking to cut out every last penny from the price, making lots of last-minute changes,” Labowitz adds. “Those things have negative consequences for workers and their ability to work reasonable hours and be paid reasonable rates. And there are other companies that maintain longer-term, strategic relationships with suppliers that are not going to nickel-and-dime the suppliers.”
Disclosure Falls Short, Standards Are Inconsistent
Social measures depend largely on company disclosure, and companies have a great deal of leeway in selecting the information they share. “Each company can set its own standard and decide the basis on which it will be measured,” Labowitz says. “You don’t see as much deference in either the environment or the governance field.”
A consequence of this leeway is that companies focus their reporting on initiatives, like social campaigns or employee training, and not on the effects of those efforts or their objective impact on communities. “Companies like to report on what their activities are, what they’re doing, and the measurement efforts to date have been deferential to that preference,” says Labowitz.
She points to the absence of industry-specific social standards as an explanation for inconsistent reporting among companies. If there were accepted standards for the kinds of data each company in an industry should disclose, investors would be better able to pinpoint the social leaders. “The key is to be able to compare the performance of one company versus the performance of another company. And it’s that kind of standards-based approach across an industry that’s missing right now,” she says.
Better Measures Needed for Socially Responsible Investment Products
As millennials and women gain more control of global wealth, their values are likely to push demand for measures of the social return on investment. But some changes are needed to meet this demand.
First, social measures must target investors as their audience. Second, a consensus is needed on the meaning of social impact. Otherwise, “social becomes the ‘kitchen sink’ category, where almost anything could be a social metric—from employee diversity, to human rights, to charitable giving,” Labowitz says. And finally, participants need to agree on industry standards and reporting guidelines to enable meaningful comparisons across companies.