While historically it may have been difficult to define the social element of environment, social and governance (ESG), the World Benchmarking Alliance’s Social Benchmark may offer a starting point for companies and their in-house legal teams. In-House Perspective asks how organisations can meaningfully address the ‘S’ in ESG.

The World Benchmarking Alliance (WBA) has released the findings of its first ever Social Benchmark, which assesses the world’s 2,000 most influential companies on how well they meet society’s expectations on respecting human rights, providing decent work and acting ethically. The findings show 90 per cent of companies assessed are less than halfway towards meeting these targets. The WBA argues that if these companies fulfilled these expectations, significant progress would be made towards achieving a more just and equal society.

Up to now it has seemed difficult to define the social element of environment, social and governance (ESG). The WBA’s Social Benchmark may offer a starting point for companies and their in-house legal teams to begin to meaningfully address the ‘S’ in ESG and improve their social impact.

Namit Agarwal, Social Transformation Lead at the WBA, says the promise of the UN Sustainable Development Goals (SDGs) to leave no-one behind was the starting point for the Benchmark. He says there are broadly three elements to this theme: human rights, decent work and ethical business conduct. From here, the WBA identified relevant international frameworks, conventions and standards and – in consultation with companies, civil society organisations and technical experts – translated those frameworks into a methodology for benchmarking social impact.  

Agarwal says the indicators are industry agnostic, which is important. ‘Because leave no-one behind is fundamental to the SDGs, the social transformation is fundamental to all the 2,000 companies that we assess,’ he says.

In light of the findings of its Social Benchmark, the WBA highlights four priority areas it argues companies should be held to account on, in order to improve their social impact. According to Agarwal, these priority areas reflect the major gaps in the current practice of companies. They also highlight what high-scoring companies are doing differently. The WBA, says Agarwal, likes to identify where the hope is, so that others can replicate or learn from best practice.

Acceptable working conditions

The first WBA priority says companies should commit to paying a living wage and prevent excessive working hours. Of the companies WBA assessed, only four per cent have committed to paying, or are currently paying, their employees a living wage and only three per cent have a working hours policy that complies with International Labour Organization standards.

Agarwal says companies can address inequality by ensuring all those involved in producing their products or delivering their services are paid a living wage that ensures quality of life for the employee and their family. Doing so is ‘important from a societal point of view to address the issue of poverty in a sustainable way,’ he says.

Beth Michoma, a partner at Michoma & Co Advocates in Kenya, says paying a living wage and preventing excessive working hours can mean different things in different countries and this should be taken into account when assessing the practices of global businesses. ‘What we call a living wage in Kenya is not the same as in Europe, or in Britain, or in the Americas,’ she explains.

Caroline André-Hesse, Co-Chair of the IBA Employment and Industrial Relations Law Committee and a partner at Ayache in Paris, argues that to really address the social aspect of ESG, businesses should go beyond ‘providing ethical and acceptable working conditions,’ which is ‘a basic obligation’. The exact steps a company must take will depend on the jurisdiction. In France, for example, truly addressing the ‘S’ of ESG would require providing work-life balance for employees, particularly through upholding their right to disconnect – something that’s highly valued in France, says André-Hesse.

Transparent lobbying

The WBA’s second priority says companies should be transparent about any lobbying activity they undertake to avoid them having undue political influence. The organisation found that only 11 per cent of companies it assessed have established a policy that publicly sets out their approach to lobbying and political engagement, and only five per cent disclose data on their spending on lobbying. The WBA argues it’s important for businesses to ensure their lobbying activity behind the scenes is consistent with their public stance on social issues.

Agarwal says stakeholders should be able to take an informed view of what a company is lobbying for or against and as such transparency is crucial. He says the current ‘lack of transparency [on lobbying] is quite a big blind spot’ compared to bribery and corruption, given that 60 per cent of companies assessed for the benchmark have policies in place and make disclosures on bribery and corruption.

Michoma says it’s easier to track lobbying activity in Europe or America than it is in Africa. There’s a risk, therefore, that a company with operations in multiple jurisdictions may only be transparent about its lobbying activities in those regions that properly scrutinise them.

Collaborative stakeholder engagement

The third priority the WBA sets out says companies must engage with affected stakeholders to help improve human rights and decent work practices. It found that companies who engage with their stakeholders performed better on average on every indicator in the benchmark, but that only nine per cent of companies assessed communicate examples of how they do so.

According to Agarwal, by engaging with their stakeholders, companies are trying to understand what their issues are, which puts them in a better position to have policies and commitments in place that address them. He says this kind of engagement ‘is a starting point for companies to understand what society needs from them’. 

Edie Hofmeister, Co-Chair of the IBA Business Human Rights Committee and a governance chair and non-executive public company director, says stakeholder engagement should be collaborative. ‘It’s not just about communicating what you’re doing,’ she says, ‘it’s really about […] having an open dialogue, and listening, and adjusting what you’re doing to hear what your community members are saying.’

Michoma says it’s important for businesses to really consider the nuances of a local community when they engage with it. Often, she says, businesses don’t ‘take into account who the community really is’ and the cultural practices it values. The company may need to go into detail about what it means by ‘community’ and who it expects to engage with, for example, highlighting gender, youth or persons with disabilities.

Regulation and external pressure

In its fourth priority area, the WBA says regulation, guidance and pressure are essential for driving change. The benchmark findings show that companies headquartered in countries with human rights legislation score nearly 60 per cent higher on due diligence in this area compared to those based in jurisdictions without such rules. Despite this, only six per cent have fully implemented those regulations. The companies that have are either from regions with strong legislative requirements on human rights or from high-impact sectors that have been more closely scrutinised on these issues. Agarwal says the top-performing sectors were more consumer-facing, which reflects the public’s heightened focus on the social impact of business.

Hofmeister believes most companies are well-meaning and ‘want to do the right thing by their people and communities where they operate’. Sometimes it can be hard to translate that intention into practice when there isn’t a regulation that places a clear obligation on a company to take a certain course of action. Hofmeister has seen more progress in areas that are regulated. She says regulation eliminates a lack of accountability and consistency that can arise when there are only voluntary standards in place. Ultimately, she says, ‘companies prefer certainty’. 

Vikram Shroff, Co-Chair of the IBA Employment and Industrial Relations Law Committee and a partner at AZB & Partners in Mumbai, believes regulation is needed to drive change because ‘we are not at that level where companies do it out of their own values and strategies and good practices’. He says India is seeing the outcome of a greater focus on ensuring good practice across international supply chains. Larger companies that have subsidiaries in the country or do business with Indian organisations often contractually extend certain guidelines or human rights considerations to those Indian companies. ‘We’ve seen that additional pressure from the stakeholders,’ he says, ‘that if you want to do business with us, you need to comply with these requirements.’

In July the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) came into force. The CSDDD imposes new rules that require in-scope companies to identify and address the human rights and environmental impacts of their actions both inside and outside Europe.

‘There is a very strong market signal that this legislation has sent not just in the EU context but globally,’ says Agarwal. ‘That is quite a big shift.’ He adds that the legislation could have been stronger, alluding to the compromises that had to be made to get the Directive through the approval process. Nevertheless, he believes there will be opportunities in future to strengthen the CSDDD.

In addition to new and existing regulation, there are other sources of external pressure on companies to improve their social impact. Oscar De La Vega Gómez, Co-Chair of the IBA Global Employment Institute and Founding Partner at De La Vega & Martinez Rojas in Mexico City, says the US-Mexico-Canada Agreement is a source of pressure and scrutiny on labour practices. In particular, the treaty covers freedom of association and the right to bargain.

Compliance with the treaty’s provisions is monitored by the US government and penalties can be imposed on companies that fail to comply with key labour obligations. De La Vega Gómez believes the US will put similar pressure on other Latin American countries to uphold labour rights as part of any new commercial treaties it signs with them. He says non-governmental organisations are also exerting pressure on businesses to do better.

The International Sustainability Standards Board is considering developing a social standard and a Taskforce on Inequality and Social-related Financial Disclosures has also been established. Both echo similar initiatives developed to measure and improve the environmental impact of businesses. Agarwal also highlights voluntary due diligence guidelines that have been developed in Japan that align with the CSDDD and that other Southeast Asian countries are considering replicating. The US has also updated its voluntary National Action Plan on Responsible Business Conduct. Agarwal believes these developments are encouraging and says ‘we are moving towards a more legislated and mandatory approach’.

In some ways regulation and external pressure on companies to improve their performance in the ‘S’ bucket of ESG are following a similar pattern to how companies have been persuaded to improve their environmental performance. At the moment, global businesses are faced with an array of fragmented social impact obligations that have been developed at a national level or by a regional bloc in the case of the CSDDD. There isn’t one international regulation that every business must comply with. Legislation and standards on the ‘E’ bucket have become increasingly harmonised over recent years, meanwhile, which offers greater clarity for global businesses. However, a question remains as to whether it’s possible or even desirable to achieve the same kind of harmonisation for the ‘S’ bucket, when so many of the elements that fall under its remit are defined by local circumstances and culture.

Agarwal believes harmonisation will be important to ensure effective implementation of human rights and other social standards. ‘Until and unless there is harmonisation in policy across important economic clusters,’ he says, ‘it will be very hard to implement.’

For Shroff, it’s important to put any approach to social issues in the context of the country the business is operating in. He says India, for example, is ‘still very far behind to have a sophisticated law like right to disconnect’. He argues that it would be more difficult to develop and enforce more progressive guidelines on working hours in India because the country depends on the global economy. ‘In these situations,’ he says, ‘a one-size-fits-all approach does not necessarily work.’

André-Hesse agrees that there might be different priorities in the ‘S’ bucket of ESG depending on which country the business is operating in. ‘You cannot address the “S” everywhere in the same way,’ she says, which poses a challenge for multinationals. A policy in one country, for example, might not be consistent with the financial capabilities, the culture or the expectations of employees in another jurisdiction.

Next steps on social impact

The WBA’s benchmark offers a useful tool for in-house lawyers to use as a roadmap for addressing and improving their company’s social impact. They can look at which elements or questions they score well on – or don’t – and how that compares with other companies to understand what constitutes best practice.

The WBA offers guidance on how it ranks and scores companies for each question – for example, which key words it’s looking for in a disclosure to understand whether the company is making a specific commitment. ‘A lot of the time it’s unclear for companies what exactly they can do,’ says Agarwal. ‘The Social Benchmark and the methodology gives that roadmap for companies to see where they are and what else they can do […] so that they are on the right trajectory.’

Hofmeister agrees the benchmark is helpful for general counsel and in-house legal teams. As well as offering practical guidance, she says, ‘a benchmark helps [in-house lawyers] find [their] peers in that same range so [they] can make it relevant to [their] CEO [Chief Executive Officer] or board’ by showing them what their competitor is doing and encouraging them to do something similar.

Michoma says some in-house lawyers may see the benchmark as a starting point to aim higher. For example, they may look at the priority to engage with stakeholders and consider going a step further by looking at intersectionality as part of the engagement process. ‘Lawyers, in-house counsel and companies can decide to expand further,’ she says, ‘to ensure that all the bases are covered, and human rights are adhered to, and ethics also.’

Agarwal says the indicators the WBA developed for its benchmark are fundamental and achievable for businesses because they’re based on standards or conventions that have been in place for around a decade. ‘We believe that if companies want to demonstrate their responsibility and how they are responding to the needs and expectations of society, they need to have disclosures in place,’ he says, ‘they need to come back to society and say, this is what we’ve committed to, this is how we’ve performed on these expectations.’

There are economic benefits for businesses in improving social impact. According to André-Hesse, ‘having employees who feel well within the business and who are happy with their employer clearly improves productivity and […] improves their involvement, which positively impacts economic results’. Shroff adds that talent attraction and retention is also a factor. ‘Today, talent, especially the younger generation, is influenced by what companies do […] in relation to human rights,’ he says.

Meanwhile, Agarwal believes companies are genuinely interested in contributing to social transformation. ‘That intent is definitely there,’ he says, and companies understand that improving their social impact is ‘fundamental to their own existence.’

‘It is high time not only as lawyers but as corporates we stop looking at ESG as this novel invention […] this is now the norm,’ says Michoma. She says human rights are and will continue to be important to businesses and this fact should be a fact that’s internalised by companies and their lawyers. ‘It should be ingrained in all of us that this is what we are doing for a better world,’ she says.