Over the past three decades, investor interest in environmental, social, and governance (ESG) factors has moved from niche to mainstream. Many attribute this shift to a rising demand from millennials and women, two groups that are increasingly seeking investments consistent with their values. A vast industry of ratings, research, and reporting services now exists to help identify corporate sustainability leaders. However, a new paper released today by the NYU Stern Center for Business and Human Rights finds that none of these metrics yet capture companies’ performance on labor and other human rights issues.
Co-authored by Casey O’Connor and Sarah Labowitz, the report Putting the ‘S’ in ESG: Measuring Human Rights Performance for Investors examines 12 leading frameworks for assessing companies’ social practices and impacts. It finds that current measurement is overly deferential to companies to voluntarily disclose the efforts they undertake on a wide range of poorly defined “social” activities, rather than measuring their real-world effects.
“Social measurement must evaluate what is most meaningful, not what is most convenient,” said O’Connor, Sani Fellow at the Center for Business and Human Rights. “Though ESG strategies are much more common today than a decade ago, many investors remain on the fence about when and how to incorporate these factors into their analysis. Overcoming this skepticism and confusion will require better data that help investors identify which companies are social leaders and why these companies make for better long-term investments.”
The report outlines several principles for improving companies’ social measurement, including:
- Shift measurement from companies’ social policies and practices to the effects these are having on workers and communities on the ground.
- Diversify data sources.
- Develop clear standards that enable comparisons of industry competitors using a common framework.
- Target investors as the primary audience.
It additionally lays out a series of recommendations regarding next steps for key stakeholders including companies themselves, investors and the creators of measurement frameworks.
“Investors must demand accurate data that allows them to assess companies’ social performance,” said Labowitz, co-director of the Center for Business and Human Rights. “Otherwise, sustainable investing will remain a costly check-the-box exercise devoid of meaning and unlikely to satisfy growing demand.”
Putting the ‘S’ in ESG: Measuring Human Rights Performance for Investors grew out of a two-day workshop convened in April 2016 by the NYU Stern Center for Business and Human Rights and Robert F. Kennedy Human Rights. The convening brought together investors, representatives from different business sectors, civil society, ratings agencies, and academia to explore the current gaps in evaluating the human rights performance of large multinational companies.