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What about the ‘S’ in ESG? New Guidelines for Evaluating Companies’ Social Performance

When it comes down to environmental, social, and governance (ESG) issues, more and more investors are looking at how companies perform on human rights. Guarding long-term investments against a potential fallout from social grievances has become part of their fiduciary duty.

When it comes down to environmental, social, and governance (ESG) issues, more and more investors are looking at how companies perform on human rights. Guarding long-term investments against a potential fallout from social grievances has become part of their fiduciary duty. In view of the complexity of global supply chains, however, many mainstream investors have a tough time scrutinizing social issues such as labor relations on a day-by-day basis.

According to Sharan Burrow, General Secretary of the International Trade Union Confederation, “the ‘S’ in ESG has been the weak link in investment analysis so far, and investors have lacked a shared framework to assess companies’ approaches.” The integration of social issues – including labor standards – into investment decision-making is particularly relevant to the trustee boards of pension plans, because they oversee the retirement savings of unionized workers. From this perspective, institutional investors are expected to exclude investments contributing to anti-social corporate conduct.

“Pension money is not gifted,” emphasizes Paddy Crumlin, president of the International Transport Workers' Federation (ITF). “It’s the hard-earned product of hard work and industrial negotiation and is a deferment of wages that workers decide to make to secure a dignified and decent retirement. It has got to be put to work itself in a way that respects that source. It is only right that it helps build sustainable individual and collective futures, and that it does so ethically.”

In order to help investors to properly evaluate company adherence to labor standards and responsible employer relations, the Global Unions Committee on Workers’ Capital (CWC) has been developing a new set of guidelines with comprehensive key performance indicators. The CWC is an international labor union network for dialogue and action on the responsible investment of workers’ retirement savings. It is a joint initiative of the International Trade Union Confederation), the Global Union Federations and the Trade Union Advisory Committee to the OECD.

10 themes to evaluate social performance

The new Guidelines are inspired by key international norms, standards and frameworks including the UN Guiding Principles for Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the ILO Fundamental Conventions. While existing human rights disclosure platforms such as Shift’s UNGP Reporting Database, the Human Rights Compliance Assessment (HRCA) Tool by the Danish Institute for Human Rights, the Company Action Platform by the Business & Human Rights Resource Centre, and the recently introduced Corporate Human Rights Benchmark (CHRB) provide investors with well-structured information about corporate performance on human rights, the CWC Guidelines will be cascaded down the investment chain through a recognition of their ten themes in the guiding policies of asset owners. Asset owners would then require their asset managers to assess each company individually, based on the ten distinct themes:

  1. Workforce composition
  2. Social Dialogue
  3. Workforce participation
  4. Supply chain
  5. Occupational Health and Safety
  6. Pay Levels
  7. Grievance Mechanisms
  8. Training and Development
  9. Workplace diversity
  10. Pension fund contributions for employees

Apart from asset owners and investment managers, the Guidelines also enables ESG rating agencies to get a snapshot of a company’s long-term strategy and performance in regards to human rights, and to improve their own rating methodologies and indices. The larger objective is to improve the signals that are sent to companies via investment chains – such as company ranking in a sustainability index – regarding their management of workers' human rights and labor standards.

Spread the word

In order to promote the human rights aspect among investors, the CWC plans to concentrate its activity on advocacy and capacity building. The goal is to create awareness among asset owner board members so that they reference the Guidelines in their investment policy and that they set expectations for reporting on the Guidelines from their asset managers. On the one hand, it will focus on ESG rating agencies to improve the level and quality of social indicators in their methodologies. On the other hand, it aims at building the capacity of pension fund trustees around the incorporation of decent work issues into investments. Using the Guidelines as the anchor point, board members will receive summary guidance and template investment policies tailored to each national context.

The initiative will be powered by capacity-building events for asset owners, meetings of trustee groups and interactive workshops throughout the world. At the same time, the Guidelines will be referenced in consultations with regulatory bodies at the national and international levels. The CWC also collaborates closely with key investment chain initiatives such as the UN Principles for Responsible Investments (PRI) to incorporate social issues into investment processes. This year, for instance, pension trustees and trade union representatives from around the world will gather in Berlin for the annual CWC Conference on the eve of the 2017 PRI in Person conference.