Standardization in disclosures is an extremely important issue, as investors are looking for consistent and comparable disclosures in order to assess a company’s performance (Getty Images/Alvarez)
The “social” pillar of environmental, social and governance (ESG) has been drawing heightened interest in recent years. However, social practices and performance are often challenging to assess and quantify due to their complexity.
To provide further insight into social disclosure requirements and best practices, CPA Canada has released a research study, State of Play: Study of social disclosures by Canadian public companies.
This latest report builds on CPA Canada’s report on The rise of the social pillar issued last year. “We are seeing a number of regulatory and standard setting initiatives regarding social disclosure topics,” says Oujala Motala, CPA, principal, sustainability and emerging issues, research guidance and support for CPA. “We wanted to dive deeper into key social topics to gain an understanding of the Canadian disclosure landscape and identify areas where work is needed.”
Conducted by ESG Global Advisors, the study focused on the following topics in social disclosure: human capital management, diversity, equity, and inclusion (DEI), community engagement and human rights, with special consideration of Indigenous matters for each.
SOCIAL DISCLOSURE EVOLVING WITH THE TIMES
Historically, social matters were considered more as niche issues, with interest limited to a smaller group of investors and other stakeholders, says Motala. “Now social matters are becoming mainstream considerations for companies, investors, regulators and other stakeholders as they begin to understand how companies’ performance on social matters can affect many aspects of the business, including reputation and financial performance.”
Rebecca Zentner-Barrett, director, ESG Global Advisors, the consulting firm that conducted the study, agrees. “Investors are recognizing the impact social factors could have on the value of their investments. “Due to the increasing focus on social factors from investors, companies are thinking about how to enhance disclosure on social matters to demonstrate that they are aware of these issues and managing them effectively.”
There is also a growing understanding of what is encompassed under social matters, says Motala. “There are some topics that immediately come to mind, such as diversity, equity and inclusion, and labour practices. These topics have historically been in the realm of the social pillar. But now we are seeing topics such as cybersecurity also being identified in the social category, for example, when considering data privacy.”
Defining good performance on social issues has generally been perceived as being difficult, says Zentner-Barrett. “Because many of these social topics are qualitative in nature, they are often viewed as being harder to measure and quantify. It hasn’t always been clear what represents strong disclosure in areas such as human capital management, DEI, community engagement, human rights, and Indigenous matters.”
THE STATUS ON STANDARDS
One noteworthy outcome from the research is the lack of comparability and standardization in social disclosure practices, even in something as fundamental as terminology, says Zentner-Barrett. “Standardization in disclosures is an extremely important issue, as investors are looking for consistent and comparable disclosures in order to assess a company’s performance. Without standardization, it is challenging to compare disclosure and performance within industries.”
There have been some significant global developments in standard setting for sustainability disclosures, notes Motala. “In February, the International Sustainability Standards Board (ISSB) announced that it had made its final decision on the technical content of its first two standards: general requirements for disclosure of sustainability-related financial information and climate-related disclosures. With the first two standards nearing issuance, the ISSB is seeking feedback on its priorities for its next two-year work plan, including potential research projects in key social areas—human capital and human rights. The Request for Information Consultation on Agenda Priorities is open for comment until September 1, 2023.
In Canada, the Canadian Sustainability Standards Board (CSSB) has officially launched, with a mandate to develop and support the adoption of international sustainability standards in Canada.
WHERE TO START
When reviewing social disclosure practices, “It’s really important to be strategic in your efforts to ensure disclosure is meeting the needs of investors and other stakeholders,” notes Zentner-Barrett. She offers the following guidelines:
Ensure you have a process in place to identify and prioritize the social topics that are most important to your company, and to provide very clear disclosure on the process the company went through to identify and prioritize these factors (e.g., tools used, stakeholder interviews, peer reviews). “The ESG materiality assessment is a key starting point to make sure the company has robust processes in place to identify and assess material ESG factors, including social factors,” says Zentner-Barrett. “It is important to understand how social factors can impact the company’s business model, strategic objectives and financial performance.”
The ESG factors, including social factors, that are identified through the ESG materiality assessment should form the basis of strategic activities and disclosure.
Benchmark disclosures against identified best practices. Find opportunities for improvement, starting with some quick wins, and identifying where more strategic work needs to be done. The report is a great starting point for that exercise and identifying best practices, she says. “Understanding current best practices as they relate to social disclosures and identifying where your opportunities for improvement are and how you want to position yourself is a good exercise.”
Be thoughtful about the ESG reporting frameworks that the company is aligning its disclosure to. “Every company we looked at in the study aligned its disclosure to at least one ESG reporting framework. Does it adequately cover the social topics you have identified as being priorities for your company? Should you be considering other frameworks to enhance reporting on social topics?”
“In Canada we can’t have a conversation about ESG without acknowledging the importance of Indigenous matters,” says Zentner-Barrett. “In Canada there are distinct constitutional rights to consider that set Indigenous Peoples and communities apart and there is a clear call to action for corporate Canada in the final report of the Truth and Reconciliation Commission of Canada. Indigenous matters are critically important in the social context and it was important that they were considered explicitly in this research and that they continue to be central to ESG conversations.”
NEXT STEPS FOR CPAs
Motala advises CPAs that there are existing disclosure requirements for social matters such as disclosures for certain public companies regarding women on their board of directors and in executive officer positions. Companies should make sure they are complying with existing regulatory disclosure requirements and are familiar with the available voluntary reporting frameworks that cover social matters.
“Companies will be positioning themselves well if they use established voluntary frameworks for developing disclosure, such as those referenced in the report.”
Keep in mind that it takes time to develop the processes, systems and controls for reliable, high-quality disclosure, she adds. “It would be advisable to ramp up now.”
Beyond looking at available resources, Motala encourages companies to ask some of the questions that are outlined in the report around identifying and assessing social risk—for example, how could social factors affect your business model, strategic objectives and financial performance? And have social issues been appropriately integrated into existing governance structures and overall enterprise risk management processes?”
Given the heightened focus on social matters, non-disclosure is not an option, she stresses.
“Investors and consumers are increasingly considering companies’ social policies and practices, as well as their performance, when making investment and purchasing decisions. If a company is not clearly disclosing its policies and practices on social matters or not meeting performance expectations, then investors and other stakeholders may choose to put their money elsewhere.”
MORE ON THE “S” IN ESG
CPA Canada has a wealth of sustainability resources. To learn about where Canadian public companies stand on social reporting, see State of Play: Study of social disclosures by Canadian public companies and The S in ESG: an increasing focus for organizations. Plus, find out more about the business impact of environmental and social issues, how CPAs can lead ESG initiatives, and how SMPs can build an ESG strategy.