The “S” in ESG: an increasing focus for organizations (and CPAs)
CPAs have a critical role to play in the area of social reporting (Getty Images/vgajic)
While there has been a lot of talk lately about environmental, social and governance (ESG) investing and reporting, the focus so far has been mainly on the “E.”
But now, as recent events in Canada and internationally have brought social topics to the forefront of reporting conversations, efforts are increasingly being made to concentrate on the “S.”
“Over the past two years, organizations and stakeholders have been zeroing in on the social pillar,” says Oujala Motala, CPA, principal, sustainability and emerging issues, at CPA Canada. “Much of that increased attention has been triggered by the inequities and injustices we are seeing in the world—including the fact that the COVID-19 pandemic has impacted certain groups more than others.”
With their skills in business strategy and decision making, as well as their ability to evaluate processes and controls, CPAs are in a prime position to influence and inform decision makers on social issues.
Here are some key facts for CPAs to keep in mind when considering this area.
THE MANY FACES OF “S”
The social pillar of ESG is wide ranging: it spans everything from diversity and inclusion to human rights, health and safety, security, ethics and Indigenous reconciliation. [For further examples, see CPA Canada’s recently released foundational publication, The Rise of the Social Pillar: An Introduction to the ‘S’ in ESG.]
But, despite its broad scope, the social pillar does not yet enjoy equal consideration by all organizations. While some are already considering social matters and sustainability factors in their full production lifecycles, others are just beginning their journey. “Social matters can easily be overlooked if companies are not educated on what they are and what their impacts could be,” says Motala.
Given that social reporting is gaining prominence, Motala says it’s important for both public and private organizations to get up to speed. “Businesses that are not reporting publicly may still be squeezed out of the value chain if they are not up to par on key social issues,” she says.
CAPTURING THE COMPLEXITIES
Social matters are complex and multi-dimensional and can also intersect with other issues. “Social matters may have legal and human rights implications for example. Climate change is clearly an environmental matter, but it is also a social matter as certain communities are more impacted than others,” says Motala.
Moreover, the social component of ESG continues to evolve, notes Elisabeth Laratta, director, environmental, social and governance with CIBC. Laratta is part of a centralized team that leads the development and coordination of the organization’s enterprise-wide ESG strategy. “There has been a longstanding focus on social matters within the financial services industry,” she says. “Community investment is still very important, and now more attention is also being paid to creating more access to economic opportunities for underrepresented communities.”
Laratta adds that the range and breadth of social matters is expected to keep changing. “The pandemic has shone a light on a multitude of inequities. Inflation is now exacerbating affordability challenges and, moving forward, more consideration needs to be given to communities and workers who may be more acutely impacted through the low-carbon transition.”
Scott Munro, CPA, deputy chief executive officer of the First Nations Financial Management Board in Vancouver, points to the increasing attention being paid to Indigenous social issues in recent months. “My hope is that will create the need for conversations around the meaningful inclusion of Indigenous Peoples in Canada’s mainstream economy.”
The public’ revelations around the impact of climate change on Indigenous communities and the many unmarked graves at former residential school sites have had a profound impact on the social pillar of ESG, says Munro. “Investors are now more interested in companies that are acting in an ethical and more sustainable way. There are a growing number that want to reward those companies that are committed to Indigenous reconciliation over ones that aren’t. It is a growing investor-led movement as they start to understand and react.”
HOW CPAs CAN HELP
CPAs have a critical role to play in the area of social reporting, says Motala. “CPAs can support companies to identify and assess material social topics and reporting requirements, and support the development and enhancement of systems, processes, and controls to gather and report data. This will help ensure that the quality of social-related data is comparable to traditional financial reporting.”
As Munro says, CPAs can play a pivotal role on the reconciliation front as well. “CPAs have the opportunity to become drivers of change in this area. A CPA in today’s society in fact has an obligation to take an active role in some form of reconciliation. Anyone working in the industry should be encouraging their board to voluntarily prepare and disclose some sort of reconciliation plan.”
Call to Action 92 in the Truth and Reconciliation Commission of Canada: Calls to Action is the place to start. To respond, companies should report and disclose efforts being taken in a reconciliation action plan that is shared with employees, customers, investors and other business partners, Munro adds. “Accountability needs to be visible through reporting. This work must be done by both the Indigenous and non-Indigenous segments of society so that Indigenous perspectives are part of any discussion on social topics and all other parts of ESG.”
GETTING STARTED
As CPA Canada’s publication on the “S” in ESG points out, there are a number of voluntary reporting standards and frameworks that cover social matters. Reporting on the social dimension is also a focus for regulators. In August 2020, the U.S. Securities and Exchange Commission (SEC) introduced a requirement for companies it regulates to describe their human capital resources, including any human capital measures or objectives it focuses on in managing the business, to the extent such disclosure would be material to the understanding of the business taken as a whole.
Motala adds that a key development in sustainability reporting over the past year was the formation by the IFRS Foundation of the International Sustainability Standards Board to develop a comprehensive global baseline of sustainability disclosure standards.
Integration is also key to social reporting, says Motala. “Historically, ESG reporting was relegated to separate departments working on sustainability reports. There is a need for more integration across organizations with finance, human resources and even marketing teams to provide a coordinated approach.”
Social issues are also a focus of the A4S Canadian CFO Leadership Network and members are exploring innovative ways to account for social and human capital to make more informed business decisions. For example, Brookfield Asset Management undertook a fair market valuation for its most important asset—the workforce. Similarly, Manulife Financial Corporation defined and measured the value of its human capital.
At CIBC, stakeholder engagement is critical to the ESG program, says Laratta. “We prioritize disclosure and engagement so that we can share our progress externally and seek insights into our stakeholders’ priorities. These perspectives can then be incorporated into our strategic plans, which are bolstered by measurement and defined accountability., Disclosure, stakeholder engagement and ongoing input are critical components to the success and execution of our ESG strategy.”
MORE ON THE “S”
To learn more about social reporting, see The Rise of the Social Pillar: An Introduction to the ‘S’ in ESG, a foundational resource issued by CPA Canada. Plus, find out more about the business impact of environmental and social issues, how organizations can put social value thinking into practice and how CPAs can lead ESG initiatives.