From niche to necessary: the need for credible and comparable social data to support sustainable investing
Investors are increasingly demanding and relying on social data to inform business decisions. But how can they determine which data to trust?
Social impact has long been secondary to financial return in investment decisions. However, stakeholders are increasingly interested in companies’ non-financial impacts, including:
Governments, led by the European Union’s recent efforts, are increasingly regulating through mandatory sustainability reporting standards and due diligence, and;
Consumers who are using their buying power to regulate the market where companies don’t respect human rights in their supply chain.
In the same vein, investors are demanding credible and actionable sustainability information. There is a growing body of research which suggests taking Environmental, Social & Governance (ESG) seriously is a financially sound investment. For example, in 2021, research showed the average dividends were higher for the top 100 most sustainable American companies than the S&P 500 index average. For all these reasons, ESG performance is now critical for investment decision-making. However, collecting the right data for investors throughout global supply chains has proved complex.
SLCP’s Converged Assessment Framework (CAF) is one of the tools multinational companies with global supply chains can use to provide data on social and labor conditions in their supply chains to investors. The CAF is a pioneering tool for companies looking to demonstrate their social performance to investors for two key reasons: its rigorous verification process and the comparability of the data output.
Capturing verified credible data critical for sustainability reporting
For investors looking to invest in companies with global supply chains, there is the added burden of capturing appropriate reporting data in locations where it is not readily available. This can present a gap between demand and capability.
Companies, particularly those with complex supply chains such as is common in the apparel and textile industry, need credible tools that transcend borders to make actionable disclosures. This speaks to the demands from investors as their sensitivities to sustainability risk grows, but the supply of comparable and credible data has not kept pace.
SLCP’s CAF can be one solution for companies looking to make credible disclosures on their human rights risks. As uncovered in SLCP’s 2022 Credibility Survey, 79% of SLCP stakeholders, including brands, manufacturers, MSIs, civil society and audit firms, see the CAF’s data as trustworthy.
Importance of Comparable Data given the Patchwork of Reporting Initiatives
As global supply chains become increasingly complex, investments will likely stem from a different corner of the globe. As such, the ability to provide actionable and comparable social data over time and across jurisdictions should be a priority.
One dimension of complexity lies within the myriad of voluntary indices and frameworks used by companies for sustainability reporting. There is a desire for aligned international frameworks to harmonize what companies report, and progress has been made through Europe’s Corporate Sustainability Reporting Directive (CSRD) implementation. However, overhauls of voluntary sustainability reporting standards – as seen in the upcoming ISSB Standards (formerly SASB Standards) and Global Reporting Initiative Standards – as well as the developments in Europe through the Corporate Sustainability Reporting Standards (CSRD) – suggest this goal remains far from reach.
SLCP’s CAF is non-judgmental and captures objective data. This allows for comparability and creates a greater use for global investors relying on social and labor trends across regions to make investment decisions. Moreover, as the tool is a broad social assessment, it is useful for companies looking to make baseline human rights disclosures as required across reporting frameworks and indices. It is also useful for investors who can compare risks and performance metrics when analyzing disclosures.
Norges Bank Investment Management (NBIM), a founding signatory of SLCP and one of the largest global investors, considers the non-financial impacts of companies as central to their due diligence and investment analyses.
“As a financial investor with a long investment horizon, our returns depend on sustainable economic, environmental and social development. Respecting human and labour rights is at the core of responsible business conduct and good risk management. Companies and investors alike need credible and comparable data about social and labour conditions in global supply chains. SLCP and the Converged Assessment Framework have an important role to play in helping companies provide this”.
Carine Smith Ihenacho, Chief Governance and Compliance Officer, Norges Bank Investment Management
While human rights impacts are no longer a siloed risk, global supply chains are yet to make them a genuine priority when contemplating significant business decisions. However, the advances of mandatory sustainability reporting standards, and increasing stakeholder demands to understand companies’ human rights impacts, suggest a shift in the tide. Policymakers and investors are giving a clear warning that companies that don’t make credible social and labor data a priority will be left behind. A data collection and verification tool such as SLCP’s CAF can play an important role for companies looking to meet the demand for human rights data.
