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The State of Social in ESG

Data & Insights:

Governance and Strategy

Introduction

In recent years, we have seen a growing number of organizations incorporating climate risks and opportunities into their business strategy. Boards and senior management teams are establishing formal oversight of climate issues, and organizations are adopting disclosure frameworks such as the Task Force on Climate-related Financial Disclosures to analyze, manage, and communicate their practices related to climate change. This raised a question for us: Are organizations taking similar steps for social issues in the post-pandemic era? This section explores how survey participants manage social issues with respect to board oversight, enterprise risk management, business strategy, frameworks, executive compensation, and communication strategy. 

Governance

Figures 1 & 2: Oversight of Social Risks and Opportunities

Figure 1

Are social risks & opportunities systematically integrated into your organization’s board governance?

Figure 2

Are social risks & opportunities systematically integrated into your organization’s enterprise risk management?

To kick off our survey, we started with questions about the governance and oversight of social issues. We first asked if participants’ boards have systematically integrated social risks and opportunities into board governance, and we followed up by asking if the same issues are integrated into their enterprise risk management (ERM). 

As shown in Figure 1 above, 44% of participants’ boards have established formal oversight of social risks and opportunities. A sizeable minority (44%) of participants are considering board oversight of social issues or describe it as a work in progress. Only 12% of respondents reported that their boards are not overseeing social risks and opportunities and are not considering doing so. 

With respect to ERM frameworks, Figure 2 shows that approximately half (48%) of respondents reported that social risks are systematically integrated, while 37% said work is in progress or under consideration in this area. Only 15% said that social issues are not integrated into their ERM frameworks and they are not considering it. 

We may be witnessing a major shift where governance of social issues at the highest levels of the organization is emerging as the new norm.

These data suggest that we may be witnessing a major shift related to the oversight of social issues. The large minorities of respondents incorporating social issues into governance and risk management, combined with the large minorities reporting that work is in progress or under consideration, collectively make up very strong majorities. Specifically, 88% of participants are either integrating social issues into board governance or considering/working on it, while 85% are either integrating social issues into ERM frameworks or considering/working on it. This signals that governance of social issues at the highest levels of the organization may be an emerging norm for businesses operating in Canada and the United States.  

Business Strategy

Figure 3: Social Issues in Business Strategy

Which social issues are formally prioritized in your organization's corporate or ESG strategy?
Employee Engagement
94%
Employee Health & Safety
79%
Data Security
66%
Human Rights & Community Relations
62%
Labour Practices
61%
Customer Privacy
52%
Product Quality & Safety
34%
Access & Affordability
31%
Customer Welfare
23%
Selling Practice & Product Labelling
23%

N=71

We wanted to understand which social issues are most strategically important to organizations operating in Canada and the U.S. So, we asked survey participants to identify the social issues that are formally prioritized in their corporate or ESG strategies. To do this, we provided a list of social issues drawn from SASB’s Social Capital Metrics and Human Capital Metrics, including definitions which can be found the SASB website here 

 

As shown in Figure 3, employee engagement and employee health and safety are the social issues most commonly incorporated into business strategy, followed by data security, and human rights & community relations, and labour practices. Additional details are shown in Figure 3 

 

The fact that employee engagement and employee health and safety comprise the top strategic priorities among social issues supports the notion that employee wellbeing and retention are critical focus areas for management teams in the post-pandemic era.  

Figure 4: Social Frameworks

Which framework(s) does your organization use for analyzing, measuring, managing, and/or reporting on social issues?

Standardized frameworks are critically important for the disclosure of consistent and comparable information used by investors, customers, and other stakeholders. They are also important for establishing a common language for particular subjects, which enables clear and coherent communication across organizations, sectors, and geographies. This certainly holds true for disclosures and communication around social issues.  

To gain a sense of which standardized frameworks are most widely used for analyzing, measuring, managing, and reporting on social issues, we asked survey participants to let us know which frameworks they use for external purposes (such as public disclosures) and internal purposes (such as internal measurement and monitoring, materiality assessments, and terminology). We also asked the investor participants to identify which frameworks they use for investment analysis. These results are presented in Figure 4 above. Note that respondents often rely on multiple frameworks, so the data sum to a total that is greater than the number of respondents. 

As shown in Figure 4, the United Nations’ (UN) Sustainable Development Goals (SDGs) are the clear frontrunner among social frameworks, likely due to the global reach of the UN and the business community’s widespread support for the SDGs as a framework for sustainable development. The SDGs are followed by the SASB Standards3, which focus on material financial information for capital markets, the Global Reporting Initiative (GRI), a framework for organizations to report their impacts on the economy, environment, and people, and the UN Global Compact, a set of principles adopted by corporations to promote sustainable practices.  

The lesser-used frameworks among respondents, also shown in Figure 4, included the IIRC, which focuses on integrated reporting4, the Impact Management Platform (IMP), which focuses on the measurement and management of sustainability-related impacts, and IRIS+, a system for measuring, managing, and optimizing impact administered by the Global Impact Investing Network (GIIN).  

Some participants wrote that they use additional standardized frameworks, including four mentions of the Taskforce on Climate-Related Financial Disclosures (TCFD), which is not widely viewed as a social framework, and two mentions for each of GRESB, The First Nations Principles of OCAP, UN Declaration on the Rights of Indigenous Peoples, and Canada’s Truth and Reconciliation Commission.  

A surprisingly large number of participants reported that they do not use any social frameworks.

A surprisingly large number of participants reported that they do not use any social frameworks to guide their priorities or practices. This is represented by the “None” label in Figure 4. This lack of framework adoption among some participants may be attributable to the fact that many organizations are still early in their ESG journeys, and social metrics & social performance management tend to be less developed than other areas of ESG such as corporate governance and environmental risk management.  

Communication Strategy

Figure 5: Public Communication Strategies for Social Performance

How does your organization publicly communicate your commitments to and progress on social issues?
Website
79%
Social Media
73%
Internal Communications Platforms
71%
ESG / CSR / Sustainability Report
59%
Thought Leadership
45%
Annual Report
42%
Recruitment Communications
19%
Consumer / Brand Marketing Campaigns
12%
Other
12%
Alumni Communications
1%

N=73

To gain a sense of how social performance is communicated, we asked survey participants how they publicly communicate their commitments to and progress on social issues. As presented in Figure 5, most survey participants use their website (79%), corporate social media channels (73%), internal communications platforms (71%) and ESG / CSR / sustainability reports (59%). Other communication channels include thought leadership (45%) and annual reports (42%). The least frequent methods of public communication for organizations include recruitment communications (19%), consumer/marketing campaigns (12%), and alumni communications (1%). Twelve percent of organizations said they use other methods to communicate their commitments to and progress on social issues publicly. 

Given the high importance employees place on social performance, it’s surprising that so few organizations are including this in their recruitment communications.

Executive Compensation

A review of the governance of social issues would be insufficient without observing the social metrics that are linked to executive compensation. However, there are no publicly available data for the Canadian market. As a result, we are leveraging publicly available compensation data from Semler Brossy – a U.S.-based compensation consultancy – covering the S&P500. We acknowledge this data is collected from a different sample comprising only U.S. public companies, but it can serve as a useful proxy for observing general trends in compensation practices among businesses operating in North America.  

Figure 6 presents data from Semler Brossy’s 2022 ESG + Incentives Report, adapted for formatting purposes. The chart shows the proportion of S&P500 companies that have incorporated various ESG metrics into their executive compensation packages. The blue bars represent social metrics, while the orange bars represent other ESG metrics.  

These data indicate social issues dominate among ESG metrics in compensation design, comprising the top 7 ESG metrics. These findings provide additional support for the notion that social issues are in sharp focus for organizations in the post-pandemic era, especially DEI, employee safety, and human capital management more broadly. The next section dives deeper into human capital management practices.  

Figure 6: ESG Metrics in Executive Compensation (S&P500)
Source: Semler Brossy

Diversity & Inclusion
46%
Safety
33%
Customer Satisfaction
32%
Talent Development
27%
Employee Satisfaction
22%
Turnover/Retention
20%
Company Culture
16%
Carbon Footprint
16%

N=500

Community Engagement
11%
Product Quality
10%
Emissions / Chemical Containment
8%
Cybersecurity
6%
Energy Efficiency
5%
Waste Reduction
4%
Sustainable Sourcing
3%
Water Consumption
2%

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