The Future of Social Reporting | Ndevr Environmental

Environmental reporting requirements have surged since the turn of the century and shifted from voluntary to mandatory. Companies should expect similar developments for social reporting and ready themselves early.

The evolution of environmental, social and governance reporting

Reporting on corporate governance was first of the environmental social governance (ESG) factors to became commonly regulated in the late 1970s.[1] Environmental reporting was next, near the turn of the century. And now in 2020, rigorous and often mandatory social reporting is taking root globally.

In 2013, there were 39 reporting instruments focused on social and human rights issues, this increased to 74 by 2016, outpacing environmental instrument growth.[2] Today, there are 321 social instruments around the world, nearly on par with the 327 environmental instruments.[3]

Figure 1: Key social themes addressed by reporting provisions (source: Carrots & Sticks: Global trends in disclosure as the ESG agenda goes mainstream, 2020, p. 26)

Despite the similar prevalence, an important distinction remains; most social reporting requirements are voluntary and often lack rigour, monitoring, and penalties for non-compliance. This is shifting, and companies should expect social reporting to formalise in the same way that environmental reporting has.

A shift is already underway on specific social issues such as modern slavery and human trafficking. In 2000, there were no mandatory reporting requirements on this topic. Today, there are twelve national and sub-national laws and rules that organisations must follow (Figure 2 below). Nearly half of these, mostly ones in Europe, include some type of enforcement through criminal and monetary penalties.

Figure 2: Growth of voluntary and mandatory human rights instruments over the past two decades

This trend will only continue. For example, even after Australia passed the Modern Slavery Act 2018 (Cth) requiring all entities turning over more than AU$100 million to report on their slavery risk and controls, New South Wales and Tasmania continue progressing state-based Acts with more stringent reporting standards and potential non-compliance penalties of up to $1.1 million.[4] The United Kingdom is proposing a revision to its Modern Slavery Act 2015 that would tighten reporting requirements and extend them to government (public) entities.[5] This year the U.S. government began prosecuting human trafficking more aggressively, and we expect this to increase under a new administration in 2021.[6]

Social reporting requirements and due diligence is evolving fastest in Europe. Switzerland is voting this month to introduce an initiative making companies liable for damages and human rights violations abroad. The Dutch Child Labour Due Diligence Act and the French Duty of Vigilance Law promulgated in 2017 are mandatory instruments enforceable by legal liability and criminal penalties, serving as templates for future legislation.

Just as we saw governance and environmental reporting pass a tipping point twenty and forty years ago, respectively, social reporting requirements around the world are now starting to grow teeth.

Corporate entities need to prepare

The response should be clear: be an early mover. Corporate entities must acknowledge where social reporting is heading and ready themselves accordingly.

Specifically, corporate data collection needs to include social factors. This data will serve as the bedrock to any social reporting. Risk management frameworks need to factor in modern slavery, human trafficking, and human rights. Boards and executives need to be trained and briefed on these issues. Policies and procedures should be set and rolled out across organisations.

Making these changes early means getting ahead of regulations before they grow financial and legal penalties. Just this month, an Australian superannuation fund settled before trial with an individual who sued for failure to sufficiently identify, manage, and disclose climate-related risks.[7] In the years to come, corporate entities are likely to face similar challenges around their social response.

Beyond the “sticks” of risk reduction and compliance, proactive management of social issues also brings “carrots.” It builds brand reputation with customers and employees, affecting purchasing decisions and making hiring and retaining talent easier. It enables certification and better ESG evaluation results which can attract lenders and investors. And the growing weight of research and capital flows suggests, overwhelmingly, that operating sustainably and ethically adds value and increases returns.[8]

Environmental regulations and reporting began mostly as voluntary non-binding instruments. Twenty years on they contain heavy regulatory weight and poor compliance carries material risk. The same pattern is happening with human rights and social reporting, and early action will pay off.

Ndevr Human Rights supports clients responding to the Modern Slavery Act 2018 (Cth) and offers human rights services to reduce risk, protect stakeholders, and access value-add opportunities. Get in touch with us to find out how to best move early and strategically on this issue.

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[1]What is the History of Corporate Governance and How it Has Changed, 2018, Nicholas J Price, Diligent Insights

[2]Carrots & Sticks: Global trends in sustainability reporting regulation and policy, 2016, pg 19

[3]Carrots & Sticks: Global trends in disclosure as the ESG agenda goes mainstream, 2020, pg 26

[4] https://thenewdaily.com.au/news/national/2020/11/21/modern-slavery-australia-rights/

[5] https://www.jdsupra.com/legalnews/uk-government-proposes-tighter-72766/

[6] https://www.whitehouse.gov/wp-content/uploads/2020/10/NAP-Exec-Summary.pdf

[7] https://theconversation.com/an-australian-man-successfully-sued-his-super-fund-over-climate-risk-heres-what-that-means-for-your-nest-egg-149918

[8] Gunnar Friede et al., “ESG and financial performance: Aggregated evidence from more than 2000 empirical studies,” 2015