ESG: How companies are struggling to measure the ‘S’

In March 2024, after a series of catastrophes driven in part by a broken safety culture, Boeing stock fell more than 25%, becoming one of the worst-performing in the S&P 500. 

In May, a blistering 200-page independent review of “Workplace Misconduct and Culture” at the FDIC was released. That makes two widely respected organizations, both with major reputational and financial damage.

For Michael Watson, a human resources and employee engagement executive with decades of experience in the corporate and nonprofit sectors, company culture translates to everything an organization does.

“When trust is gone,” Watson said in an interview, “Employees might keep their mouths closed when there are problems because they fear retaliation or believe that no action will be taken, but they will also keep their best ideas to themselves. And when a better opportunity comes along, they will be gone.” 

The social dimension of ESG might be the most neglected, but its impact is rapidly becoming undeniable. For organizations looking to better manage their culture, a good place to start is with the most established standards and reporting frameworks.

A snapshot of the ESG assessment landscape

The consolidation of frameworks and standards is fast-tracking the availability of reliable and comparable ESG data for businesses and investors. The newly launched ISSB framework, for example, incorporates the SASB and TCFD (Task Force on Climate-related Financial Disclosures) standards, and is meant to meet the needs of the capital markets.

Read more: Investors have a new tool for analyzing sustainability disclosures

ISSB complements the GRI (Global Reporting Initiative), which considers a broader range of stakeholders. And the 17 UN Sustainable Development Goals (SDGs), designed for nation-states, have been mapped with SASB standards to help companies and investors identify relevant issues. 

Private equity initiatives are using the consolidation to design more harmonized reporting and data collection from private companies. 

But organizations are still left with a dizzying number of decisions to make, and often look to experts to help them design an ESG strategy that can be integrated within their specific company objectives, investment strategies, and regulatory environments.

How to measure the S

Dr. Caitlin Pentifallo is head of metrics and regulations at Novata, a certified B Corp that offers technology and expert services to streamline and simplify ESG and carbon data management for PE investors and companies.

When we asked Pentifallo how organizations can measure the social dimension, she described the challenges of quantifying such a subjective area: Are employees happy and treated well? Is this a good place to work?

She explained that to capture standards as broad as employee satisfaction, worker health, and worker safety, for example, we need a number of resource-based indicators such as: What is your percentage of turnover and attrition? What is your employee injury rate? What kinds of policies do you have in place for time off, or for employee development and promotion? 

“What we do,” she said, “is design and bundle a series of indicators that are going to speak towards what it is we’re trying to evaluate. Together, these small data slices give us a picture of what’s going on within any kind of organization.” And, as Pentifallo puts it, help answer the question for investors: “Is this a good place to put my dollars?

Strategy first: What’s the story

For an organization wondering just how many data slices are needed, the answer is: it depends.

In an interview, Alison Taylor, Clinical Professor at NYU Stern School of Business and expert on sustainability issues and business ethics, suggested that as an overall ESG strategy companies focus on one to three issues that are fundamental to their business model and that they can actually address. A reminder that a successful business strategy is one that can be executed.

For Pentifallo, there is rarely a one-size-fits-all approach. “It’s about meeting clients where they are,” she said, “and figuring out what they care about, the story they want to tell—that’s the measurement and evaluation perspective we want to come from.”

A modular approach to strategy

The Novata library includes the leading ESG frameworks and more than 2,300 metrics. These building blocks, as Pentifallo calls them, allow a company to customize a framework and add or remove pieces as the organization’s strategy develops.

If a company wants to start with a narrower slice of the picture, they might use the EDCI framework, specifically designed for private companies. EDCI includes approximately 12 social metrics and offers flexibility—a company would only request data on 6 to cover their diversity reporting asks, for example.

On the other hand, a company that has more ambitious goals might also add indicators from the GRI, which has an entire standard related to diversity and equal opportunity and is also licensed by the Novata Metric Library. When building any framework, additional sector or industry specific regulations can be added as required. 

How a publicly traded company measures S

Schneider Electric, a publicly traded company SBGSF and leader in the digital transformation of energy management and automation, is known for its sustainability program, including ranking #1 in S&P’s 2023 Corporate Sustainability Assessment among numerous other awards. Frameworks they use include GRI, SASBE, TCFD, ISO, and SDGs.  

The scope of the 17 KPIs in their social dimension report reflects the company’s commitment to trust, equal opportunity and empowering local communities. 

For example, 2 of the KPIs—increasing gender diversity (in hiring, front line, and leadership team) and the level of confidence employees have for reporting unethical behavior, have risen every year since 2020. 

Community impact is a standard not every business chooses to measure and report on, but Schneider is aiming to double hiring opportunities for interns and recent graduates as well as for training people for energy jobs.

As the program grows, the company adds new building blocks. They are aggressively addressing the supply chain, one of the toughest challenges in the social dimension. A metric introduced in 2022 to assess whether strategic suppliers provide decent work to employees reached 21% in 2023, with a target of 100% by 2025. 

The ten pillars that define decent work come from the International Labour Organization (ILO): Employment opportunities; Adequate earnings and productive work; Decent working hours; Stability and security of work; Social dialogue and workplace relations; Fair treatment in employment; Safe work; Social protection; Purchasing practices; and Balancing work and family life.

Shareholder advocacy and benchmarking

Quality benchmarking with robust, comparable data is crucial to decision making for both companies and investors. Meredith Benton, CEO and founder of Whistle Stop Capital, also manages the Workplace Equity Scorecard in collaboration with As You Sow, a nonprofit leader in shareholder advocacy. 

The scorecard asks companies in the Large-Cap 3000, to release data on key performance indicators, including workforce composition, retention and promotion (gender globally, race and ethnicity within the United States), recruitment, and pay equity, as well as two or more years of EEO-1 forms. The scorecard ratings are then used in discussions with CEO’s and senior executives to work towards more effective workplace equity programs.

In a conversation with Benton, she said the first question many organizations ask is, how are we doing compared to our competitors? Benton explained that the scorecard is built so that when companies ask how others are managing their S and what their best practices are, the data is easily available.

“If we’re talking to a company in consumer discretionary, for example, we’ll send them a list of consumer discretionary companies that are doing workplace equity well. Whether within a sector, or region, or head count, we can parse the data to make it easy for a company to identify companies they might find it easier to emulate rather than starting from scratch.” 

The other audience for the scorecard is investors. The Scorecard Visualization tool makes it easy to evaluate if a company is actually “walking the talk” or greenwashing. With just a click, an investor can see a company’s overall score, overall rank, and sector rank compared with 2,995 companies.

Continuing to build transparency and trust

In contemplating the future of ESG and sustainability reporting, Pentifallo thinks the social dimension has the greatest distance to go. “More needs to be done in terms of: How could it best be standardized? Where could there be more rigor? And where could we see the greatest capacity for change . . . not just in workforces, but in and across communities?”

And as Watson advises, it’s important to learn from companies that are making S a priority as they are often providing shareholders with superior returns. He pointed out that in addition to media stories of workplace scandals, in May, Fortune magazine, in partnership with Great Place to Work, named Hilton the No. 1 best workplace, “owing to its superior company culture, commitment to inclusivity, and opportunities for advancement.”

As CEO Christopher Nassetta commented, “I’ve been [promoting] ESG for decades, because it’s good for the business.”