The SEC is exploring new possible mandates for workforce disclosures. That may be a tall order for businesses in the short term. But with increasing data tying alpha to employee well-being, leaders would do well to preempt these requirements.
The pandemic, social justice movements and the current administration have all sharpened the current focus on environmental, social and governance (ESG) issues. COVID-19 and the tight labor market have especially proved just how important the “S” is to a corporation’s business continuity and resilience. With the strong correlation between a workforce’s well-being and a company’s bottom line, businesses are recognizing the need to create a diverse and equitable people-first culture.
In August, the U.S. Securities and Exchange Commission (SEC) announced possible new workforce disclosure requirements for public companies – including data on diversity, staff compensation and employee turnover.
Investors want to better understand one of the most critical assets of a company: its people.
I’ve asked staff to propose recommendations for the Commission’s consideration on human capital disclosure.
— Gary Gensler (@GaryGensler) August 18, 2021
While social disclosure requirements are a great step toward increased diversity, inclusion and a more equitable workplace, they could pose significant risks for enterprises with global supply chains. For these businesses, sufficiently reducing reputation risks with all stakeholders will require increased visibility of ESG practices that goes beyond the organization itself and deep into its supply chain and suppliers. Reputation risks will increase unless actions of the supply chain match a company’s ESG commitments. On the flip side, an enterprise’s DEI effort must also apply to its supplier selection and ongoing management.
Stakeholder Capitalism and ESG: Shining the Spotlight on “S”
Today stakeholder capitalism is top of mind for many business leaders. In 2019, 181 CEOs committed to the Business Roundtable’s redefined purpose of a corporation to benefit all stakeholders – customers, employees, suppliers, communities and shareholders. With companies prioritizing the needs of all stakeholders and the community at large, social issues have come to the forefront.
There is a new realization that shareholders benefit from the shift in focus. While effective supplier diversity programs can and should be part of a company’s efforts to “do the right thing,” they can bring benefits directly to the enterprise that go beyond reputation enhancements. A strong supplier DEI program also provides these four benefits:
- Improved Supply Chain Resiliency – Increased inclusiveness provides more transparency and also increased sourcing options. More sourcing options increase opportunities for agility in these times of frequent supply chain disruptions.
- Reduced Costs – The wider the pool of potential suppliers, the greater potential for competition in the supply base; increased competition means increased potential to reduce costs.
- Improved Talent Recruitment and Retention Efforts – Employees expect employers’ DEI programs to go beyond internal efforts to incorporate supplier diversity. Enterprises currently dealing with major talent shortages must carefully consider their organization’s supply chain diversity programs and make the changes necessary to attract new and retain existing talent.
- Enhanced Revenue – Favorable brand perceptions from diversity initiatives can increase sales as consumers are considering both a company’s and its supply chain DEI initiatives in their decision to buy.
The 2021 Meaningful Brands report provides further support that socially responsible practices boost a company’s reputation and will in turn boost revenue. In that survey, 73 percent of global respondents believe “brands must act now for the good of society and the planet”; 64 percent of global consumers prefer to buy from “companies with a reputation for purpose”; and 53 percent are willing to pay more for “a brand that takes a stand.” The flip side to this good news is that these expectations come with significant reputation risk. As consumers become more cynical that companies are making promises that they can’t deliver on, a company increasingly needs supply chain visibility to mitigate this risk.
The Call to Do More
The bottom line of the 2021 Meaningful Brands report is that while consumers are seeking transparency and tangibility, brands are failing to deliver. Seventy-one percent of consumers have “little faith that brands will deliver on their promises.” Case in point: Analysis of SEC filings of corporate 10-Ks following last November’s rule change concluded that while companies claimed DEI were top concerns, few actually included this data in their disclosures. A year ago, the SEC left human capital reporting requirements open for interpretation, encouraging companies to report only on the attraction, retention and development of the workforce. Only a handful reported on more than the bare minimum needed.
But the pandemic, a tight labor market, civil unrest and the shift to stakeholder capitalism have recently prompted SEC Chair Gary Gensler to ask his staff to consider “human capital” disclosure requirements for public companies, including workforce metrics of turnover, skills and development training, compensation, benefits, diversity, health and safety, etc. These proposed disclosures would increase visibility into a corporation’s treatment of its people, which is increasingly recognized as a major factor in a company’s long-term success.
Business should be prepared for this attention to spread beyond the enterprise itself to its suppliers. It’s not just your own ESG performance and reporting that matters; it’s the performance of your entire supply chain. Partnering with a supplier that doesn’t adhere to good social practices – or that isn’t aligned with your enterprise’s ESG goals – could seriously impact your business.
Social Risks Matter: Check Your Suppliers Continuously
With all stakeholders increasing their focus on an enterprise’s ESG commitments, it’s critical that your supply chain can stand up to the scrutiny. Take for example the growing concerns in the Xinjian region of China around forced labor and mass detention in internment camps. Retailers like Adidas are taking a stand. In spite of some Chinese consumers boycotting the brand for publicizing “false accusations,” revenue has increased around the globe, driving a 55 percent hike in second-quarter sales from the previous year.
If the tables were turned – and Adidas did include a supplier involved in the Xinjian region in its supply chain – a potential for major backlash would follow. Who your organization works with, buys from and invests in matters. Because of this, procurement and supply chain leaders need transparency to know who they should and should not include in the supply chain.
To avoid major reputational risk, companies must ensure that every supplier – including the supplier’s suppliers (Nth parties) – is aligned with their ESG expectations around safe working conditions, fair compensation, equal opportunity, sustainability and more. Overlooking any supplier’s ESG performance can have serious negative impacts.
Proactively Managing Social Risk Across Your Entire Ecosystem
It’s time to move beyond point-in-time ESG assessments. Data collected during an annual or even quarterly ESG assessment is quickly stale in today’s rapidly evolving ESG landscape. To ensure adequate protection against reputation risks and to reap the benefits of good ESG practices outlined above, a proactive approach to ESG risks is needed.
A proactive approach to ESG risks also requires deep visibility into your supply chain. Your reputation risks extend beyond your suppliers to the suppliers of your suppliers. Therefore, your ESG monitoring needs to as well.
As our ESG risk landscape is changing rapidly, your ESG monitoring program should be aligned with current global ESG standards, such as GRI Standards, ILO Labor Standards, WEF Stakeholder Metrics, Financial Stability Board TCFD, UN Global Compact & Sustainable Development Goals and ISO 26000 Social Responsibility Goals.
The SEC’s proposed social disclosure requirements provide an opportunity for companies to shine the light on how they are doing the right thing for their teams. Hopefully, this level of reporting will hold businesses accountable not only for their operations and practices, but their supply chain as well. For global companies, this may seem daunting, but it doesn’t have to be.
Recent advancements in automation, artificial intelligence and machine learning make true continuously monitoring of ESG risks deep into supply chains not only possible, but cost efficient as well. By ensuring you know the overall ESG health and risks of your supply chain in real time, continuous risk monitoring capabilities allow you to go beyond compliance to build a responsible, people-first organization and supply chain. The rewards go far beyond the enterprise to help build a better global business community from which all stakeholders will benefit.