Measuring the S of ESG

ES3G – www.es3g.com


“Going forward, what’s needed is to blend feedback directly from workers into the rating process – so that input from business is balanced by input directly from workers”

Measurement is a key requirement of “sustainable” trade and specifically sustainable trade finance and sustainable supply chain finance.

Behind every sustainable trade finance program or supply chain finance program is the principle that a measurable improvement in business performance attracts some kind of benefit for the party delivering it.

Typically, in a trade or supply chain finance program, suppliers that perform well against ESG measures get cheaper financing. Today we typically rely on ratings and “business-to-business” feedback to assess the performance of companies in respect of the labour rights of their workers.

This short article points out that it is time to involve workers directly into the process – and that this is becoming feasible, economic and it is an essential step if the “social component” of sustainable trade is to retain credibility.

Is “S” – social – important?

Yes.

Of the 17 sustainable development goals set by the UN, 10 of them are supported by social measures:

These goals go to the heart of how society provides employment to workers in its economy.

Converting the SDGs into practical measures

The ILO (the International Labour Organisation, an arm of the UN) has published a wide-ranging set of standards to support the delivery of the SDGs – but an easier-to-digest set of measures has been published by the Ethical Trading Initiative in the form of their “base codes”:

Each of these base codes relates meaningfully to labour conditions that workers might experience in their daily lives.

The base codes are not “theoretical”

No system is perfect, but the base codes translate a complex topic into easy-to-consume measures that can be applied to a workplace and to the workers within it.

The next step is to measure the business against the base codes to assess its social performance.

Financiers are keen to be seen to encourage good behaviour, but they don’t have the resources or willingness to form an opinion on how workers are treated in supply chains.

So we need internal rating systems or external rating agencies to help – and/or systematic ways to roll up data harvested from the detail of business operations that can drive an assessment of social performance.

What do we typically do today?

Most sustainable trade finance or supply chain finance programs rely on ratings, social audits and other “business-to-business” tools to assess whether suppliers are treating their workers appropriately.

Suppliers are typically the beneficiaries of trade finance or supply chain finance. Suppliers that are shown to be treating their workers well are invited into sustainable finance programs and typically offered slightly cheaper funding as a result.

But we need to question whether this “business-to-business” process really works.

Here is the challenge

Ratings and social audits of suppliers are business-to-business processes. Some sustainable programs are even built upon suppliers completing “self-assessment questionnaires” to determine their compliance.

But these approaches are now being widely discredited within the specialist labour and human rights arenas – but are still forming the backbone of most trade finance and supply chain finance sustainability programs.

Business-to-business measures of compliance when it comes to labour rights are not generally effective. Asking suppliers whether or not they are fully observing the labour rights of their workers is asking the potential poachers to own up to their own poaching.

Is it practical to Ask The Workers?

It is.

New low-cost technologies are emerging that can link workers at scale to rating agencies, certification bodies, and to business.

With widespread use of smart phones, even in emerging markets, workers have the tools in their hands to provide their feedback, and to do this efficiently, authentically, anonymously and continually.

New technologies are based on apps that workers can download. Workers use the app to provide their feedback, which is then assessed algorithmically and measured against the standards (eg: the ETI base codes).

How does this enable us to measure “S”?

As mentioned above, measuring the performance of the “S” of ESG is a matter of opinion – but that is also why there are rating agencies and ratings available to us to use.

Going forward, what’s needed is to blend feedback directly from workers into the rating process – so that input from business is balanced by input directly from workers.

And that feedback from workers should be continuous to ensure it is authentic and difficult to manipulate – otherwise the sustainability element of trade finance and supply chain finance programs may not be built on a firm foundation.