Podcast transcript: Why businesses are measuring social factors as part of their ESG performance

Bruno Sarda

Hello and welcome to the EY Sustainability Matters Podcast I'm Bruno Sarda, and I'm a partner in the Climate Change and Sustainability Services practice at EY [Ernst & Young LLP], and your host for this series. Sustainability Matters is our regular look at ESG and sustainability topics and how they impact organizations around the globe. In each episode, we explore a different issue that’s topical in the sustainability agenda. And I'm joined by a mix of business and thought leaders, as well as colleagues as my guests. The conversation around ESG topics, you know, environmental [E], social [S], governance [G], often focuses on the E, or the environmental factors. But are those elements of ESG that drive the most meaningful impact? In today's episode, we'll be looking at the S in ESG, the social dimensions, to an extent all we do in the sustainability space relates back to human well-being. And increasingly, investors are looking at the contributions that companies make to society as a potential determinant of future business success. 

The business of business is no longer just business; and in these times of hyper transparency, consumer and employee engagement and activism, companies must consider how they create value for stakeholders beyond shareholders. Important concepts like environmental justice, health equity or just transitions are increasingly discussed as part of a broader business agenda. But this value creation can be elusive and difficult to quantify. How can social impact resulting from business activity be measured? And what are the reporting models that can give reliable data to investors and other stakeholders? As the saying goes, if you can't measure it, you can't manage it. So, joining me to talk about the increasing importance of social factors in ESG is my colleague in EY Climate Change and Sustainability Services group, Lucy Godshall [Ernst & Young LLP]. And we're delighted to welcome two distinguished guests: Emily Bayley is ESG project [Head of Private Sector Engagement, ESG] lead for the future of investing at the World Economic Forum [WEF]. And Ebony Thomas is senior vice president for ESG and Public Policy at the Bank of America. Thank you all so much for joining us today for this important conversation. Lucy, over to you.

Lucy Godshall

So environmental, social and governance, ESG is quickly becoming the hot word in business today, on conference agendas, in boardrooms around the world. Now I think there's been a lot of focus on the E and the environment in ESG these days but growing importance and emphasis of the S. Ebony, let's start with you, why is that attention on the S in ESG so vital today?

Ebony Thomas

You know, I think that the E for most people has been around the longest and, and oftentimes we talk about the most. And we think about there are standard metrics that are around the E. But I think that the S is, probably in some ways, the least understood but the most important, or could be the most important. There are deep people, talent implications, diversity and inclusion, social issues that impact a community in which businesses reside, and their ability to respond and action those issues are increasingly important. We are now in a generation where things are right in front of us all the time. And there are expectations that the organizations that we work for, that we spend a great deal of our time with, day in and day out, respond to those issues. Have a voice. Speak out. And so, it is becoming increasingly important that organizations that have not focused on the S really have a structure and a strategy moving forward, because it will only become more important. And if not on the same level playing field of the E, it certainly will be there over time.

Godshall

And now when we think about those social factors and the challenges we face today, I'm really interested and you mentioned the word, Ebony, on expectations. I'm interested in who and what is driving that demand, particularly the investors? What are you seeing from the Bank of America in regards to investor demand?

Thomas

I mean I think all investors, honestly, stakeholders and shareholders – one of the things that have a particular emphasis on S is culture and talent. And that directly impacts the bottom line, because if you're having high turnover, because you don't have a good culture of inclusion or respect, or safety, whatever, you know – your culture is known for if that takes a hit, so then does your talent. And then implications around where people want work, where they want to spend their time. That's a direct impact on shareholders, because that's your ability to recruit the best talent, to be innovative, to really drive the strategy and the structure that you put in place. And so, investors are keenly looking at organization structure, and then beyond investors, individuals, right? They want transparency. Again, it goes back to that time of expectation. At Bank of America, we release our human capital report for the last few years, which really gives full transparency into our people, our practices, who we are  – you know, what diversity and inclusion means to us. And I think that's important when individuals and investors are really trying to figure out what's important to Bank of America. We demonstrate that. We're really transparent about what those issues and what those things are.

Godshall

And speaking of transparency, Emily, I'd love to get your view, your perspective at the World Economic Forum on what you're doing to push and improve transparency when it comes to ESG, and particularly the S, and working with investors and ESG practitioners?

Emily Bayley

And so I mean the last few years as we've taken on this work at the Forum called the Stakeholder Capitalism Metrics Initiative. We really have seen through the course of this initiative a big shift in the importance. As Ebony was saying, you know, there was always a lot of attention paid to the E. The E is perceived to be reasonably well established, the S was kind of a bit ambiguous. We ran a very extensive open consultation process for our work, in 2020 from January to June, which was essentially the six months where you saw the pandemic spreading around the world. You saw the social justice movement really reaching a critical juncture in the US [United States]. And throughout that six-month window, we saw such a shift in the importance that investors were placing on the S metrics that other stakeholders like employees, potential employees, not-for-profits, the general public were really placing on companies to have more transparency in their social metrics. On things like diversity and inclusivity, training and upskilling and, of course, health and safety. 

So, it was interesting. If you look at the inputs we received around February, they evolved so that to move away from, you know, carbon and climate to move more toward health, dignity and diversity. So, it was really fascinating to see in such a short window of time that shift of let's say, creating more emphasis or more urgency on the S part of ESG measurements and disclosures. And as Ebony was saying, I mean there's really a lot to learn at the moment because we're trying to understand how to best provide comparable, consistent and transparent information on social metrics and disclosures. And it's something we're all trying to sort out now through the international processes underway. Through processes underway that are going to start soon in the US and in other jurisdictions, so it's really important now that we're having this conversation so we can start to learn and make sure that when we reach that kind of penultimum of transparency, and consistency, and measurements, and disclosures - we're informed with the best information that we've all been collecting and hearing through the course of the last few years, as this has really come to the forefront of the ESG conversations.

Godshall

And Emily I wanted to pick up on that point with the WEF. I understand you lead a large community of ESG practitioners at the Forum. And you mention, you know, in the kind of the absence of a standardized approach, you know, to measuring social impact. What role do you think the private sector has in demonstrating and reporting on progress beyond compliance?

Bayley

Yeah, so we have what we call a community of ESG practitioners. So, we work with about 350 executives across the finance, sustainability, legal, corporate affairs functions, who are really the senior stakeholders responsible for developing their ESG reporting strategy, and leading the reporting process and their dialogue with stakeholders. So, this community is really from a diverse set of functions, they're also from diverse set of industries, geographies, and also the maturity and kind of capability in ESG reporting. We work with companies who've done ESG reporting for 20 plus years. We also work with companies who are just starting their first ESG reporting cycle now. So, we have a breadth of experiences and different perspectives. And so everyone's kind of learning through this network of peers, what these best practices are. What troubleshooting through measuring some of these metrics is like? How to establish best practices in your organization.

So, we'll have a healthcare company from the EU sharing how they found a tool in the US to measure living wage metric, and they'll come to the community discussion and share that. So then, it helps to have other companies have better awareness of the tools and resources out there to help them measure a living wage and making sure they're complying with the living wage for the countries and the communities in which they operate for all their employees. And it's helping to improve. So, it's this peer exchange mechanism, while this is all voluntary that's really helping to share this knowledge and kind of really disseminate all the learnings we're taking from this work and being able to share those in a community of peers. So, I can't say we've solved all the problems of ESG metrics in this group, but it has certainly helped to enlighten others who have been doing this for so long, and others who are just getting started.

Godshall

And Ebony, as a practitioner in the WEF community, you know, how has Bank of America been approaching social impact measurements strategically within your organization?

Thomas

I think to Emily's point, we're probably one of those who've been doing it for quite some time, right? So, when you think about the range of organizations that are a part of this community, we like to think of ourselves as one that can offer best practices. That can share our journey in a way that for those who are just putting out their report for the first time that there is a frame and/or some foundation that we've been able to provide over the last few years. But to Emily's point it is a work in progress when we think particularly about the S. But I think what we can do with the bank is continue to be transparent. Continue to share what we're learning, what we know. You know, when I think about Covid [COVID-19] for example, I mean Covid [COVID-19] took center stage over the last two years. It's still taking center stage. And when we think about the organizations and what they did for their employees, how they treated their employees, right? Sharing that, understanding that we were all in the midst of a major stress test that we didn't sign up for. And yet there are certain organizations maybe, who had been at the S for quite some time who may have fared better than others.

So what are those things? You know, how can we continue to share and put out there all of the work that we continue to do around health and safety employ? I love what Emily said around health, dignity and diversity. I mean at its core, that's a lot of what the S is about, and they are hard to quantify. But, I think collectively, hopefully with Bank of America and others leading the way, we can come up with some standard ways in which we can think about the dignity of employees and what is that employee, you know, index in terms of what's the baseline? Where do they start for an organization? And what are they saying, you know, year two, year three, year four? And again, being transparent and publishing that information so it sets a baseline for communities.

Godshall

And Ebony, what's getting you real excited about measuring the S today and health outcomes? You know, you've mentioned dignity.

Thomas

I'm so excited because it's new. In some ways it's a whiteboard and I love, you know, what Emily talked about as the collaboration with other organizations. I think that's what's so exciting is that organizations, businesses, non-profits, public, I mean the notion of public, private partnerships that are being generated from the S is incredibly exciting, because it demonstrates that no one place or industry can do this alone, that it has to be in collaboration. And so, the ability to have these amazing collaboratives that work together to come up with 100-year problems, right? You know, 100-year problems that we've had to come up with new and innovative solutions to the work. That is what the S is doing, it is bringing people together in a space and place like never before. So that is what excites me every day.

Godshall

And Emily, as a real, you know, the World Economic Forum has is a real convener of public and private institutions and that collaborator. What gets you excited about the S and what's next on the horizon for, for the WEF?

Bayley

Yeah so just, I mean taking a step back to where we started this initiative three years ago. So, we really initiated this initiative from a global business community perspective. A group of companies who really wanted to come together and see if they could help drive some convergence to actually create better reporting regimes and systems. So that they could communicate their ESG performance in more consistent and comparable ways. This effort was led by Brian Monahan the CEO of Bank of America, who chairs this business community. So, Bank of America has very much been the north star for us, since we started this journey together three years. But, you know, what we've done is because we brought such a global community together on the forum platform. We actually have been able to, or let's say be uniquely positioned, to bring so many different actors into the conversation.

So, it's truly been a multi-stakeholder process. So we've attracted the attention of the different standard setters. And we collaborated with impacts management project to bring them all together in the early stages of this journey. So these are the mergers you know see with the convergence of many of them under the International Sustainability Standards Board [ISSB]. We also were invited to take part as a member of the technical readiness working group of the IFRS [ International Financial Reporting Standards] Foundation to get the International Sustainability Standards Board established. And we were able to feed in the corporate perspective into that process to really make sure that it was for accounted for as we're actually building the foundations. And taking all the learnings we've captured from our work to date. And then, you know, just as this kind of carried on, you know, and then we've been dialoguing with different regulators and policy makers, particularly in the US and the EU, to share the learnings we've taken from the community. 

As they're thinking now about, you know, what's coming forward in the next few years you're going to have a lot of new proposals coming out around social disclosures. Human capital disclosures. Particularly in the US and in the international context. You have the environmental ones out right now for consultation from the International Sustainability Standards Board and from the US SEC [U.S. Securities and Exchange Commission], but there's going to be one's coming shortly on human capital. So it's really, you know, the forum is continuing to be this intermediary, providing these opportunities for dialogue in exchange. And making sure that, you know, in a few years’ time, we actually have standards that are able to provide decision useful information to all stakeholders that companies are able to report in a clear and concise manner. And it's really easy for someone to see the year over year progress that companies are making on their ESG performance. So, it's really an exciting time. We've accomplished a lot in the last three years together, but there's certainly much more that can be done. And the forum's very keen to continue to play this Intermediary platform role to continue to progress toward a globally aligned system for ESG reporting.

Godshall

I'll ask the same question of Ebony. What is next on the horizon for Bank of America in the S space?

Thomas

I think it's the continuation of, you know, the evolution of reporting. And what are those new things that we can continue to add in? You know, we started this conversation around the E and all that we've done in reporting around the E, and now how do we onramp mean a lot of that reporting together. And quite honestly, when we think about some of the social issues that actually intersect with the E, is just as important. How do we co-mingle those metrics together? How do we create net new ones in this collaborative community? And again, you know, I go back to the word of how do we share those and how do we make sure that we continue to be that north star, that leader in this space around ESG reporting? And as we develop, or come up with new ideas around the S, bringing those to a forum where folks can talk through, agree upon and you know, a set of standard metrics moving forward.

Godshall

You made a great point about co-mingling the E, the S, the G and how, you know, when I think about co-mingling I think about the interdependencies and the trade-offs as well. So then you might do something to help the environment but that's not going to be great from a people perspective. Can you give an example, perhaps Ebony of where you're seeing that, you know, in practice at Bank of America?

Thomas

I mean I think it's due and, I would say it's a space that we are continuing to learn more about, right? But when we talk about environmental justice issues for example, right? And the notion of, you know, we recognize that there are certain communities that have been deeply impacted over years based on a number of environmental factors. Heat, lack of, you know, trees and resources. Things that are in those neighborhoods, right? And so how do you now really think about the environment in a social context of putting those two together? What do they look like? It's new, those are the right questions that everyone is, is asking. We talk about water. What does that mean? And so the point of this collaboration and as Emily talked about is for everyone to ask the questions but then really put pen to paper and think about then how do we measure that? Or to be meaningfully changed over time. And so I would say environmental justice is probably one of those, which we've talked about the environment and justice for some time, but I think it's getting more attention than it ever has before so again, it's, it's really capitalizing on the momentum, and continue on with the urgency and to actually then put some measurements around it.

Sarda

Well, thank you for this wonderful and inspiring conversation. I think in this day of stakeholder capitalism, it's a good reminder that business can and should be a force for good and for change. Business can truly operate at the speed and scale needed to address some of these issues, and to compliment public measures and policy in support of social impact. Thank you for the leadership of organization like the World Economic Forum in helping develop new measuring systems, and the contribution of firms like, like the Bank of America in really leading in this space. New measurement systems are needed so that we're not limited to things like market share or earnings per share to determine the value creation potential for business.

On that note, thank you for listening to Sustainability Matters. If you enjoyed this episode, please check out previous episodes on ey.com or wherever you get your podcasts. We'd love you to subscribe. And ratings, reviews and comments are also very welcome. Please also visit ey.com where you'll find a wide range of related and interesting articles that may help put these bigger topics in the context of your business priorities. I look forward to welcoming you on the next episode of Sustainability Matters. My name is Bruno Sarda. You can find me on LinkedIn and feel free to connect with me there. Thanks so much for listening.