Approaches to Assessing Corporate Performance on Socially Responsible Operations by Erb Institute

Approaches to Assessing Corporate Performance on Socially Responsible Operations A STUDENT RESEARCH PROJECT PROJECT RESEARCH ASSISTANTS: Junghoon Park – MBA/MS 2022 Ryan Woock – BS 2021 PROJECT ADVISORS: Dr. Ravi Anupindi, Ross School of Business, University of Michigan Dr. Kiyoteru Tsutsui, School of Humanities and Sciences, Stanford University SEPTEMBER 2021

Acknowledgments This project was generously funded by the University of Michigan President’s Advisory Committee on Labor Standards and Human Rights (PACLSHR) and the University of Michigan’s Erb Institute. We would also like to sincerely thank the following contributors for their continued support, advice and guidance during the research. THE RESEARCH ADVISORS: Dr. Ravi Anupindi, Colonel William G. and Ann C. Svetlich Professor of Operations Research and Management and Chair of (UM) President’s Advisory Committee on Labor Standards and Human Rights; and Dr. Kiyoteru Tsutsui, Henri H. and Tomoye Takahashi Professor in Japanese Studies at the Shorenstein APARC at Stanford University and former Director of University of Michigan Donia Human Rights Center. THE MEMBERS OF PACLSHR: Kristen Ablauf, Director of Licensing, Intercollegiate Athletics; Khaled Eid, Senior Contract Administrator, Finance Sponsored Programs; Alexis Handal, Associate Professor, Epidemiology, School of Public Health; Amanda Kaplan, Undergraduate Student, Gerald R. Ford School of Public Policy; Allison Kolpak, Undergraduate Student, Political Science, College of Literature, Science and the Arts; Leila Kawar, Associate Professor of American Culture, College of Literature, Science and the Arts, and of Social Theory & Practice, LSA Residential College; Paul LaBute, Procurement Supervisor, Procurement Services; Joon Lee, Project Management Assistant, Office of the President; and Steve Yaros, Sr. Project Manager, Office of the President. The staff at the Erb Institute: Terry Nelidov, Managing Director; Melissa Zaksek, Research and Thought Leadership Manager; Emily Keeler, Student Affairs & Alumni Manager; and Carmen Quinonez, Marketing and Communications Manager. Special thanks to Sean Ansett, President, At Stake Advisors Ltd., and Dr. David Hess, Professor of Business Law and Business Ethics at the Ross School of Business, for invaluable advice on the preparation of this report.

Table of Contents 2 ACKNOWLEDGMENTS

22 CONCLUSION

APPENDIX A INDICATOR CRITERIA

APPENDIX B LIST OF ASSESSMENT METHODOLOGIES

APPENDIX C DESCRIPTIVE ANALYSIS OF SELECT INDICATOR CRITERIA

EXECUTIVE SUMMARY

6 INTRODUCTION 10 METHODOLOGY A. Definition of Key Terms and Concepts.......... 11 B. Sampling and Data Collection Methods........ 12 C. Categorization of Indicator Data..................... 13

14 FINDINGS Overview...................................................................... 15

37 REFERENCES

FINDING 1: Assessment methodologies represent interests of international NGOs, corporations and investors..................................... 16 FINDING 2: More indicators measure internal management practices over their impact on worker and community rights......................... 17 FINDING 3: Indicators primarily measure companies’ activities using a checkbox approach. ............... 19 FINDING 4: Indicators fail to provide information on the social performance of companies’ suppliers................................................ 21

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Executive Summary

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Following the adoption of the UN Guiding Principles on Business and Human Rights, which mandated business’s responsibility to respect human rights, increasing demand for transparency in corporate supply chains led to a surge in the number of assessment methodologies available to evaluate a company’s performance in socially responsible operations. However, the overabundance of such assessment methodologies has created problems: companies are burdened with the number of indicators to track, and their effectiveness in changing firm behavior is unclear. Previous studies on investorfocused assessment methodologies revealed that the current indicators fail to provide useful information for investors to evaluate corporations’ social performance.

Our study finds that different biases in the social performance indicators influence their usability in improving outcomes for affected stakeholders. Worker unions, community organizations and supplier trade associations are disproportionately underrepresented in the development of assessment methodologies. Indicators tend to focus on internal management practices rather than the impact on labor and community rights. They also measure companies’ inputs and activities with a binary approach rather than a contextual analysis of outcomes on the affected stakeholders. Also, only a small fraction of the indicators referenced supply chains and required information on suppliers’ social performance.

This research aims to review the current status of indicators used by different assessment methodologies to measure corporate performance on socially responsible operations and identify potential gaps in their effectiveness. We reviewed 19 assessment methodologies, including management guidelines, reporting frameworks, environmental, social and governance (ESG) ratings and compliance standards, and analyzed the individual metrics used by each assessment methodology. Our analysis focuses on who developed the indicators, what is being measured, and how it is measured, including indicator type (input, activity, output, outcome) and variable type (binary, categorical, continuous, descriptive).

These biases can exacerbate the current inefficiencies in measuring corporate social performance. By reflecting the perspectives of only a certain group of stakeholders, the indicators may fail to capture critical information that represents actual impact on workers and affected communities. A more inclusive discussion of social performance indicators is needed to improve effectiveness. As next steps, our research suggests a need for comprehensive mapping of activities to outcome indicators and an analysis of stakeholder preferences on desired outcomes—so that assessment methodologies for socially responsible operations can be developed more inclusively.

THIS RESEARCH AIMS TO REVIEW THE CURRENT STATUS OF INDICATORS USED BY DIFFERENT ASSESSMENT METHODOLOGIES TO MEASURE CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS AND IDENTIFY POTENTIAL GAPS IN THEIR EFFECTIVENESS.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

1 INTRODUCTION

INCREASED DEMAND FOR TRANSPARENCY IN THE HUMAN RIGHTS IMPACTS OF CORPORATE SUPPLY CHAINS HAS LED TO THE EMERGENCE OF MULTIPLE ASSESSMENT METHODOLOGIES THAT ATTEMPT TO EVALUATE A COMPANY’S PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Sustainability reporting, from its origins dating back to the first Earth Day of 1970 and through multiple environmental regulations across Europe and the United States, such as the Clean Water Act of 1972 and the Endangered Species Act of 1973, has now become a mainstream business practice among many small and large corporations (Brockett & Rezaee, 2012).1 Unlike the conventional financial reporting model, sustainability reporting seeks to incorporate a company’s financial and non-financial information on ESG performance. Over the years, different methodologies have emerged to assist with, assess and analyze the sustainability information companies disclose. In his review of corporate sustainability reporting tools, Siew divided these methodologies into three categories: frameworks, standards, and ratings and indices (Siew 2015).2 Frameworks assist companies in disclosing sustainability information by providing principles and guidelines. Standards set guidelines on best practices that companies should follow, and ratings and indices attempt to measure corporations’ ESG performance based on the reported information. While initially driven by environmental concerns and regulations, a company’s social performance gradually became a key component of sustainability reporting as well. The working conditions of manufacturing workers in the global supply chains represented by the Nike sweatshops of the 1990s served as a wakeup call and led to increased scrutiny of corporations’ human rights impacts around the world (Harrison & Scorse, 2004).3 The establishment of the UN Guiding Principles on Business and Human Rights in 2011 was critical in clearly stating the responsibility of business to respect human rights.4 Governments also began to take more definitive action to protect workers in global supply chains by enacting regulations such as the California Transparency in Supply Chains

Act, the UK Modern Slavery Act, and the French Corporate Duty of Vigilance Law, which mandate multinational corporations to disclose information on the social performance of their supply chains.5 6 7 Despite such efforts, human rights crises continue to surface across global supply chains in all sectors. Among the worst industrial accidents is the Rana Plaza disaster in 2013, which killed more than a thousand people working in the garment factories housed in an unsafe building (ILO, n.d.).8 Following such disasters, and witnessing continued reports of human rights violations in corporate supply chains, various stakeholders are increasingly demanding to know what companies are doing to ensure compliance with international labor standards and improve the human rights conditions of workers and affected communities. As customers, especially large institutional customers such as universities and hospitals, take products’ human rights implications into their purchasing decisions, corporate managers begin to recognize their role in addressing the labor and human rights issues in their supply chains. Investors are also taking notice of the importance of corporations’ social performance in their investment portfolios (Bernow et al.).9 Increased demand for transparency in the human rights impacts of corporate supply chains has led to the emergence of multiple assessment methodologies that attempt to evaluate a company’s performance on socially responsible operations. A 2015 study by de Felice identified at least 30 methodologies across different types, including management tools, reporting frameworks, ESG indices, sustainability standards, human rights impact assessment tools and ethical ratings (de Felice, 2015).10

1 Brockett, A. M., & Rezaee, Z. (Eds.). (2012). Corporate sustainability: Integrating performance and reporting (pp. 27-35). N.p.: John Wiley & Sons. 2 Siew, R. Y. (2015, September 15). A review of corporate sustainability reporting tools (SRTs). Journal of Environmental Management, 180-195. 3 Harrison, A., & Scorse, J. (2004). The Nike Effect: Anti-Sweatshop activists and labor market outcomes in Indonesia. Ann Harrison (UC Berkeley and NBER) and Jason Scorse (UC Berkeley). 4 Ruggie, John. (2011), Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework, Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises. U.N. GAOR, Hum. Rts. Council, 17th Sess., U.N. Doc. A/HRC/17/31. 5 Modern Slavery Act 2015, c. 30 (Eng.), www.legislation.gov.uk/ukpga/2015/30. 6 Cal. Civ. Code § 1714.43 (West 2017). 7 LOI n° 2017-399 du 27 mars 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre, www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000034290626&categorieLien=id. 8 The Rana Plaza accident and its aftermath. (n.d.). In International Labour Organization. Retrieved December 18, 2020, from www.ilo.org/global/topics/geip/ WCMS_614394/lang--en/index.htm. 9 Bernow, Sara, et al. (2019), More than Values: The Value-Based Sustainability Reporting That Investors Want. McKinsey & Company. www.mckinsey.com/business-functions/sustainability/our-insights/more-than-values-the-value-based-sustainability-reporting-that-investors-want#. 10 de Felice, D. (2015). Business and Human Rights Indicators to Measure the Corporate Responsibility to Respect: Challenges and Opportunities. Human Rights Quarterly 37(2), 511-555. doi:10.1353/hrq.2015.0031.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

While such increased focus on transparency and disclosure of sustainability information has greatly improved the availability of data on labor and human rights conditions in global corporate supply chains, the effectiveness of these transparency initiatives is questionable. Critics argue that companies may selectively disclose information that would present their behavior positively. Others point out that increased reporting and disclosures do not lead to meaningful organizational change in company practices, so they fail to improve workers’ and communities’ human rights conditions (Hess, 2019).11 Companies now feel overburdened by the number of assessment methodologies and social performance indicators that they have to fulfill. A 2019 survey by McKinsey & Company indicates that 89% of investors and 86% of corporate executives surveyed think there should be fewer sustainability reporting standards to help them make more effective decisions (Sara et al., 2019).12 Having to follow different transparency guidelines and adopt different assessment methodologies creates inconsistencies in

how companies audit and rate their suppliers and in the demands that the companies impose on suppliers to achieve compliance (Kuruvilla et al., 2020).13 Studies investigating the metrics used for social performance indicators in these assessment methodologies, to understand the discrepancy between the quantity of data produced and the effectiveness of improving corporate human rights impact, are sparse. A 2017 study by the New York University Center for Business and Human Rights provides valuable insights into analyzing these metrics. The researchers reviewed the social performance indicators used by 12 reporting frameworks and ESG ratings and indices, and found little standardized definition of what constitutes social performance. Moreover, almost all the indicators reviewed targeted corporations’ efforts rather than the effects on workers. The researchers concluded that the lack of definition of social indicators and the tendency to measure what is convenient over what is meaningful render the current assessments based on reporting frameworks and ESG indices unfit for socially responsible investors’ needs (O’Connor & Labowitz, 2017).14

11 Hess, D. (2019), The Transparency Trap: Non-Financial Disclosure and the Responsibility of Business to Respect Human Rights. Am Bus Law J, 56: 5-53. doi:10.1111/ablj.12134. 12 Bernow, Sara, et al. (2019), More than Values: The Value-Based Sustainability Reporting That Investors Want. McKinsey & Company. www.mckinsey.com/business-functions/sustainability/our-insights/more-than-values-the-value-based-sustainability-reporting-that-investors-want#. 13 Kuruvilla, S., Liu, M., Li, C., & Chen, W. (2020). Field Opacity and Practice-Outcome Decoupling: Private Regulation of Labor Standards in Global Supply Chains. ILR Review, 73(4), 841–872. https://doi.org/10.1177/0019793920903278. 14 O’Connor, C., Labowitz, S. (2017). Putting the “S” in ESG: Measuring Human Rights Performance for Investors. NYU Stern Center for Business and Human Rights. www.stern.nyu.edu/experience-stern/global/putting-s-esg-measuring-human-rights-performance-investors.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

In 2018, Shift reviewed 12 ESG indices and reported that human rights indicators simply measure the resources that a company uses for an activity rather than indicate outcomes for the business and affected stakeholders. The report also notes that the indicators focus on questions that can be answered in binary “yes” or ”no,” and then those answers are translated into a rating on a numerical scale. While this approach allows for comparison among companies, it limits the ability to evaluate more qualitative and nuanced indicators (Erangey, 2018).15 Both the NYU and Shift studies provide invaluable insight on the current status of ESG ratings and indices, typically developed by investor-oriented companies and organizations. However, focusing on ESG indices and investors as the sole stakeholder group provides only a partial picture. To gain a comprehensive understanding of the effectiveness of social performance indicators’ effectiveness, the analysis must be expanded to include other types of assessment methodologies and their impact on stakeholders, such as business managers and workers in supply chains. Building on the research methodologies established by the previous literature, this study aims to analyze the social performance indicators used in the full spectrum of assessment methodologies.

Addressing not only the investor-focused methodologies of frameworks and ESG indices but also standards, including management guidelines and compliance standards (Siew, 2015)16, this research explores the following questions: 1. What stakeholders are involved in developing the assessment methodologies, and whose interests do they represent? 2. What data are being collected as social performance indicators, and how are they being collected? 3. What factors determine the effectiveness of social performance indicators in improving outcomes for workers and affected communities in supply chains? By aggregating, collating and analyzing the current landscape of assessment methodologies on socially responsible operations in supply chains, we intend to advance the discussion on imagining the future of assessment methodologies that can lead to meaningful change in outcomes for workers and affected communities in the global supply chain network.

15 Erangey, G. (2018). Evaluating human rights performance: The role of ESG ratings, indices and benchmarks in driving change. In Shift. Retrieved from https://shiftproject.org/wp-content/uploads/2019/09/evaluating-human-rights-performance.pdf. 16 Siew, R. Y. (2015, September 15). A review of corporate sustainability reporting tools (SRTs). Journal of Environmental Management, 180-195.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

2 METHODOLOGY

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

METHODOLOGY

A. DEFINITION OF KEY TERMS AND CONCEPTS 1. Labor Standards and Human Rights This research narrowly defines the labor standards and human rights that are in scope for assessing a company’s performance on socially responsible operations as economic, social and cultural rights applicable to workers of a company’s extended supply chain and the communities in which the company operates production facilities or sources raw materials. These include labor rights recognized by the International Labour Organization (ILO) International Labour Standards, International Covenant on Economic, Social and Cultural Rights (ICESCR), national and regional laws, and other relevant human rights instruments.

While recognizing a business’s responsibility toward a broader group of stakeholders, this research does not include a company’s responsibility to the environment, consumers and communities that are not directly associated with the company’s operations. Please refer to Appendix A for the detailed list of in-scope indicator criteria.

2. Assessment Methodologies Assessment methodologies are frameworks and guidelines that are available for a company or its stakeholders to report and evaluate the company’s social performance on ensuring labor standards and human rights. De Felice, in his review of business and human rights indicators, divided the assessment methodologies into six categories based on the purpose and target stakeholders of each standard (de Felice, 2015).17 Building on this previous study, we further collapsed the standards into four categories based on the general purpose of each category of assessment methodologies:

• Compliance Standards – Compliance standards are most commonly developed and used by thirdparty organizations to validate the claims companies make on their social compliance. Through different methods, including on-site audits and document reviews, these organizations may certify, assure, attest or accredit a company’s social compliance in accordance with the methodology they employ. Examples of this type of assessment methodology are SA8000, FLA Principles of Fair Labor & Responsible Sourcing/Production and ICMM Assurance Procedure.

• Management Guidelines – We define management guidelines as a group of international and regional regulations and mandates that outline what companies should do to fulfill their responsibility to respect labor standards and human rights. Examples of management guidelines include the OECD Guidelines for Multinational Enterprises, ILO MNE Declaration and IFC Sustainability Framework.

• ESG Ratings – Using the data provided by companies, third-party organizations and other sources, such as media reports, ESG ratings rate the companies’ performance on socially responsible operations and often rank them for comparison. Examples include Corporate Human Rights Benchmark (CHRB) and Refinitiv/S-Network ESG Best Practices Ratings.

• Reporting Frameworks – Reporting frameworks are tools companies use to showcase how well they are fulfilling the responsibilities imposed in the management guidelines. The most commonly used examples of this assessment methodology include GRI Standards, SASB Standards and NASDAQ ESG Reporting Guide.

Please see the References section at the end of the report for links to each of the assessment methodologies included in the research.

17 de Felice, D. (2015). Business and Human Rights Indicators to Measure the Corporate Responsibility to Respect: Challenges and Opportunities. Human Rights Quarterly 37(2), 511-555. doi:10.1353/hrq.2015.0031.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

B. SAMPLING AND DATA COLLECTION METHODS 1. Selection of Assessment Methodologies

2. Assessment Methodologies: Background Information

The aim of this research is to build a comprehensive database of indicators that currently available assessment methodologies use to evaluate companies’ performance on socially responsible operations. But, due to resource limitations, priority is given to certain assessment methodologies in collecting and analyzing data.

For each assessment methodology, we collected the following background information on its publication and issuing organization:

Criteria for prioritization include:

• Issuing organization name

• Non-industry-specific or applicable to multiple industries

• Issuing organization type (private, nonprofit, multi-stakeholder, intergovernmental)

• Cross-referenced in other assessment methodologies and corporate reports

• Stakeholder representation

• References in major media sources and keyword search queries such as “sustainability reporting,” “ESG index” and “human rights standards” • Assessment criteria and indicator details are publicly available Based on the priorities above, we selected 19 assessment methodologies for initial review. Please refer to Appendix B for the list of selected methodologies.

• Year first published • Year last revised • Revision frequency/period

For each assessment methodology reviewed, we determined the types of stakeholder representation by inspecting the current and past positions held by the members of groups responsible for developing the methodology, such as the board of directors, standards committee and members council. Stakeholders without decision-making authority, such as observers and advisory members, were excluded from this analysis. • Evidence type Self-report: The assessment methodology relies on self-reported data from the company. Documentation review: The assessment methodology evaluates the availability and content of documentation issued by the company. On-site inspection: The assessment methodology requires on-site verification by a third-party auditor.

3. Assessment Indicators For each assessment methodology, the set of indicators that is relevant to the above-defined labor standards and human rights is extracted from the issuing organization’s documentation on assessment

methodology. We also recorded the original categorization of the indicators and reference code assigned by the issuing organization, when applicable.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

METHODOLOGY

C. CATEGORIZATION OF INDICATOR DATA 1. Indicator Criteria

2. Indicator Analysis

Upon review of the documentation and categorization of indicators by each assessment methodology, we developed a list of 29 indicator criteria and assigned each indicator to one of the identified criteria.

In addition to the assessment criteria, we developed the following attributes to analyze each indicator’s characteristics:

Then, we grouped the criteria into the following four categories:

• Industry - Whether the indicator is designed specifically for a certain industry. This attribute includes an option for “non-industry-specific” records.

• Management Practice – Indicators associated with the processes companies can use to manage supply chain human rights risks, including commitment to human rights, governance and accountability, management systems, supplier management, reporting and transparency measures.

• Supply Chain Coverage - Whether the indicator specifies coverage of the company’s supplier in its measurement

• Worker Rights – Indicators topically associated with the rights of workers in the supply chain, including freedom of association, forced and child labor, employment discrimination, wages and hours of work, recruitment practices, and worker health, safety and well-being.

• Indicator Type - The type of information the indicator measures, categorized as below:

• Community Rights – Indicators topically associated with the rights of affected communities in the supply chain, including land and Indigenous rights, security arrangements, conflict areas and community development. • Business Ethics – Indicators topically associated with business ethics, including anti-corruption, regulation compliance and corporate citizenship. We then further classified the indicators under worker rights, community rights and business ethics as topic-based indicators, because they target a specific area of labor standards and human rights. We classified those under management practice as process-based indicators, because they focus more on how a company manages its human rights risks, regardless of what those risks are.

• Supply Chain Tier Depth - If the indicator covers the company’s suppliers, the lower limit of supplier tier depth the indicator applies to

Input: The amount or level of resources allocated for social responsibility Activity: Actions taken by the company or its suppliers in relation to social responsibility, including assessments, training and stakeholder engagement Output: Immediate results of the company or its suppliers’ input or activity Outcome: Realized impact on the labor standards and human rights of workers and affected communities in the supply chain. Please refer to Appendix C for examples of each indicator type. • Variable Type - How the indicator is measured, categorized as below: Binary: Yes/no, satisfactory/unsatisfactory Categorical: Choose from available options Continuous: Measurement of a continuous variable, such as rating or percentage Descriptive: Description of the actions taken or outcomes observed

Please refer to Appendix A for a detailed description of each criterion.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

3 FINDINGS

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

FINDINGS

Overview of assessment methodologies and indicator characteristics We classified the 19 selected assessment methodologies along the four categories:

For the 19 assessment methodologies analyzed, we observed a total of 2,403 indicators. The number of indicators for each assessment methodology varied significantly between 33 (the Voluntary Principles on Security and Human Rights) and 351 (FLA Workplace Code of Conduct). The average number of indicators per methodology was 127, and the median was 99.

MANAGEMENT GUIDELINES REPORTING FRAMEWORKS COMPLIANCE STANDARDS ESG RATINGS The number of assessment methodologies under each category ranged from four to six, providing a reasonably balanced analysis of each assessment methodology type. Within the sample of assessment methodologies inspected, management guidelines and compliance standards were developed earlier, ranging from 1976 (OECD Guidelines for Multinational Enterprises) to 2006 (ICMM Assurance Procedure), while the earliest reporting frameworks and ESG ratings were published later, in 2009 (Refinitiv ESG Best Practices Ratings). For most of the assessment methodologies, the latest revision occurred within the last five years. Please refer to Appendix B for the year of publication and revision for each assessment methodology. The type of evidence collected by each assessment methodology shows that management guidelines and reporting frameworks rely heavily on selfreported data. Most of the ESG ratings based their assessment on a review of the documentation available publicly or received directly from the company. All compliance standards included some components that required a third-party inspection on-site. Please refer to Table 1 below.

We then reviewed the distribution of indicators across the 19 assessment methodologies and the indicator criteria listed in Appendix A. While the number of assessment methodologies under each category was somewhat balanced, the aggregated number of indicators for each methodology type varied significantly. Compliance standards had the largest number of indicators, totaling 886 metrics across 5 assessment methodologies, and management guidelines had the least, totaling 401 metrics across 6 assessment methodologies. In the following pages, we summarize our findings from the general analysis of indicators across multiple criteria. In addition, we selected three indicator criteria— reporting and transparency, remedy and corrective action, and stakeholder engagement— for a deeper analysis. These are closely related to the discussion of corporate disclosures’ effectiveness in inducing actions to address the labor and human rights issues in supply chains. For each of these three criteria, we reviewed what assessment methodologies require companies to report on the topic and what specific metrics are used to measure performance. We found that the characteristics of indicators in these three criteria follow the trends from our overall findings. Please refer to Appendix C for a descriptive analysis of the three indicator criteria.

Table 1 - Assessment Methodologies by Type and Evidence (count) EVIDENCE TYPE Assessment Methodology Type

Documentation Review

Compliance Standards ESG Ratings

On-site Inspection

Reporting Frameworks 4

Grand Total 5

Management Guidelines

Grand Total

Self-Report

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

FINDING 1:

Assessment methodologies represent interests of international NGOs, corporations and investors. Our review of the types of organizations that issued the selected assessment methodologies showed that most of the methodologies are developed by either a nongovernmental organization or a multistakeholder initiative that includes nongovernmental organizations as significant contributors. Only 2 out of 19 assessment methodologies were solely developed by a private-sector entity. We recognize this bias in our selection of assessment methodologies, due to the limited accessibility of indicator details developed by private ESG ratings. Please refer to Table 2 below.

of directors. While about 60% of the assessment methodologies involved at least one member in their decision-making body who has experience in international NGO and corporate management, less than 30% of the methodologies had any representatives from community organizations, labor unions or supplier associations engaged in developing indicators. This gap would increase further when adjusted for the Fair Labor Association, which accounts for three of the methodologies reviewed and involves both labor union and community organization representatives. Please refer to Table 3 below.

We then reviewed the stakeholder representation within the decision-making bodies, such as their boards

Table 2 - Assessment Methodologies by Type and Organization (count) EVIDENCE TYPE Organization Type

Compliance Standards

Management Guidelines

ESG Ratings

Intergovernmental

Reporting Frameworks

Grand Total

Multi-stakeholder

Nongovernmental

Private Grand Total

Table 3 - Stakeholder Representation by Assessment Methodology Type (count) EVIDENCE TYPE Management Guidelines

Reporting Frameworks

Compliance Standards

ESG Ratings

Grand Total

International NonGovernmental Organization

Multinational Corporation

Investor/Shareholder

Academic Institution

Intergovernmental Organization

National Government

Community Organization

Labor Union

Supplier Association

Organization Type

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

FINDINGS

FINDING 2:

More indicators measure internal management practices over their impact on worker and community rights. Aggregating the number of indicators across the 19 assessment methodologies by the four indicator criteria categories—management practice, worker rights, community rights and business ethics—we noticed that about 45% of the total indicators focus on the company’s internal management practices, such as commitment to human rights, governance structure and procedures on human rights due diligence. Indicators addressing specific worker rights areas accounted for the other 42% of the total. However, the number of indicators for the worker rights category is largely driven by one assessment methodology: FLA Workplace Code of Conduct, which contains 333 indicators in the category. The number of indicators measuring management practice dominates, by a large margin, all other methodologies reviewed. A significantly lower number of indicators was identified for the business ethics and community rights categories, each accounting for less than 7% of the total indicators reviewed. Please refer to Table 4 below.

Moreover, the distribution of indicators across the criteria categories within an assessment methodology differed significantly. We observed that some methodologies rely almost exclusively on management practice criteria, or, in other words, process-based indicators. At the other end of the spectrum, some methodologies leaned heavily toward topic-based indicators, including the worker rights, community rights and business ethics categories. For example, 95% of indicators assessed by the Fair Labor Association Workplace Code of Conduct are associated with topics under worker rights, while the indicators that the UN Guiding Principles Reporting Framework Assurance Guidance use are exclusively concerned about a company’s management practice. Most of the other assessment methodologies were situated somewhere in the middle of the spectrum, balancing between the two approaches. Please refer to Figure 1 on page 18.

Table 4 – Indicators by Methodology Type and Criteria Category (count and percent) Assessment Methodology Type Compliance Standards Criteria Category

Count

ESG Ratings Count

Management Guidelines Count

Reporting Frameworks Count

Total Count

Total %

0.45%

7.42%

12.22%

9.57%

150

6.24%

1.58%

6.11%

22.94%

4.86%

166

6.91%

Management Practice

345

38.94%

219

47.82%

186

46.38%

339

51.52%

1089

45.32%

Worker Rights

523

59.03%

177

38.65%

18.45%

224

34.04%

998

41.53%

Grand Total

886

100.00%

458

100.00%

401

100.00%

658

100.00%

2403

100.00%

Business Ethics Community Rights

Percent of Indicator 0.45%

59.03

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

FLA Workplace Code of Conduct

ILO MNE Declaration

SASB Standards

IFC Sustainability Framework

Global Compact Self Assessment Tool

SA8000

Just Capital

NASDAQ ESG Reporting Guide

GRI 400 - Social Standards

The OECD Guidelines for Multinational Enterprises

Reﬁnitiv/S-Network ESG Best Practices Ratings

KnowTheChain Benchmark

Corporate Human Rights Benchmark

UNGC Advanced COP Self-Assessment

ICMM Assurance Procedure

The Voluntary Principles on Security and Human Rights

FLA Principles of Fair Labor & Responsible Production

FLA Principles of Fair Labor & Responsible Sourcing

UN Guiding Principles Reporting Framework Assurance Guidance

% o- Based Indicatorsf Process

Figure 1 – Process-Based Indicators by Assessment Methodology (percent) 100% Percent of Process

4.84% 1

75%

50%

25%

FINDINGS

FINDING 3:

Indicators primarily measure companies’ activities using a checkbox approach. Within the four types of indicators (input, activity, output, outcome), 1,415 indicators (58.9%) measured the activity of the company or its suppliers, such as enacting a policy and implementing procedures. Only 485 indicators (16.0%) had a component in their measurement that asked about the realized outcome, including employee behavioral changes and decreasing the number of human rights allegations. Also, 85 input indicators measured the amount of money and resources invested, and 518 output indicators described the immediate result of the company’s activities. Please refer to Table 5 below.

Disaggregating the data by assessment methodology types further showed a strong preference among compliance standards and management guidelines to measure activities that companies are undertaking to adhere to the labor and human rights standards. In comparison, reporting frameworks most often used outcome measures to evaluate a company’s performance on socially responsible operations. Please refer to Table 6 below.

Table 5 – Indicators by Methodology Type and Criteria Category (count and percent) Indicator Type

Count

% of Total

1415

58.88%

3.54%

518

21.56%

Activity Input Output Outcome Grand Total

385

16.02%

2403

100.00%

Table 6 – Indicators by Type and Assessment Methodology (count and percent) Assessment Methodology Type Compliance Standards Indicator Type Activity Input Output Outcome Grand Total

Count

ESG Ratings Count

Management Guidelines Count

Reporting Frameworks Count

Total Count

Total %

593

66.93%

227

49.56%

361

90.02%

234

35.56%

1415

58.88%

1.02%

6.55%

1.25%

6.23%

3.54%

233

26.30%

118

25.76%

5.74%

144

21.88%

518

21.56%

5.76%

18.12%

2.99%

239

36.32%

385

16.02%

886

100.00%

458

100.00%

401

100.00%

658

100.00%

2403

100.00%

Percent of Indicator 1.02%

90.02%

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Of the 385 indicators that measured outcomes, a significant number (41.8%) fall under the criteria of worker health, safety and well-being; diversity and employment discrimination; and governance and accountability, where outcomes are relatively easier to measure. Examples of the most commonly used outcome indicators include workplace incident rates and workforce representation by race and gender. Please refer to Figure 2 below.

response to the indicator was descriptive, accounting for 343 items (14.3%). A descriptive indicator was commonly used to provide additional context, to complement binary or continuous indicators. For example, a continuous indicator might ask the number of employees by employment type, whereas contract in GRI Standards (Disclosure 102-8a – 102-8c)— is a descriptive indicator stating “whether a significant portion of the organization’s activities are performed by workers who are not employees. If applicable, a description of the nature and scale of work performed by workers who are not employees (Disclosure 102-8d)”—was used to provide additional context (GRI, 2016).18 Please refer to Table 7 below.

Looking at how the indicators are measured (binary, categorical, continuous, descriptive), most of the indicators followed a binary approach, eliciting an indication of yes or no, totaling 1,697 items (70.6%). Another popular method to measure a company’s Figure 2 - Outcome Indicators by Indicator Criteria (count) Indicator Criteria

Number of Outcome Indicators

Worker Health, Safety and Wellbeing Diversity and Employment Discrimination Governance and Accountability Supply Chain Management Freedom of Association and Collective Bargaining Anti-Corruption Remedy and Corrective Action Fair Wage Stakeholder Engagement Ethical Recruitment and Termination Commitment to Human Rights and Labor Standards Reporting and Transparency Regulation Compliance Management System - Monitoring and Evaluation Community Stewardship Management System - Planning Management System - Execution Forced labor and Trafﬁcking in Persons Marketing & Labeling Conﬂict Areas Child labor Shareholder Rights Worker Training and Career Development Indigenous Rights Corporate Citizenship & Philanthrophy Hours of Work

7 7 6 5 4 3 3 3 3 2 1 1 0

18 17 15 15 13 11 11 10

25 23 21

80 46

Table 7 - Indicators by Variable Type (count and percent) Variable Type

Count

% of Total

Binary (Yes/No)

1697

70.62%

Categorical

0.42%

Continuous

353

14.69%

Descriptive Grand Total

343

14.27%

2403

100.00%

18 “GRI Standards Download Center.” Global Reporting Initiative. Global Reporting Initiative, 2016. www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-english-language/.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Based on the analyses of the indicator type and variable type, we performed a test for association to understand the relationships among them. Most of the indicators were binary measures of the company’s activities, such as whether a company enacts a human rights policy or provides worker training. Input and output indicators

FINDINGS

were most commonly measured in a binary format as well, while outcome indicators used continuous measures more often, as shown in cases of employee diversity representation and workplace incident rates. Please refer to Table 8 below.

Table 8 - Indicators by Type and Variable Type (percent) Variable Type Indicator Type

Binary (Yes/No)

Categorical

Continuous

Descriptive

Grand Total

49.19%

0.21%

0.79%

8.70%

58.88%

1.58%

0.00%

0.79%

1.17%

3.54%

15.44%

0.17%

3.75%

2.21%

21.56%

4.41%

0.04%

9.36%

2.21%

16.02%

70.62%

0.42%

14.69%

14.27%

100.00%

Activity Input Output Outcome Grand Total Percent of Indicator 0.04%

49.19%

FINDING 4:

Indicators fail to provide information on the social performance of companies’ suppliers. Of the total of 2,403 indicators reviewed, 89% measured only the company’s social performance. Only 11% of the indicators either referenced both the company and its suppliers or were specific to the suppliers. Within those indicators that concerned

suppliers, most did not specify the type and the depth of supplier tiers that the indicator covered. Please refer to Table 9 below. The most common example of indicators related to supply chains was human rights clauses being included in supplier codes of conduct.

Table 9 - Indicators by Supply Chain Tier Depth (count and percent) Supply Chain Tier Depth Company Only Some Supplier (not specified) Tier 1 Supplier Grand Total

Count

% of Total

2132

88.72%

261

10.86%

0.42%

2403

100.00%

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

4 CONCLUSION OUR EXAMINATION OF THE CURRENT ASSESSMENT METHODOLOGIES TO EVALUATE CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS SHOWS THAT DIFFERENT BIASES CAN BE INTRODUCED IN THE EVALUATION.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Addressing the biases in measuring corporate performance on socially responsible operations Our examination of the current assessment methodologies to evaluate corporate performance on socially responsible operations shows that different biases can be introduced in the evaluation. These biases can determine whose interest is represented in developing the methodology, what the indicators measure, how they are being measured, and the assessments’ ultimate usability of the assessments. Our review of stakeholder representation in the organizations that develop assessment methodologies found that the decision-making groups in these organizations mostly comprise people with backgrounds in international NGOs, corporations and investors. We noted that the voices of players at the bottom of the supply chains—suppliers, workers and affected communities—are significantly underrepresented. This imbalance of perspectives can lead to a lack in both the quantity and quality of indicators in certain areas of assessment. For example, a common outcome indicator in diversity and employment discrimination criteria is the percentage of employees disaggregated by gender. While this indicator may be meaningful to a corporate manager who would need this information for regulatory compliance, it does not reveal much about the quality of the positions available or employment mobility opportunities for a female worker who seeks to build a career at the company. Moreover, our research has identified that a significantly large proportion of indicators concern the companies’ internal management practices, while they are lacking in measuring the impact on the rights of affected communities and supply chain operations. This result correlates with the limited proportion of members with community organization and supplier representation background in the makeup

of the decision-making bodies of the organizations developing the assessment methodologies. Previous studies on ESG ratings and social indicators repeatedly reported that the vast majority of indicators focus on measuring companies’ inputs, activities and immediate outputs, rather than the realized outcomes on workers and affected communities. Our research reaffirms the previous findings and points out that most of these indicators are measured with a checkbox approach. These findings show the assessment methodologies’ tendency to measure what is convenient over what is meaningful. Our in-depth review of the indicator criteria related to reporting and disclosure also shows that the companies are measured for simply providing information regarding their policies and procedures, rather than showing their effectiveness on stakeholder impact. Biases in the assessment methodologies may also influence the usability of the assessment results for various users. The assessment methodologies included in our research showed a varying mix of process-based indicators and topic-based indicators. A company that has a strong external statement on its commitment to human rights may perform well on a process-based methodology, such as the UN Guiding Principles Reporting Framework, that highly values management practices companies implement in addressing human rights issues. This indicator would be useful to an impact investor, because it tells where the company is planning to allocate its resources in the coming years. However, this indicator would be meaningless for a local civil society organization that is attempting to negotiate living wages for the workers employed by one of the company’s suppliers.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Toward inclusive development of social performance indicators The goal for the next generation of assessment methodologies of socially responsible operations should be to build a strong set of indicators that reflect the realized outcome of corporate activities—and one that can drive value creation and improve well-being for workers and affected communities in global supply chains. The first step forward is to understand the desired outcomes of different corporate activities that are currently being measured. A lesson from the monitoring and evaluation field and “Theory of Change” framework is that we can sequentially map all of a project’s activities to one or more outcomes (USDOL, 2018).19 Aligning the activities to outcomes will help us identify the common sets of outcomes that can be measured and where gaps exist in the current measurement of outcome indicators. We would then need to add, refine and prioritize these sets of outcome indicators based on what outcomes are meaningful for different stakeholders. Analyzing the dependencies among different outcomes, and how an outcome takes precedence over others in addressing one or more issues, would also be valuable. In this process, incorporating the perspectives of people at the bottom of the supply chains—workers, suppliers and affected communities—is especially important. For example, an investor concerned with the company’s ESG risks may value risk-based indicators, such as compliance with minimum wage requirements

and reported incidents of forced and child labor. However, factory workers may desire forwardlooking outcomes, such as skills development and employment mobility into management roles. The 2016 Amnesty International report on the artisanal cobalt mining in the Democratic Republic of Congo shows the complex nature of the human rights issues that workers face (Amnesty International, 2016).20 While the primary concern from the international society was child labor, the report suggests loss of wages and income of the children’s parents as a contributing cause, and access to education as the desired outcome for UNICEF and other nongovernmental organizations. An inclusive understanding of what outcomes matter the most will help reduce bias in the types of indicators used. We recognize that the current checkbox approach is not conducive to creating an outcome indicator that is informative and meaningful for stakeholders. For example, a company may indicate that it has a collective bargaining agreement with the workers in its manufacturing facilities, but the indicator cannot speak to the quality of the agreement. The trade union may be pressured or co-opted to include exploitative clauses in the agreement. We need to include the perspectives of those who are the most affected by these outcomes in discussing the appropriate proxies to measure the desired outcomes, both quantitatively and qualitatively.

19 Resources for developing an OCFT comprehensive monitoring & evaluation plan (CMEP). (2018, February 13). In US Department of Labor. Retrieved from www.dol. gov/sites/dolgov/files/ILAB/CMEP%20Resource%20Document_FINAL%2002132018.pdf. 20 “This is what we die for”: Human rights abuses in the Democratic Republic of Congo power the global trade in cobalt. (2016). In Amnesty International. Retrieved from www.amnesty.org/en/documents/afr62/3183/2016/en.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

APPENDIX A

Indicator Criteria

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Criteria Category

Management Practice

Worker Rights

Indicator Criteria

Criteria Description

Commitment to Human Rights and Labor Standards

Demonstration of commitment to human rights and labor standards through public statement, business model, membership and endorsement, leadership behavior

Governance and Accountability

Assignment, composition, competency, and operation of a governing body, including board of directors, senior management, and functional department/ personnel responsible for implementing, assessing, monitoring, responding, and reporting on labor and human rights issues and standards

Management System - Planning

Availability or documentation of management policies and procedures to implement, assess, monitor, respond, and report on labor and human rights issues and standards

Management System - Monitoring and Evaluation

Monitoring and evaluation of the company’s management system on labor and human rights

Management System - Execution

Implementation of human rights due diligence activities

Management System - Remedy and Corrective Action

Implementation or documentation of the results of implementing grievance mechanisms and remedying activities, including corrective and preventive actions to human rights impact assessment

Stakeholder Engagement

Communication of or involvement in the development of the company’s labor and human rights policies, processes and procedures with general or specific stakeholders, including the employees, shareholders, suppliers, business partners, affected communities, governments

Supply Chain Management

Application of the supplier’s labor and human rights performance in procurement and sourcing decisions, including supplier onboarding, contract renewal and termination

Reporting and Transparency

Public disclosure or third-party inspection of the reports and data on the company’s performance on labor and human rights issues and standards, including integrated reporting, sustainability reporting, third-party assurance and attestation

Freedom of Association and Collective Bargaining

Practice or status within the company’s extended supply chain regarding protection of workers’ right to form or join trade unions and to engage in collective bargaining

Forced Labor and Trafficking in Persons

Practice or status within the company’s extended supply chain regarding the use of forced labor, encompassing issues such as human trafficking, debt bondage, recruitment fees, wage delays, freedom of movement, retention of personal documents

Child Labor

Practice or status within the company’s extended supply chain regarding the use of child labor

Diversity and Employment Discrimination

Equal rates of remuneration for the work of equal value and other forms of discrimination in occupation and employment (ILO Convention No. 100, 111)

Fair Wage

Practice or status within the company’s extended supply chain regarding the amount of compensation for work, such as minimum wage, living wage, overtime pay and other fringe benefits including health insurance and retirement benefits

Hours of Work

Number and time of working hours

Ethical Recruitment and Termination

Practices in hiring and terminating employees, including use of recruiting agencies, recruitment fees

Worker Abuse and Harassment

Employee abuse and harassment beyond the scope of employment discrimination

Worker Training and Career Development

Employee training on the job function and support of career development, including performance reviews and education support

Worker Health, Safety and Well-being

Healthy and safe working conditions, healthcare provided to workers, and additional benefits related to worker well-being

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Criteria Category

Community Rights

Business Ethics

Indicator Criteria

Criteria Description

Indigenous Rights

Rights of the people who are indigenous to the region where the company and its suppliers operate or extract resources from

Land Rights

Land and tenure rights held by the communities associated with the company’s acquisition and development of property

Security Arrangements

Use of public or private security at the premises of the company and its suppliers

Conflict Areas

Business operation and materials sourcing in areas of conflict

Community Stewardship

The company’s impact on and involvement with the development of communities that the company and its suppliers operate or extract resources from

Anti-Corruption

Measures and activities against corruption, bribery, fraud, money laundering

Regulation Compliance

Compliance with international and national regulation

Marketing & Labeling

Use of a certification scheme or product labeling related to supply chain sustainability or social performance

Shareholder Rights

Rights concerning the company’s shareholders

Corporate Citizenship & Philanthropy

Volunteer, charitable giving and other activities unrelated to the company’s core operations

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

APPENDIX B

List of Assessment Methodologies

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Order

Assessment methodology

Organization

Assessment Type

Year Published

Year Last Revised

GRI 400 - Social Standards

Global Reporting Initiative

Reporting Framework

2016

2018

NASDAQ ESG Reporting Guide

NASDAQ

Reporting Framework

2017

2019

SASB Standards

Sustainability Accounting Standards Board

Reporting Framework

2018

UN Guiding Principles Reporting Framework

Shift

Reporting Framework

2015

2017

Corporate Human Rights Benchmark

ESG Rating

2016

2020

Just Capital

ESG Rating

2018

2020

KnowTheChain Benchmark

KnowTheChain

ESG Rating

2016

2020

Refinitiv/S-Network ESG Best Practices Ratings

Thomson Reuters/S-Network

ESG Rating

2009

2020

FLA Principles of Fair Labor & Responsible Production

Fair Labor Association

Compliance Standard

1999

2011

FLA Principles of Fair Labor & Responsible Sourcing

Fair Labor Association

Compliance Standard

1999

2011

ICMM Assurance Procedure

International Council on Mining & Metals

Compliance Standard

2006

2020

SA8000

Social Accountability International

Compliance Standard

1997

2017

FLA Workplace Code of Conduct

Fair Labor Association

Compliance Standard

1999

2011

Global Compact Self Assessment methodology

UN Global Compact

Management Guideline

2006

N/A*

IFC Sustainability Framework

International Finance Corporation

Management Guideline

2006

2012

ILO MNE Declaration

International Labour Organization

Management Guideline

1977

2017

The OECD Guidelines for Multinational Enterprises

OECD

Management Guideline

1976

2011

The Voluntary Principles on Security and Human Rights

The Voluntary Principles Initiative

Management Guideline

2000

N/A*

UNGC Advanced COP Self-Assessment

UN Global Compact

Management Guideline

2000

2016

* N/A indicates that the researchers were not able to identify the year of the assessment methodology’s last revision from the publicly available information inspected. It does not indicate that the assessment methodology has not been revised. ** Please refer to References section at the end of the report for links to each of the assessment methodologies included in the research.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

APPENDIX C

Descriptive Analysis of Select Indicator Criteria

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

1. Reporting and Transparency Of the 19 assessment methodologies, 14 had one or more indicators regarding reporting and transparency. The topics under this criterion include the process and content for disclosing sustainability information, requirements for assurance of the disclosed information, and alignment with certain reporting and certification standards. On average, reporting frameworks had the largest number of indicators on reporting and transparency, related

to compliance with the requirements of their own reporting guidelines. Please refer to Figure C.1 below. For each of the indicators associated with reporting and transparency, we inspected the metric type and variable type. In compliance with the general observation above, most of the indicators were measures of activities with binary-type variables. Out of 88 indicators in this criteria, 11 indicators (12.5%) were measures of outcomes.

Figure C.1 – Indicators by Assessment Methodology on Reporting and Transparency (count) 16

GRI 400 - Social Standards 14

Assessment Methodology

UN Guiding Principles Reporting Framework Assurance Guidance 9

FLA Principles of Fair Labor & Responsible Sourcing 7

Corporate Human Rights Benchmark

FLA Principles of Fair Labor & Responsible Production 6

Reﬁnitiv/S-Network ESG Best Practices Ratings

NASDAQ ESG Reporting Guide 5

The Voluntary Principles on Security and Human Rights

Just Capital 4

The OECD Guidelines for Multinational Enterprises 3

SA8000

ICMM Assurance Procedure 2

FLA Workplace Code of Conduct 1

Global Compact Self Assessment Tool 0

Number of Indicators Reporting Frameworks

Management Guidelines

ESG Ratings

Compliance Standards

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Table C.1 below summarizes the number of indicators per each metric type, definition of each metric type in the context of reporting and transparency,

examples of indicators, and the assessment methodology and variable type of the examples.

Table C.1 – Reporting and Transparency Sample Indicators Metric Type Definition

Indicator Example

Example Assessment Methodology

Example Variable Type

Personnel responsible for reporting or entities included in the scope of disclosure

A list of all entities included in the organization’s consolidated financial statements or equivalent documents

GRI 400 – Social Standards

Descriptive

The contact point for questions regarding the report or its contents

GRI 400 – Social Standards

Descriptive

Actions taken by the reporting company to prepare and communicate its disclosure

Does the company publish a separate CSR/H&S/Sustainability?

Refinitiv/SNetwork ESG Best Practices Ratings

An explanation of the process for defining the report content and the topic boundaries

GRI 400 – Social Standards

Any known severe human rights impacts with which the company has been involved, but which are unrelated to its salient human rights issues, have been clearly disclosed, or, where this is not the case, the company has provided a credible explanation for their omission

UN Guiding Principles Reporting Framework Assurance Guidance

Standards or guidelines setting out reporting requirements for business and for data and information to be independently assured

ICMM Assurance Procedure

Descriptive

Frequency that company appeared on an FLA staff report for failure to meet principles

FLA Principles of Fair Labor & Responsible Production

Continuous

If the company reports on the nature of its involvement with the severe impacts concerned, there is evidence that: • the company has accurately understood the distinctions between whether it has caused an impact, contributed to an impact, or is simply linked to the impact through its operations, products or services, but without any contribution on its part • the company has accurately understood the nature of its responsibility in relation to the impact, based on whether it caused, contributed or is linked to the impact

UN Guiding Principles Reporting Framework Assurance Guidance

(# identified)

Input (3)

Activity (51)

Output (23)

Outcome (11)

Requirement on the content of the company’s sustainability disclosure

Assessment on the adequacy of the company’s reporting process and content

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Binary

Descriptive

Binary

2. Management System – Remedy and Corrective Action 15 of the 19 assessment methodologies included at least one indicator on the requirement for remedy and corrective action. Indicators associated with this criterion included the topics regarding grievance and complaint mechanisms, provision of remedy, retaliation, and training on remedy process. Review of the number of indicators in this area shows that assessment methodologies with explicit focus on remediation, such as the UN Guiding Principles Reporting Framework and Corporate Human Rights Benchmark, have significantly more related indicators than the rest. Please refer to Figure C.2 below.

For each of the indicators associated with remedy and corrective action, we inspected the metric type and variable type. In compliance with the general observation above, most of the indicators were measures of activities with binary variables. Out of 146 indicators in this criteria, 30 indicators (12.3%) were measures of outcomes Please refer to Table C.2 on page 34 for a summary of the number of indicators per each metric type, definition of each metric type in the context of reporting and transparency, examples of indicators, and the assessment methodology and variable type of the examples.

Figure C.2 – Indicators by Assessment Methodology on Remedy and Corrective Action (count) 37

UN Guiding Principles Reporting Framework Assurance Guidance 22

Corporate Human Rights Benchmark 18

KnowTheChain Benchmark 16

Assessment Methodology

FLA Principles of Fair Labor & Responsible Production 13

FLA Principles of Fair Labor & Responsible Sourcing 11

SA8000 5

ICMM Assurance Procedure

UNGC Advanced COP Self-Assessment 4

The Voluntary Principles on Security and Human Rights FLA Workplace Code of Conduct

4 3

IFC Sustainability Framework

ILO MNE Declaration Just Capital

The OECD Guidelines for Multinational Enterprises

Global Compact Self Assessment Tool

1 0

Number of Indicators Reporting Frameworks

Management Guidelines

ESG Ratings

Compliance Standards

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Table C.2 – Reporting and Remedy and Corrective Action Sample Indicators Metric Type

Definition

Indicator Example

Example Assessment Methodology

Personnel responsible for receiving and managing complaints/ grievances and the appropriateness of such personnel

There is evidence that senior management and those individuals with responsibility for the company’s overall human rights performance and (where different) for specific salient human rights issues understand that the company has a responsibility to enable effective remedy to any individuals whose human rights are harmed by its actions or decisions.

UN Guiding Principles Reporting Framework Assurance Guidance

Demonstrate managers’ and supervisors’ capacity or that of other relevant staff to manage and address grievances submitted by workers

FLA Principles of Fair Labor & Responsible Production

Actions taken on establishing and managing grievance mechanisms, implementing corrective actions, providing training programs

The company has processes or practices through which it systematically considers how it can provide, contribute to or otherwise enable remedy for individuals who have been harmed by its actions or decisions.

UN Guiding Principles Reporting Framework Assurance Guidance

Describe the company’s grievance process for responding to and remediating adverse impacts.

The Voluntary Principles on Security and Human Rights

Evidence of active grievance and remediation processes, quantitative data on number of complaints filed and remedy provided

The company indicates that it has one or more channel(s)/ mechanism(s), or participates in a shared mechanism, accessible to all workers to raise complaints or concerns related to the company. An explicit reference to human rights is not required, but a channel/mechanism that is specifically designed to cover other topics (e.g. a corruption hotline) will need to make clear to stakeholders that it can be used for human rights concerns as well.

Corporate Human Rights Benchmark

Discloses data about the practical operation of the mechanism, such as the number of grievances filed, addressed and resolved, or an evaluation of the effectiveness of the mechanism

KnowTheChain Benchmark

Descriptive

Evaluation of the effectiveness of facility grievance mechanisms

FLA Principles of Fair Labor & Responsible Production

Binary

There is evidence that recipients of remedy in the context of reported examples:

UN Guiding Principles Reporting Framework Assurance Guidance

Binary

(# identified)

Input (3)

Activity (95)

Output (30)

Outcome (18)

Evaluation of the effectiveness of grievance mechanisms and appropriateness of the remedy provided

• consider that the remedy provided was acceptable • consider that the remedy provided was effective

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Example Variable Type Binary

Descriptive

Binary

Descriptive

Binary

3. Stakeholder Engagement Sixteen of the 19 assessment methodologies included at least one stakeholder engagement indicator. Indicators associated with this criterion addressed communication and training on the company’s human rights policy, inclusion of relevant stakeholders in developing human rights policy, stakeholder feedback on implementation, and engagement with civil society organizations and affected communities. The UN Guiding Principles Reporting Framework included the highest number of indicators on stakeholder engagement, followed by assessment methodologies focusing on resource extraction and materials sourcing, such as the ICMM Assurance Procedure, the Voluntary Principles on Security and Human Rights, and FLA Principles of Fair Labor & Responsible Sourcing. Please refer to Figure C.3 below.

For each of the indicators associated with stakeholder engagement, we inspected the metric type and variable type. In compliance with the general observation above, most of the indicators were measures of activities with binary variables. Out of 141 indicators in this criteria, 15 indicators (10.64%) were measures of outcomes. Please refer to Table C.3 on page 36 for a summary of the number of indicators per metric type, definition of each metric type in the context of reporting and transparency, examples of indicators, and the assessment methodology and variable type of the examples.

Figure C.3 – Indicators by Assessment Methodology on Stakeholder Engagement (count) 37

UN Guiding Principles Reporting Framework Assurance Guidance

ICMM Assurance Procedure 14

The Voluntary Principles on Security and Human Rights 11

Assessment Methodology

FLA Principles of Fair Labor & Responsible Sourcing

Corporate Human Rights Benchmark 9

UNGC Advanced COP Self-Assessment 8

SA8000 7

FLA Principles of Fair Labor & Responsible Production 6

FLA Workplace Code of Conduct 4

GRI 400 - Social Standards 3

IFC Sustainability Framework 2

Reﬁnitiv/S-Network ESG Best Practices Ratings Global Compact Self Assessment Tool

Just Capital

The OECD Guidelines for Multinational Enterprises

ILO MNE Declaration

1 0

Number of Indicators Reporting Frameworks

Management Guidelines

ESG Ratings

Compliance Standards

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Table C.3 – Stakeholder Engagement Sample Indicators Metric Type

Definition

Indicator Example

Example Assessment Methodology

Example Variable Type

Identification of relevant stakeholders and the appropriateness of personnel responsible for stakeholder engagement

A list of stakeholder groups engaged by the organization.

GRI 400 – Social Standards

Descriptive

There is evidence that any policies, procedural guidance and/or practices governing engagement with stakeholders are:

UN Guiding Principles Reporting Framework Assurance Guidance

Binary

The company describes how it has identified and engaged with affected and potentially affected stakeholders in the last two years AND it describes the frequency and triggers for engagement on human rights issues (for example, by type or by stakeholder group).

Corporate Human Rights Benchmark

Binary

Does the company explain how it engages with its stakeholders?

Refinitiv/SNetwork ESG Best Practices Ratings

Binary

Percentage of sourcing countries where the affiliate has relationships with CSOs

FLA Principles of Fair Labor & Responsible Sourcing

Continuous

Key topics and concerns that have been raised through stakeholder engagement, including:

GRI 400 – Social Standards

Descriptive

UN Guiding Principles Reporting Framework Assurance Guidance

Binary

UN Guiding Principles Reporting Framework Assurance Guidance

Binary

(# identified)

Input (8)

• known to those who need to implement them • understood by those who need to implement them

Activity (110)

Output (8)

Actions taken to facilitate stakeholder engagement and reflect on the feedback

Records on the frequency and content of stakeholder engagement

i. how the organization has responded to those key topics and concerns, including through its reporting; ii. the stakeholder groups that raised each of the key topics and concerns.

Outcome (15)

Demonstration of stakeholder understanding and evidence of stakeholder impact on company’s human rights policies, results of stakeholder engagement as reported by external media

There is evidence: • “that staff and key external stakeholders are aware of the views of top management regarding the company’s commitment to respect human rights • that staff and key external stakeholders find these views to be consistent with other explicit or implicit messages communicated by top management” There is evidence that any permanent or ad hoc stakeholder advisory groups the company has established, whose remit includes human rightsrelated issues, have had an impact on the company’s human rights due diligence practices or outcomes.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

References

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Assessment Methodologies “Corporate Human Rights Benchmark.” Corporate Human Rights Benchmark, 2020. www.corporatebenchmark. org/sites/default/files/CHRB%202020%20 Methodology%20AGAPEX%2028Jan2020.pdf. “ESG Reporting Guide.” Nasdaq. 2019. www.nasdaq.com/ESG-Guide “FLA Principles of Fair Labor and Responsible Sourcing and Production.” Fair Labor Association. n.d. www.fairlabor.org/our-work/principles. “FLA Workplace Code of Conduct and Compliance Benchmarks.” Fair Labor Association, October 5, 2011. www.fairlabor.org/sites/default/files/fla_workplace_ compliance_benchmarks_rev_10.2020.pdf “Global Compact Self Assessment.” Global Compact Self Assessment. United Nations Global Compact, n.d. https://globalcompactselfassessment.org/ environment/responsibilityandperformance. “GRI Standards Download Center.” Global Reporting Initiative. 2016. www.globalreporting. org/standards/gri-standards-download-center/. “IFC Sustainability Framework.” International Finance Corporation. World Bank Group, 2012. www.ifc.org/wps/wcm/connect/topics_ext_content/ ifc_external_corporate_site/sustainability-at-ifc/ policies-standards/performance-standards/ps2.

and Development, 2016. http://mneguidelines.oecd. org/industry-initiatives-alignment-assessment.htm. “Refinitiv/S-Network ESG Best Practices Ratings & Indices.” S-Network Global Indexes and Thomson Reuters, 2019. https://snetworkglobalindexes.com/ indexes/refinitiv-s-network-esg-best-practices. “SA8000 Standard.” SAI. Social Accountability International, 2014. https://sa-intl.org/programs/sa8000. “SASB Standards.” Sustainability Accounting Standards Board. 2018. www.sasb.org/standardsoverview/download-current-standards. “Sustainable Development Framework: Assurance Procedure.” International Council on Mining and Metals, 2008. https://www.icmm.com/website/ publications/pdfs/commitments/assurance-procedure. “The OECD Guidelines for Multinational Enterprises.” OECD Watch. Organization for Economic Cooperation and Development, 2011. www.oecdwatch. org/oecd-ncps/the-oecd-guidelines-for-mnes. “The Voluntary Principles on Security and Human Rights.” The Voluntary Principles Initiative, 2000. www. voluntaryprinciples.org/wp-content/uploads/2020/11/ Reporting-Guidelines-for-the-Corporate-Pillar.pdf.

“JUST Capital Ranking Methodology.” JUST Capital, 2019. https://com-justcapital-web-v2.s3.amazonaws. com/pdf/JUSTCapital2020RankingsMethodology.pdf.

“Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy.” International Labour Organization. March 17, 2017. www.ilo.org/empent/Publications/ WCMS_094386/lang--en/index.htm.

“KnowTheChain Benchmark Methodology.” KnowTheChain. March 25, 2020. https:// knowthechain.org/benchmark-methodology.

“UN Guiding Principles Reporting Framework.” UN Guiding Principles Reporting Framework. Shift, 2015. www.ungpreporting.org.

“OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas.” OECD Responsible Business Conduct. Organization for Economic Co-operation

“UNGC Advanced COP Self-Assessment.” UN Global Compact, 2016. https://d306pr3pise04h.cloudfront. net/docs/communication_on_progress%2FGC_ Advanced_COP_selfassessment.pdf.

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

Bibliography Bernow, Sara, et al. (2019), More than Values: The Value-Based Sustainability Reporting That Investors Want. McKinsey & Company. www. mckinsey.com/business-functions/sustainability/ our-insights/more-than-values-the-value-basedsustainability-reporting-that-investors-want#. Brockett, A. M., & Rezaee, Z. (Eds.). (2012). Corporate sustainability: Integrating performance and reporting (pp. 27-35). N.p.: John Wiley & Sons. Cal. Civ. Code § 1714.43 (West 2017). de Felice, D. (2015). Business and Human Rights Indicators to Measure the Corporate Responsibility to Respect: Challenges and Opportunities. Human Rights Quarterly 37(2), 511-555. doi:10.1353/hrq.2015.0031. Erangey, G. (2018). Evaluating human rights performance: The role of ESG ratings, indices and benchmarks in driving change. In Shift. Retrieved from https://shiftproject.org/wp-content/uploads/2019/09/ evaluating-human-rights-performance.pdf. “GRI Standards Download Center.” Global Reporting Initiative. 2016. www.globalreporting. org/standards/gri-standards-download-center/. Harrison, A., & Scorse, J. (2004). The Nike Effect: Anti-Sweatshop activists and labor market outcomes in Indonesia. Ann Harrison (UC Berkeley and NBER) and Jason Scorse (UC Berkeley). Hess, D. (2019), The Transparency Trap: NonFinancial Disclosure and the Responsibility of Business to Respect Human Rights. Am Bus Law J, 56: 5-53. doi:10.1111/ablj.12134. Kuruvilla, S., Liu, M., Li, C., & Chen, W. (2020). Field Opacity and Practice-Outcome Decoupling: Private Regulation of Labor Standards in Global Supply Chains. ILR Review, 73(4), 841–872. https://doi.org/10.1177/0019793920903278.

donneuses d’ordre, www.legifrance.gouv.fr/affichTexte. cidTexte=JORFTEXT000034290626&categorieLien=id. Modern Slavery Act 2015, c. 30 (Eng.), www. legislation.gov.uk/ukpga/2015/30. O’Connor, C., Labowitz, S. (2017). Putting the “S” in ESG: Measuring Human Rights Performance for Investors. NYU Stern Center for Business and Human Rights. www.stern.nyu.edu/experience-stern/global/putting-sesg-measuring-human-rights-performance-investors. Resources for developing an OCFT comprehensive monitoring & evaluation plan (CMEP). (2018, February 13). In US Department of Labor. Retrieved from www.dol.gov/sites/dolgov/files/ILAB/CMEP%20 Resource%20Document_FINAL%2002132018.pdf. Ruggie, John. (2011), Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework, Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises. U.N. GAOR, Hum. Rts. Council, 17th Sess., U.N. Doc. A/HRC/17/31. Siew, R. Y. (2015, September 15). A review of corporate sustainability reporting tools (SRTs). Journal of Environmental Management, 180-195. The Rana Plaza accident and its aftermath. (n.d.). In International Labour Organization. Retrieved December 18, 2020, from www.ilo.org/global/ topics/geip/WCMS_614394/lang--en/index.htm. “This is what we die for”: Human rights abuses in the Democratic Republic of Congo power the global trade in cobalt. (2016). In Amnesty International. Retrieved from www.amnesty.org/en/documents/afr62/3183/2016/en.

LOI n° 2017-399 du 27 mars 2017 relative au devoir de vigilance des sociétés mères et des entreprises

APPROACHES TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS

The Erb Institute is the University of Michigan’s businesssustainability partnership between the Ross School of Business and the School for Environment and Sustainability. We work with business leaders to help them improve company competitiveness through enhanced social, environmental and economic performance. Our degree programs prepare students to be future business leaders for sustainability, while our research and executive education prepare current business leaders for what’s next in sustainability. Ross School of Business 701 Tappan Street Ann Arbor, Michigan 48109-1234 School for Environment and Sustainability 440 Church Street Ann Arbor, Michigan 48109-1041 CONTACT US erb.umich.edu erbinstitute@umich.edu 734.647.9799

PROJECT RESEARCH ASSISTANTS: Junghoon Park – MBA/MS 2022 Ryan Woock – BS 2021 PROJECT ADVISORS: Dr. Ravi Anupindi, Ross School of Business, University of Michigan Dr. Kiyoteru Tsutsui, School of Humanities and Sciences, Stanford University APPROACHES SEPTEMBER 2021 TO ASSESSING CORPORATE PERFORMANCE ON SOCIALLY RESPONSIBLE OPERATIONS 40

Approaches to Assessing Corporate Performance on Socially Responsible Operations

Articles inside

APPENDIX A INDICATOR CRITERIA

REFERENCES

EXECUTIVE SUMMARY

METHODOLOGY

CONCLUSION

INTRODUCTION