INTRODUCTION

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.

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.

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.

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.