Social aspects of non-financial disclosure.
Frameworks for ESG disclosure, including the TCFD, TNFD and SASB, have been continuously updated in recent years, and companies need to consider a range of disclosures that are in line with the reality of their business and the demands of society.
This article provides an overview of the successive and latest frameworks and the responses required of companies to the growing social aspects of risk and concern, which are receiving increasing attention following climate change and environmental issues.
Importance of the social sector in ESG.
Of the three elements of ESG - Environment, Social and Governance - the environmental area has been the most frequently discussed. Indeed, high-profile initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Taskforce on Nature-related Taskforce on Nature-related Financial Disclosures) have both focused on environmental issues.
However, social issues such as human rights and inequality are similar to environmental issues in that they are also major themes that need to be addressed by the international community as a whole. These issues, which have historically persisted, are now attracting renewed attention and are beginning to challenge not only the efforts of the UN and national governments, but also the policies and practices of companies.
Issues in the social sector and corporate responsibility
The UN Principles for Responsible Investment (PRI) list human rights, modern slavery, child labour, working conditions and employee relations as examples of ESG social factors (Figure 1).
Figure 1: Examples of ESG factors (Source:Principles for Responsible Investment (PRI))
Until now, major issues such as regional disparities and child labour have been considered to be matters for the international community and national governments to address, while issues for which companies are responsible are mainly those that occur within their own companies, such as discrimination against women and harassment. However, the social issues presented by the PRI are not only internal to companies, but also include labour conditions and inequality issues dating back to the entire supply chain, and the trend towards ESG investment requires companies to understand the mutual impacts and risks of these issues to themselves and to disclose this information to consumers and investors.
Human rights and inequality-related frameworks
There is a long history of international frameworks relating to social issues, and various human rights and inequality-related frameworks have been proposed. The following table summarises guidelines of particular relevance to business and their relationship with companies and organisations.
Table 1: Human rights and inequality-related frameworks (prepared by the authors)
| Name (organisation, year of publication) | Overview. | Use and participation of enterprises |
| OECD Guidelines for Multinational Enterprises (OECD, 1976) | Guidelines for recommending that companies voluntarily adopt the responsible behaviour expected of them. Revised 2023. | [Voluntary use] Not legally binding. |
| SA8000 (SAI, 1997) | International standards for the exercise of all employee rights and the protection of employees. 4th edition, 2014. | [Certification and participation]. Third-party audit required for acquisition => Audit every six months. |
| ILO Core Labour Standards (ILO, 1998) | 10 conventions in five areas of fundamental principles and rights at work (minimum standards to be observed). 'Safe and healthy working environment' added in June 2022. | [Other. Obligations towards Member States |
| Ten principles of the Global Compact (UNGC, 2000) | Ten principles in four areas (human rights, labour, environment and anti-corruption) adopted and agreed globally. | [Certification and participation]. Signature ⇒ Reporting obligation |
| ISO 26000 (ISO, 2010) | International Standard on Organisational Social Responsibility. | [Voluntary use]. Not a certified standard |
| Guiding Principles on Business and Human Rights (United Nations, 2011) | Global standards to be respected by all countries and companies. National Action Plans (NAPs) | [Voluntary use]. Not legally binding, but compliance is encouraged by the NAP |
| UN Guiding Principles Reporting Framework (United Nations, 2015) | First comprehensive guidance for companies to report on human rights issues in accordance with the Guiding Principles above. Japanese version in 2017. | [Report]. Minimum standards and stated use of the framework. |
| Action Plan on 'Business and Human Rights' (2020-2025). (Japan, 2020) | Japanese NAP of the Guiding Principles on Business and Human Rights. Expectations of various government policies and enterprises | [Voluntary use]. Human rights policy development, implementation of human rights DD and remedy mechanisms are expected to be established. |
| Handbook for management respecting human rights. (Keidanren, 2021) | Guidance on disseminating the UN Guiding Principles and guidance on human rights DD and specific examples of human rights challenges in the international community. | [Voluntary use]. Encouraging member companies to strengthen their initiatives Cautious about making it mandatory |
| Guidelines for respecting human rights in responsible supply chains, etc. (Japan, 2022) | Guidelines to promote respect for human rights by companies, based on international standards. Building on the UN Guiding Principles, the OECD Guidelines for Multinational Enterprises and the ILO Declaration on Multinational Enterprises | [Voluntary use]. Not legally binding. Can refer to specific steps for the implementation of human rights DD |
| Tackling inequality:Guidelines on corporate behaviour (BCTI, 2023) | Report by the Business Commission to Tackle Inequality (BCTI), established by the WBCSD 10 actions companies can take against inequality | [Voluntary use]. |
| TISFD[1] (TISFD, 2024 onwards). | Framework for financial disclosure on social and inequality-related issues. | [Report]. Disclosure in line with the framework |
The Guiding Principles on Business and Human Rights, adopted by the UN in 2011, clarified that companies have a responsibility to respect human rights. Since then, human rights due diligence (human rights DD), in which companies investigate and curb the risk of human rights violations related to their business activities, has been recognised and spread worldwide. In particular, since the UN Guiding Principles Reporting Framework, which is based on the above-mentioned Guiding Principles, was formulated in 2015, the trend towards mandatory human rights DD has been progressing, particularly in Europe [2]. Although no legally binding framework exists in Japan yet, companies are being encouraged to take action through action plans and guidelines, and the impact of mandatory DD is already being felt by companies and others that provide services in the EU.
However, many frameworks currently only set out principles and guidelines and do not provide a sufficiently widespread approach for companies to actually investigate and disclose information. Guidelines providing specific guidance have been formulated in parallel by various organisations, both domestically and internationally. Companies considering strengthening disclosure of social aspects in the future will have to start by scrutinising which standards they should follow in their risk investigations [3], which may ultimately lead to raising the hurdles to information disclosure.
According to a survey conducted by the Japanese Government in 2021, 52% of companies have implemented human rights DD, while around 30% of those that have not reported difficulties in selecting the method and scope of implementation (Figures 2 and 3).
Figure 2: Status of corporate human rights initiatives
(Source:Results of the Questionnaire Survey on the Status of Human Rights Initiatives in the Supply Chains of Japanese Companies.)
Figure 3: Reasons for not implementing human rights DD
(Source:Results of the Questionnaire Survey on the Status of Human Rights Initiatives in the Supply Chains of Japanese Companies.)
Benefits and processes for companies to engage in human rights DD
While growing international concern about human rights and inequalities is putting pressure on individual companies to address human rights DD, proper disclosure of social aspects is also in the interests of the companies themselves.
The report on the Study on Business and Human Rights prepared by the Ministry of Justice in 2021 [4] summarises the impact of human rights initiatives on business activities, both positively and negatively (Fig. 4).
Figure 4: Impact of human rights initiatives on business activities
(Source:Report of the Study on Business and Human Rights.)
Neglect of human rights issues related to business activities can lead to problems that cause direct damage to company management, such as reduced productivity and mass turnover, in addition to the same risks as in other areas of ESG, such as damage to corporate image and share price.
So what steps do companies actually need to take when addressing human rights DD? According to the Guidelines for Respecting Human Rights in Responsible Supply Chains, etc., published by the government [5], the first step is to identify and assess the negative human rights impacts that a company's business activities may involve. The process involves the following.
1. identify business areas of significant risk
It identifies business areas where risks are likely to be significant, considering factors such as the type of risk and regional characteristics.
2. identification of the process of occurrence of negative impacts
Specify how negative impacts will occur in each process of the project.
3. assessment of negative impacts and company involvement
Assess whether the enterprise caused or contributed to the negative impact and whether the negative impact is directly related to the enterprise.
4. prioritisation
Respond to the most serious and probable first.
Once priorities are determined, various measures are considered to prevent or mitigate those negative impacts. These may vary depending on the industry and the size of the business, but may include improving relations with specific suppliers or suspending business with them. The human rights DD process also includes evaluating the effectiveness of the measures and explaining and disclosing information internally and externally.
For many companies, identifying and assessing where and how their products and services relate to human rights risks can be challenging.
The services provided by aiESG enable ESG analysis not only on a company or business unit basis, but also on a product or service basis, and can quantify a range of human rights factors such as community impacts and indigenous rights, in addition to indicators such as greenhouse gas emissions, which can be measured by conventional services. Furthermore, it is possible to identify hotspots of high risk areas in the supply chain for each item, leading to the identification of high-risk regions and business areas.
Conclusion.
In this article, we have introduced the importance of social risks among the three ESG factors, as well as trends in Japan and abroad. As each company is required to disclose information not only internally but also about its entire supply chain, it is important to first identify where your company's social risks lie to the extent possible.
To date, ESG information disclosure has shown effective and comprehensive disclosure methods by conforming to international frameworks such as the environment-related TCFD and nature-related TNFD. Attention is currently focused on the Task Force on Inequality and Social-related Financial Disclosures (TISFD), which will begin full-scale activities from 2024 onwards as a follow-up to these social and inequality-related frameworks. Disclosure Task Force). We will be publishing more information on the TISFD on this website in the near future.
aiESG can provide support on the TISFD and related frameworks, from the basics to the actual disclosure of non-financial information. companies that need help with the social aspects of ESG disclosure are encouraged to contact us.
Enquiry:
https://aiesg.co.jp/contact/
Bibliography
[1] New disclosure framework to follow TCFD and TNFD (to be explained in more detail in the next blog). The name is provisional and may change in the future (seeTaskforce on Inequality and Social-related Financial Disclosures (TISFD) | Groups | LinkedIn)
[2] https://www.ilo.org/tokyo/information/terminology/WCMS_791223/lang–ja/index.htm
[3] https://www.meti.go.jp/press/2021/11/20211130001/20211130001-1.pdf
[4] ff71991849952a56349b71abb955b8e61fa549fe.pdf (jinken-library.org).
[5] 20220913003-a.pdf (meti.go.jp).
*Related page*.
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https://aiesg.co.jp/report/2301016_nikkeiev1/
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https://aiesg.co.jp/report/2301120_csrd/