Blog | Tuesday July 26, 2022

In Egypt, Digital Payroll Helps Garment Workers Reap What They Sew

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Port Said, at the northern tip of the Suez Canal, is uniquely attractive to national and international fashion brands due to its direct shipping connections, its free zone, and easy access to so-called “white gold”—superior Egyptian cotton, one of the finest natural fibers in the world. After “black gold”—oil—and actual gold, textiles and apparel are among Egypt’s top exports, and the sector employs more than 1.5 million workers, half of which are women.

In a country with strict gender norms and roles, where men tend to be seen as the breadwinners and women as the main caregivers, this sector offers a unique opportunity for women’s economic empowerment.

Most workers in this industry still receive their wages in cash. It can lead to unfortunate consequences for all parties: Paying employees in cash is risky for factories—it requires them to transport large amounts of money. Another danger for women: They are also more at risk of being robbed than men. Female workers usually have limited control over their salaries, and family members might have easy access to their cash. Additionally, workers stand in long lines to receive their wages, which cuts down on productivity and personal time.

We recently piloted “HERfinance Digital Wages” with workers at Lotus Garments Group, a Levi Strauss & Co. manufacturer in Port Said. Bringing the benefits of the digital economy to cash-dependent workers, the initiative helps managers digitize their payroll while ensuring the specific needs of female workers are considered.

Nearly three years later, 9,310 workers at Lotus were being paid digitally into financial accounts—that’s nearly 90 percent of the factory workforce. Now the initiative is expanding with the aim of supporting nine more factories supplying global brands, including M&S, Kontoor, PVH and The Children’s Place. The goal is to reach 20,000 workers in total.

Marwa, a worker at the Lotus factory, says the training she received as part of the digital wages program helped her save and budget better during the COVID-19 crisis.

Building financial capability for workers, especially women, is a vital part of digital payroll services. With support from the Mastercard Center for Inclusive Growth, participants in the Digital Wages program receive gender-sensitive training, including technical guidance using their new payroll accounts and associated financial services. They also learn lessons on financial planning, budgeting, savings, and discussing finances with their families.

The training especially addresses women workers' needs, acknowledging the discriminatory situations they might face at the workplace and the different challenges they encounter when accessing digital financial services.

“At the beginning, I knew only how to withdraw the money from an ATM, and I used my bank account in the same way as a cash envelope,” says Amal Fahmy, one of the Digital Wages peer educators at Lotus Garments. “Once my salary was put on my account, I withdrew all my money. After the training sessions, I learned about the many services offered by my payroll account and other financial skills. Now I save part of my salary in my account and withdraw only the needed amount of money.”

Digital accounts were also a critical asset during the COVID-19 lockdowns, as many facilities closed and workers receiving payments in cash faced long delays in their salaries. In contrast, most workers with a bank account received payment on time. The knowledge workers gained from the training sessions also helped them cope with uncertainty and foster resilience: “I’ve been using what I learned to follow up on my expenses and build a budget,” says Marwa, 29, a female garment worker. “I think this knowledge on saving and financial planning was especially useful during the COVID-19 crisis.”

After digitizing wages and participation in the HERfinance Digital Wages program, Lotus reported a 42 percent reduction in time spent on payroll, and 96 percent of workers interviewed reported that they prefer to be paid in a bank account, rising from 25 percent at the start of the program. Four in 10 women surveyed reported saving every month after the program implementation.

By sharing digital tools and training, we can improve the long-term financial health of women and, in turn, make the communities in which they live — and the supply chains on which we all depend — stronger and more resilient.

“One of the barriers to digitizing wages was the lack of opportunity for workers to cash out wages on payday,” says Tamer El-Dessouki, sustainability manager at Lotus Garments. With only one ATM near the factory, the company arranged for a mobile ATM to be on-site for payday and the days following. Managers staggered workers’ breaks to reduce demand for the ATM and factory transport buses stopped at other ATMs on the way home. “The next step is to encourage workers to use more financial services, which will reduce their need to cash out on payday,” El-Dessouki says.

The partnership also developed technology tools to facilitate the transition to digital wages at scale. Together with Quizrr, the initiative developed a technology learning tool for workers based on the HERfinance Digital Wages program and training curriculum. The tablet-based training tool uses engaging films, quizzes, and animation to support workers in increasing their knowledge of financial services, improving financial health, and building their digital literacy. Peer educators said the tech tool makes the session more enjoyable and entertaining, and they related to the characters and situations that are used to explain the core concepts.

The collaboration also created a HERfinance Digital Wages Tech Toolkit for Managers, which sets out best practices and guidance for garment managers to transition toward digital payroll in a responsible and efficient manner.

The Egypt Digital Wages partnership has shown that digitizing wages, accompanied by financial capability training, can lead to increased financial inclusion and resilience for female garment workers. Mastercard and HERproject will continue to work together to build the business case for wage digitization and support the scale-up by sharing best practices, insights, and digital training tools with key stakeholders, including employers, buyers, and financial service providers.

Originally appeared on Mastercard.

Blog | Thursday July 21, 2022

Just Transition: Clean Energy with a Clear Conscience

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The Biden administration recently announced a bold plan that would boost US clean energy production by authorizing the Defense Production Act (DPA) to reduce energy costs, strengthen the power grid, and create well-paid jobs. The Administration’s action is a welcomed move to spur the clean energy transition, which enables the continued import of solar components that are required to construct clean energy projects on a domestic scale.

The rise in manufacturing renewable energy technologies, however, may impact workers, including through forced labor, abuses of Indigenous rights, “and the denial of workers’ rights to decent work and a living wage,” all of which cause immeasurable harms and can risk the clean energy transition. While we can celebrate increased clean energy production in the US, policymakers and business have an opportunity to take meaningful action to reimagine a world where clean energy isn’t soiled by human rights abuses.

The DPA would insulate solar importers from potential penalties raised by a recent US Department of Commerce investigation of solar cell anti-dumping circumvention. Originally from a petition filed by a US solar panel manufacturer, the investigation examines claims that solar cells imported into the US were manufactured in Cambodia, Malaysia, Thailand, and Vietnam, using Chinese parts that would otherwise be subject to tariffs.

The new plan would then allow for “a 24-month bridge as domestic manufacturing rapidly scales up to ensure the reliable supply of components that US solar deployers need to construct clean energy projects.” Federal procurement would also support internal US production through a system that would help domestic clean electricity providers sell their products to the US government.

The rights and well-being of people around the world depend on accelerating the energy transition—and we applaud the decision to allow imports of solar products while the alleged tariff circumvention investigation continues. However, that transition shouldn’t come at the expense of the rights of workers and communities impacted by the mining and manufacturing of solar panels.

Concerns around forced labor in China’s Xinjiang region, combined with the fact that around 45 percent of polysilicon—essential in photovoltaic cells—reportedly comes from Xinjiang, in part drove the development of the Uyghur Forced Labor Prevention Act (UFLPA) that came into force on June 21. An estimated 15-30 percent of global cobalt supply, critical to storing solar energy, is mined in the Democratic Republic of Congo, in conditions considered to foster child labor and the exploitation of local miners.

Both the US government and the business community have an opportunity to reconcile long- and short-term plans for heightened production with respect for human rights. It’s possible, though seemingly unlikely, that the bans on solar components from Xinjiang under the UFLPA could herald a more permanent shift in sourcing for US solar cells. Alternative locations outside Xinjiang, and China more broadly, will almost certainly not have the capacity to immediately increase production commensurate with a US solar industry backed by DPA authorization. The US government and US solar companies will need to proceed with this in mind. 

First, addressing the broader nexus between environmental protection and modern slavery risks will require the Biden administration to deliver on its promises of encouraging “the use of strong labor standards…that empower the clean energy transition in low-income communities.” Although the statement calling for project labor agreements and community benefits agreements may be directed domestically, these elements should also be included in manufacturing contracts regardless of geography.

Companies will be expected to enhance their modern slavery policies and map of business activities and relationships with suppliers. Heightened due diligence across value chains is essential to prevent and mitigate the risk of forced labor in sourced components, especially in high-risk geographies. Notably, the UFLPA requires this additional due diligence from companies sourcing products from Xinjiang and China; such practices should also be put in place for Cambodia, Malaysia, Thailand, and Vietnam.

Businesses can also actively engage with human rights and labor organizations to ensure that policies and strategies to address forced labor risks reflect current realities in sourcing countries and keep abreast with modern slavery risks in the solar value chain.

Finally, if the goal is to achieve a slave-free, clean energy transition, then meaningful multi-stakeholder cooperation between business, governments, labor experts and environmental justice groups is essential. The Administration’s commitment to “convene relevant industry, labor, environmental justice, and other key stakeholders” is a good first step, and businesses should follow suit and conduct their own dialogues.  

Taking action on climate change, the just transition, and modern slavery requires more than ticking a box. Compliance with the UN Guiding Principles, the UFLPA, and a host of environmental standards is the floor for corporate behavior, not the ceiling. It might be difficult to balance environmental and social obligations with governmental and corporate needs, but that is the cost of doing business.

Blog | Wednesday July 20, 2022

A Business Approach to Reinforcing Democracy

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Editor's Note: 

It is obvious that we are living through a time of profound and accelerating change. Our world has been rocked by a series of disruptions: COVID-19, war and social conflict, rollback of rights and democracy, and now high inflation and the risk of recession. These developments have jolted society, and business.

To help our 300+ member companies navigate this volatile environment, we're releasing a series of blogs over the coming weeks to build insight into how to shape business approaches that address this unique moment. Following last week's piece on the "backlash" against ESG, today's piece explores changing expectations of business in protecting rule of law, rights, and democracy.

We’ll conclude with a deeper dive look into how BSR’s 2025 strategy can help your company to navigate these turbulent times—and how you can collaborate with our global network to push us further, faster, to achieve a more equitable, just world for all.

Russia’s invasion of Ukraine. China’s suppression of civil liberties in Hong Kong. Ongoing attacks on voting rights, abortion access, and LGBTIQ+ health and safety in the United States. 

Around the world, we see these and other examples of democratic decline. From multiple directions, the foundational elements of societies based on rule of law, transparently and evenly applied, are facing significant threats. 

To state it bluntly: this presents a clear and present danger for business. Indeed, a recent poll from Morning Consult found that more than 80 percent of business leaders see threats to democracy as threats to business.

First and foremost, it is exceedingly difficult for business to thrive where rule of law is absent, where governments are paralyzed, and where instability is the status quo. Indeed, the decline of rule of law in Hong Kong is causing many companies to shift staff and offices away from that territory. This is not new. Businesses have long recognized that operating where the rule of law is strong is in their self-interest; after all, it protects business, employees, and consumers alike from harmful practices, and helps provide safeguards against governments which otherwise might engage in abusive practices. 

Second, business finds itself embroiled in polarized and angry debates that both reflect and cause the deterioration of public institutions. Many companies have been drawn into the crossfire of policymaking in various American states in the wake of the overruling of Roe v. Wade. Initial efforts by many companies to provide travel stipends for workers who need to travel to access abortion services have been challenged by political figures. Similarly, government inaction on climate change creates both economic and social risk, and it also can lead to an unpredictable environment in which some aim to fill the policy vacuum through litigation. This creates an inconsistent and unpredictable approach to policymaking. Dysfunctional governance creates and amplifies business risk and uncertainty. 

Third, many employees and consumers expect business to speak out on this, and other, important social issues. Worker, consumer, and investor sentiment supports companies taking decisive action. There also has been increased scrutiny of companies that continue to financially support elected officials in the United States that refused to certify the results of the 2020 presidential election.

Fourth, and finally, there is a values case for action. We regularly engage with senior business people who are angry with the decline of democratic institutions in their home countries as well as in the wider world. Many business leaders do not want to stand aside while fundamental rights and freedoms are under attack. In addition to their own preferences, they also see employees, customers, and sometimes shareholders pushing them to express support for public institutions and processes. They face numerous cross-pressures, however, with many voices challenging the wisdom, and even the right, of companies and business leaders to speak out on topics many see as “political.” 

What Can Business Do?

First, business should extend its stated commitment to human rights principles to apply more explicitly to the protection of democratic institutions, wherever they are in peril. Most large companies have now committed to upholding the UN Guiding Principles on Business and Human Rights. Much of the impetus for this movement focused on human rights abuses and poor governance in the global south. It is now time to deploy them closer to home, for example by considering whether law enforcement is equitable when making siting or investment decisions.  

Second, business can take action through large-scale collaborations. Initiatives such as the Voluntary Principles on Security and Human Rights and the Extractives Industry Transparency Initiative are designed to combat non-democratic means of violating rights that affect business directly. Such efforts leverage strength in numbers, with companies, NGOs, and governments working together to achieve reforms that have made a real difference. These models, which promote law enforcement and provision of private security consistent with human rights principles, are good examples of how collaboration is a useful tool to address violations of rule of law.

Third, business can advocate for systemic or structural reforms. Though some will characterize these efforts as partisan, the actual approaches offered can be decidedly nonpartisan, such as supporting action on issues, including the protection of voting rights to ensure full and equal access, the potential for mandatory voting requirements, and other electoral reforms. 

Fourth, and particularly in the United States, companies can withhold political contributions from elected officials and aspiring candidates who fail to commit to upholding democratic processes and the rule of law, There is a rising tide of criticism of such practices, including in shareholder resolutions. The silver lining of the current situation is the opportunity to push back against the arms race of political funding.

Finally, it is time, once and for all, for companies to address the many concerns about the role of trade associations. Companies such as Volvo, Shell, BP, TotalEnergies, and others have conducted formal reviews, with public disclosure, of their membership in trade associations, aiming to reduce misalignment with their ESG priorities. It is also well past time for trade associations themselves to recognize that new threats require new thinking and new models. Advocating for reduced taxes and regulations cannot be the only priority if they are to have a positive impact not only for business, but also for society. If trade associations cannot rise to the occasion and see the bigger picture by calling for democracy protection, perhaps they have outlived their usefulness.

We can anticipate significant pushback against business taking on this agenda. This is “too political,” and business cannot “pick sides.” In fact, many businesses already do take sides when weighing in on legislation, e.g., with many businesses and associations arguing that the SEC is exceeding its mandate with its draft regulations requiring climate disclosure.

In the final analysis, it is no longer difficult to imagine a near total breakdown of the public institutions the West has taken for granted for the 75 years since WWII ended. Eric Vuillard wrote in The Order of the Day, his satirical account of the run-up to WWII, that “great catastrophes often creep up on us in tiny steps.” Business cannot afford to wake up one day and find that the societal foundations on which it relies have collapsed. Business is taking action to combat a similar challenge with respect to climate Isn’t it also time for business to recognize that it can no longer wait for others to address the looming disaster of the collapse of democratic institutions and processes?

Blog | Thursday July 14, 2022

Delaying Climate Action: The Challenges of Moderating Climate Misinformation on Social Media

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Misinformation about climate change has been around for decades, mostly in the form of climate denialism. Today, climate misinformation is focused on seeding doubt about climate science and the measures that are taken to mitigate climate change. Examples include: suggesting that the consequences of global warming may not be as bad as scientists claim, arguing that climate change policies are bad for the economy or national security, describing clean energy as unreliable, or claiming that no action will be able to halt climate change.

These varying manifestations of climate misinformation all have the same outcome: delaying climate action.

Earlier this year, the IPCC drew attention to the impacts of climate misinformation for the first time:

Vested interests have generated rhetoric and misinformation that undermines climate science and disregards risk and urgency. Resultant public misperception of climate risks and polarized public support for climate action is delaying urgent adaptation planning and implementation.

Social media brings both opportunities and risks to the climate science dialogue. Scientific information related to climate change is accessible to larger populations through social media platforms—including real-life experiences of affected populations. On the other hand, social media can significantly undermine climate science by allowing for the rapid and widespread sharing of misinformation through user-generated content and online advertising. Social media platforms are also just one part of the information ecosystem, which also includes news media and professionally created entertainment.

At a point when delays in climate action may lead to catastrophic and irreversible harm, companies must address climate misinformation urgently and decisively. 

In 2021, Ford Foundation, the Ariadne Network, and Mozilla Foundation commissioned a research project to explore grantmaking strategies that can address issues at the intersection of environmental justice and digital rights. As part of this project, BSR wrote an issue brief on the role of social media companies in creating, shaping, and maintaining a high-quality climate science information environment.

The brief explores the specific challenges of moderating climate misinformation. We describe some of these challenges below:

• Climate Misinformation Is Happening in “Subtler” Ways and Is Increasingly Intersectional.
  While outright climate denialism is easy to refute, it is more difficult to identify subtle ways of spreading climate misinformation—such as claims that green policies are too costly. The response to climate change is a topic of political debate, making climate misinformation closely tied to politics, elections, and the larger civic space. These intersectional ties help grow the reach of misinformation and take it to different levels that can be difficult to anticipate.

• Existing Content Moderation Frameworks Are Not Sufficient in Addressing Climate Misinformation.
  Most of the content moderation principles and frameworks used by social media platforms today were written to address immediate harms related to hate speech, incitement to violence, and other objectionable content, and they are not as applicable for scientific misinformation that may be associated with broader, longer-term harms.

• Content Removals May Not Be Adequately Effective in Fighting Scientific Misinformation.
  While the removal of content is effective in fighting harmful content such as hate speech, scientific misinformation may require different approaches. Platforms should not only rely on content removal but also focus on tactics to reduce the visibility of misinformation and display high-quality information to inform users.

• Climate Misinformation Is Political and Is Backed by Institutions.
  Since the 1980s, climate disinformation campaigns have been largely driven by the fossil fuel industry’s intentional efforts to undermine climate science. Today, climate misinformation can still typically be traced to fossil fuel interests. In addressing climate misinformation, it is important to consider the material incentives of the producers of such content.

In our brief, we make recommendations to social media companies, as well as civil society actors, and funders. These include the addition of climate misinformation under content policies, applying content moderation frameworks to climate misinformation, strengthening fact-checking capabilities, investing in user resiliency, and increasing scrutiny on advertising by oil and gas companies. We envision a high-quality climate science information environment that supports informed public debate, ambitious business action, and science-based policy making.

Social media companies have made significant commitments to reduce the climate impacts of their businesses (i.e., reducing GHG emissions), but they also have a responsibility to address the potential harms that they may be connected to through climate misinformation on their platforms. 

Civil society groups and funders have an essential role to play in holding companies accountable for their actions or omissions to address climate misinformation and keep this topic on the agenda. Among these actors, it is our observation that environmental groups are less familiar about the practical challenges, complexities, and nuance of misinformation, and the content governance community is less familiar with how climate information can adversely impact our collective efforts to address the climate crisis. These communities would benefit from increased collaboration and knowledge sharing.

Fostering a deeper understanding of this topic across sectors will not only help remove one of the biggest barriers in the way of climate action, but it will also broaden our understanding of scientific information, and how human rights may be impacted online. 

BSR will continue to work with social media companies, civil society groups, and funders on this topic. Please reach out if you’re interested in connecting with us.

Blog | Wednesday July 13, 2022

What the ESG Critics Are Right About—And Where They’re Misguided

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Editor's Note:

It is obvious that we are living through a time of profound and accelerating change. Our world has been rocked by a series of disruptions: COVID-19, war and social conflict, rollback of rights and democracy, and now high inflation and the risk of recession. These developments have jolted society, and business.

These and other developments are also reshaping the world of just and sustainable business. After considerable momentum, there is now a backlash against elements of the sustainable business agenda. Claims of greenwashing are rising, including legal actions. The regulatory environment is changing, with heightened requirements for business on human rights, reporting and disclosure, and other matters. Generational change is reshaping public views about business. The rollback of human rights and democratic institutions is leading to calls for business to “take a stand.”

To help our 300+ member companies navigate this volatile environment, we are launching a series of blogs over the coming weeks to build insight into how to shape business approaches that address this unique moment.

We begin with this initial piece on the “backlash” against ESG. Future entries in the series will explore changing expectations of business in protecting rule of law, rights, and democracy; the emerging harmonization of reporting and disclosure standards; the implications of increased regulation of sustainability; the role of business in combating societal fragmentation.

 We’ll conclude with a deeper dive look into how BSR’s 2025 strategy can help your company to navigate these turbulent times—and how you can collaborate with our global network to push us further, faster, to achieve a more equitable, just world for all.

Like consumer prices, sustainable business has been on a rollercoaster since COVID-19 emerged over two years ago. Sustainability or ESG (environment, social, and governance) considerations were a business, investor, and media darling. Until recently.

Judging from 2022’s headlines, a casual observer might conclude that sustainable business has gone from hero to zero overnight. Regulators are looking to set rules to govern when investment funds earn the ESG label. Media, consumers, and now regulators are leveling claims of greenwashing on a frequent basis. The public asks: “If every company is doing what they say, and airing slick commercials to convince me how good they are, why is climate change and income inequality getting worse?” And “ESG insiders” have come out of the woodwork to assert that “the ESG emperor has no clothes.”

Some of these questions are not only legitimate, but hugely important.  Some questions, which reflect political backlash, are much less so. And for all of us focused on just and sustainable business, we ignore this backlash at our peril.

To start, the critics get three big things right.

First, there is undeniably a gap between aspiration and delivery. The rise of “net zero” carbon commitments is necessary, but clearly insufficient—so far—to put the world on a trajectory towards a stable climate that can sustain a healthy economy. The same is true with respect to companies seeking to protect biodiversity and oceans by being “nature positive” but not yet achieving the promised benefits. These big aspirations mark a leap in ambition from even five years ago. We need simultaneously to ensure accountability without creating incentives for business to retreat to incremental change.

Second, it also is true that there remains a disconnect between companies’ aspirations and what they—or more often their trade associations—do to oppose public policies needed to put our economies on a more sustainable path. For example, too many companies prioritize opposition to tax reform over full-throated support for climate action through efforts such as Build Back Better and other measures. It is critical that business close the “say-do” gap both with respect to their actions and their policy advocacy.

Third, there is widespread and legitimate confusion over what the terms “sustainability,” “ESG,” and "net zero” actually mean. The rise of consistent standards is welcome and overdue. The promise of global standards defining what companies can and cannot label “ESG,” through efforts like the International Sustainability Standards Board (ISSB), will help bring badly needed order to the current chaos. This will help reduce concerns about greenwashing for the public, and will provide the certainty business needs to make ambitious commitments.

These critiques are both valid and valuable. It is also the case that those fostering the backlash get some big things badly wrong.  

First, sustainable business is about long-term change; it is, by definition, complicated to gauge progress quarter to quarter or year to year. Climate is the best test of this principle, with most net-zero targets up to decades away from full delivery. Showing progress today is needed, but it is to be expected that full delivery will take time. There is a big difference between critiquing illusory commitments and embracing structural change that, by definition, takes time. There must be space for companies to make long-term, high-ambition commitments, even as they know that technological innovation, consumer behavior, and public policy are massive dependencies that will also play a role in whether change takes hold.

Second, some of the backlash seems to be designed to provide an “off-ramp” for businesspeople who have been skeptical about the value of sustainability to begin with. It is remarkable how much media attention has been lavished on Stuart Kirk, who has now left HSBC after his infamous jeremiad against climate alarmists, or Tariq Fancy, who now claims that ESG investing is largely useless.

The media seem to be applying the same “bothsidesism” that climate skeptics have used to their advantage, never mind the science. Basic facts suggest that their critiques are at best overstated.  Climate and the destruction of nature quite clearly threaten business, imposing costs, and disruption. The flip side is also true: increased investments in new technologies, from energy storage to plant-based foods to inclusive hiring, deliver clear benefits. There will be inevitable ups and downs as these new markets mature and take hold; dismissing them is short-termism at its worst.

The final and most corrosive element of the backlash has immense importance, especially in the United States. Many political figures, including several aspirants for the Republican nomination for president in 2024 have attacked so-called “woke capitalism.” This is nothing more than political opportunism, unfairly dragging ESG into toxic culture wars. “Green-baiting” in the 2020s is no more justified than the red-baiting that injected venom into the American political scene in the 1950s. It has been laudable to see business leaders including JP Morgan Chase’s Jamie Dimon and BlackRock’s Larry Fink push back on this narrative. One would think that Dimon and Fink’s bona fides as capitalists would put these specious arguments to rest, but the attacks continue nonetheless.

It is obvious that our world faces immense challenges. Business action can be a great asset in creating innovative solutions and new investments in a world that is safer, fairer, healthier, and more resilient. By all means, business should be held accountable, and greenwashing should be called out for what it is. If sustainable business is going to deliver the goods, and navigate a new level of scrutiny because of its importance and prominence, it’s time to get more serious. It is also time to push back on specious arguments that say more about critics’ self-interest than our mutual interest in human progress.

Blog | Thursday July 7, 2022

What Business Needs to Know about the EU Corporate Sustainability Reporting Directive

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In the fast-changing landscape of sustainability reporting, the EU emerges as a front-runner. And in doing so, it is making a crucial impact not only in Europe but across the world. The EU has set an ambitious path to reorient capital flows toward a sustainable economy while avoiding greenwashing, and it has introduced far-reaching legislation, such as the Sustainable Finance Disclosure Regulation and the EU Taxonomy. To support the EU’s goals, investors need quality and comparable data from companies.

This is where the Corporate Sustainability Reporting Directive (CSRD) proposal comes in.

After a year of negotiations, the EU Council and EU Parliament reached a provisional agreement on June 30. The CSRD is set to replace the Non-Financial Reporting Directive (NFRD). The name change is welcome, highlighting that sustainability topics are also financial topics rather than opposed to them. Ultimately, sustainability information should be considered as important as financial information.

The CSRD is not just about meeting investor needs. It will also enable civil society organizations, trade unions, and other stakeholders to assess companies’ impacts on society and the environment.

Here are six points that businesses should know about the CSRD:

1. More companies will be covered by the CSRD than the NFRD.

All large companies governed by the law of or established in an EU member state and all European stock exchange-listed companies (except micro-companies), as well as small and medium-sized enterprises (SMEs), are under the scope of the new directive.  

A large company is defined as meeting two out three of the following criteria: (1) EUR€40 million in net turnover, (2) EUR€20 million on the balance sheet, and (3) 250 or more employees.

Companies that are not established in the EU but have securities on EU-regulated markets are also in scope.

For non-European companies, the requirement to report sustainability disclosures applies to all companies generating a net turnover of EUR€150 million in the EU and which have at least one subsidiary or branch in the EU.

2. The CSRD proposal applies double materiality.

Double materiality means that businesses must not only disclose how sustainability issues can affect the company ("impacts inward") but also how the company impacts society and the environment ("impacts outward"). For businesses that have historically assessed only risks to their business rather than their impacts on the world, the CSRD implies a fundamental shift in measurement and reporting.

3. Companies will need to report according to new EU sustainability reporting standards.

The European Commission has commissioned the European Financial Reporting Advisory Group (EFRAG) to develop EU sustainability reporting standards (ESRS). The standards will be mandatory for large companies. EFRAG released a draft for public comment in April. BSR encourages its members and the general public to provide feedback on the exposure drafts ahead of the August 8 deadline.

The standards seek to align to the extent possible with global standard-setting initiatives such as GRI and the ISSB Standards, but they also aim to link other EU legislation and initiatives, such as the Sustainable Finance Disclosure Regulation, the EU Taxonomy, among others.

SMEs and non-EU companies will have separate standards.

4. Third-party assurance of the data will be mandatory.

Businesses will be required to seek "limited" assurance of the sustainability information by a statutory auditor. Individual member states may choose to allow other independent assurance service providers (IASP) or non-statutory financial auditors to perform the assurance. Although "limited" assurance still requires an auditor to evaluate the information, it falls short of what is required for the financial audit statement. The EU Commission will adopt standards for "reasonable" assurance by October 2028, which is a more demanding assurance process. 

5. Sustainability information must be included in the management report and digitally tagged.

Companies will need to report sustainability information in a dedicated section of the management report rather than in a separate report (i.e., a standalone sustainability report). This means that financial and sustainability information will be published at the same time and that the administrative, management, and supervisory bodies will be accountable for this reporting. Companies will also need to digitally tag sustainability information so that it can be fed into the European single access point database.

When it comes to reporting at a consolidated level versus entity level, the subsidiary exemption will not apply in the case where the subsidiary is listed on an EU stock exchange.  

6. CSRD application will be phased in.

The European Commission plans to adopt the final text of the CSRD in late 2022, after which member states will have 18 months to translate the directive into local law. The first companies that will need to comply to the Directive are companies that are currently within scope of the NFRD. They will need to report in 2025 based on fiscal year (FY) 2024 data.

• August 8, 2022: The public consultation of the sector-agnostic ESRS ends.
• November 2022: EFRAG proposes sector-agnostic standards to the EU Commission.
• June 2023: The EU Commission adopts sector-agnostic standards through delegated acts.
• January 1, 2024: The CSRD will come into force. Companies already in scope of the NFRD will need to report in 2025 based on FY 2024 information.
• June 2024: The EU Commission will adopt sector-specific standards, standards for listed SMEs, and standards for non-EU companies.
• January 1, 2025: Other large companies need to report in 2026 based on FY 2025 information.
• January 1, 2026: Listed SMEs need to report in 2027 based on FY 2026 information.
• January 1, 2028: Non-EU companies in scope will need to report in 2029 based on FY 2028 information. 

The ESRS standards developed via the CSRD will create a baseline for decision-useful information to both investors and stakeholders at large, and the sustainability reporting standards can both increase the impact of disclosure and reduce the burden of reporting on companies.

At BSR, we have supported greater harmonization and clarity in the field of sustainability reporting for a long time. Competing standards and diverging requests for sustainability information from stakeholders have created an unreasonable burden and reporting fatigue for companies, hindering the effectiveness and impact of reporting. We will continue to push for progress on that front, building on the leadership displayed by the EU.

It is essential that the evolution of these standards reflects the voice of report preparers, so we encourage companies to play an active part in the EU sustainability reporting standard-setting process.  If you would like to discuss this topic further, please reach out to our Future of Reporting collaborative initiative.

Blog | Wednesday July 6, 2022

Activating Directors on Sustainability: Six Questions for Your Board

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Directors of companies headquartered in the EU will likely soon face a pivotal shift in their duties regarding sustainability with the upcoming EU Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD). Under the CSRD, companies will have to disclose how sustainability matters are managed at the board level and how sustainability is integrated into directors’ incentive schemes, while the CSDDD sets out ambitious new guidance on the personal duties of directors specifically.

The first blog in the three-part series detailed key recommendations for companies to prepare for the Corporate Sustainability Due Diligence Directive. Here, we draw on our learnings from engaging with boards of BSR member companies and have identified six key questions for boards to determine their readiness to govern evolving expectations. We would also like to highlight the recent recommendations at the World Economic Forum related to human rights and the role of boards as an additional source.

A Holistic Approach across ESG

Governments, investors, and other stakeholders are increasing calls for boards to provide oversight on sustainability and environmental, social and governance (ESG) topics. Examples include the SEC’s draft rule on climate disclosure requirements, which would require board and management-related risk oversight and governance. The International Sustainability Standards Board (ISSB) has also released exposure drafts on sustainability and climate-related financial disclosures.

The EU Commission’s proposed CSDDD is far-reaching in terms of responsibilities, with a comprehensive approach beyond climate, spreading across a broad range of ESG subjects. The CSDDD sets out two provisions on directors’ duties for EU-based companies:

• Directors’ duty of care: When fulfilling their duty to act in the best interest of the company, directors should take into account the consequences of their decisions for sustainability matters, including human rights, climate change, and other environmental considerations, in the short, medium, and long term.
• Directors’ oversight responsibility: Directors are responsible for overseeing a due diligence policy and processes, with due input from relevant stakeholders, including rightsholders impacted by the company’s business activity.

One of the groundbreaking elements of the CSDDD is its potential link between the company’s sustainability strategy and the variable remuneration of directors. As stated by the European Commission,

Where companies' directors enjoy variable remuneration, they will be incentivized to contribute to combating climate change by reference to the corporate plan.

Six Key Questions for Boards

Over the past 30 years, BSR has worked with companies and boards to integrate sustainability into business strategies and operations.  

Based both on that experience and an understanding of the likely impact of these impending changes, it is essential that boards go beyond “check-the-box” compliance to provide effective oversight and governance.

1. Composition: Does the board have access to relevant knowledge and training on human rights and wider sustainability questions?

There is increasing awareness on the part of business of the need to fill the gap in sustainability expertise and skills at board and management levels, including human rights due diligence. Companies can address this gap through dedicated training for all directors to ensure that due diligence becomes integrated into the companies’ processes and by securing external expert guidance. Boards can also review their skillset when considering sustainability risks, including how ESG and human rights topics relate to other company material issues.

2. Oversight: How does the board examine and oversee ESG issues? Is there a dedicated committee or is sustainability integrated across all board committees? 

The entire board must have the right level of understanding of human rights impacts and position these within the company’s wider ESG strategy. Relevant ESG topics can be integrated into respective committees (via nomination, audit, etc.) so they are addressed alongside other board considerations. This may also include a dedicated ESG committee.

3. Company impacts: Does the company have the appropriate approach in place to understand potential adverse human rights impacts on affected stakeholders?

Based on evolving norms in materiality and the CSDDD, companies should understand not just material issues to the business, but also salient human rights impacts. Potential adverse human rights impacts may vary widely, from supply chain labor to the use of algorithms in marketing campaigns to discriminatory effects of services. Such impacts may not be covered under narrower, “traditional” views of the financial materiality of ESG.

4. Stakeholder insight: Is the company conducting stakeholder engagement as a means of understanding relevant perspectives, risks and opportunities?

This could include two main components: Boards can first ensure company management has all necessary processes to create a meaningful and ongoing dialogue with affected stakeholders. In some cases, boards may themselves engage with and/or access regular insights from key stakeholders, including employees, trade unions, and affected community organizations, on salient issues covering sustainability strategy and ongoing relevant emerging issues. One mechanism through which this can be done is the establishment of a stakeholder advisory council, with which Board members may engage, along with management.

5. Emerging risks and strategic implications: Does the board have an approach—such as scenario planning—in place to identify emerging ESG and human rights risks and opportunities?  

Boards look at strategic, capital, talent, and other commitments that will affect a company for years or even decades to come—yet few have a method for considering the profound impacts that social, environmental, and other sustainability-related trends may have on these plans.

Futures thinking employing scenario analysis enables companies to identify emerging risks, opportunities, and their potential implications for the company. While perhaps not standard practice for boards today, directors and leadership teams can use these tools to ensure that their business has allocated the right resources, against multiple “what if” scenarios to ensure they are truly resilient in the face of tomorrow’s disruptions. Whether that’s linked to geopolitical risks such as the invasion of Ukraine, acute physical climate risks, or policy and legal risks on human rights, boards have a duty to long-term governance, versus reactive shifts.

6. Accountability: Is executive remuneration aligned with the company’s sustainability objectives?

Any flexible components of Board and executive remuneration should be linked to the achievement of measurable sustainability targets (time-bound and science-based in the case of environmental targets) set in the company’s strategy and certainly to outcomes beyond share price.

The dynamic business and social context all companies face means that Directors will be most effective when they consider a diversifying set of perspectives and considerations. New EU regulations, whether the CSRD or in this case the CSDDD, mean that heightened and more sophisticated attention to ESG is not only smart practice, but required, to ensure that their Boards’ can be effective stewards of company strategy and performance to deliver long-term value. We invite companies to collaborate with BSR in enhancing board leadership on an evolving and expanding set of questions.

Blog | Friday July 1, 2022

President and CEO Aron Cramer Responds to West Virginia v. EPA

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BSR believes that today’s US Supreme Court hearing in West Virginia v. EPA is a deeply mistaken decision that wrongly undermines the US federal government’s ability to take decisive action to combat dangerous climate change.

As we continue to assess the specifics of the ruling, many things are clear. First and foremost, the science speaks in a way that is more authoritative than the Court, and it is clear that climate action is becoming more and more urgent by the day. Restricting the ability of the EPA, the main environmental regulator in the US, means that the United States will not be able to take steps necessary to shift to a clean energy economy.  Signs of further restrictions on other science-based steps to address environmental and other questions are also very troubling.  

The damage done by this decision emanates beyond the immediate impacts on the EPA’s regulatory authority. It will undermine American climate diplomacy, at a time when the world’s largest economies must band together to take action on a global basis. Reversal of climate action also creates a public health challenge, one that falls most heavily on women, people of color, and communities with fewer economic resources.  It also suggests that the Court, as it showed  in its recent decision to overrule and invalidate Roe v. Wade, and weaken states’ authority to enact gun safety legislation, is not only damaging to the rights of Americans, but also out of step with public opinion in ways that weaken its legitimacy.

Today’s decision reinforces the need for ambitious climate action on the part of business, states and cities, civil society, and all of us as citizens. We are pleased that so many companies from across the US supported an amicus brief supporting the EPA’s authority.  Even more, thousands of companies have committed to net zero climate strategies, and are investing in new business models, technologies, and transition plans to help lead the way to a clean energy future.

We are convinced that the future depends on this transition. While it is heartening to see action from state and local officials, investors, civil society, and businesses, it is extremely distressing that the Supreme Court has embraced a backwards looking ideological approach that will only create greater cost and economic uncertainty, worse public health outcomes, and even more political division. We will continue to work with our more than 300+ member companies and many partners to achieve a truly just and sustainable world.

Blog | Thursday June 30, 2022

The Norwegian Transparency Act: Key Insights for Business

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Majestic fjords, Nobel Peace prizes, and cheese slicers are not the only special features of Norway—there is also an important culture of trust and transparency among peers. So much so that everyone’s income and taxes are made public for everyone to see. It is therefore not surprising that one of the most ambitious national laws on human rights due diligence to date, which takes effect on July 1, 2022, is called Åpenhetsloven—literally, the Transparency Act.

While the business and human rights field has been buzzing with talk of the EU Proposal for a Directive on Corporate Sustainability Due Diligence (CSDD), the imminent entry into force of the Norwegian Transparency Act follows a broader trend by national legislatures across Europe—including in France and Germany—to turn human rights due diligence into law.

Following France’s trailblazing Corporate Duty of Vigilance Law in 2017, the German Supply Chain Due Diligence Act is set to come into force in early 2023. At a regional level, the EU Corporate Sustainability Due Diligence (CSDD) Draft Directive will introduce due diligence obligations on thousands of large companies based and operating in Europe—albeit not before 2025-28.

As the Norwegian Transparency Act becomes the newest human rights due diligence law to enter into force, what does it mean for business with operations in Norway? How should they best prepare?

Below are key insights and recommendations based on work we conducted with our members on assessing their preparedness for the Transparency Act.

• Scope

  The size and volume threshold for in-scope companies is substantially lower than for other human rights due diligence laws across Europe. Large companies are defined as companies that meet at least two out of the three following criteria:

  (1) at least 50 full time employees during the fiscal year (or equivalent man hours)

  (2) An annual turnover of at least NOK 70 million (EUR€6.9 million or US$7.94 million)

  (3) A balance sheet of at least 35 million NOK (EUR€3.5 million, or US$3.97 million)  

   The Act requires companies to promote respect for human rights and decent working conditions (including the provision of a living wage) across their operations and supply chains. It covers companies in Norway and foreign companies that sell products and services in Norway.

• The Right to Request Information

  The right to request information is a unique aspect of the Norwegian Transparency Act and a first in the broader armory of human rights due diligence instruments (there is no such right in the German or French due diligence laws nor in the EU CSDD proposals). The requirement enables any individual to request information from a company on how it addresses actual and potential human rights impacts.

  In practice, it means that any member of the public, including investors, NGOs, and trade unions, can ask for information about a company’s due diligence efforts. How this right will play out in practice—including the level of information that companies need to provide—remains to be seen.

• Due Diligence in Line with the OECD Guidelines

  The Act does not deviate substantially from internationally recognized standards in terms of due diligence requirements, although it is more demanding in terms of supply chain coverage. This means all companies should conduct due diligence, in a manner proportionate to their type, size, sector, and operational context, and follow a risk-based approach.

• Human Rights Reporting Requirements

  The Act also establishes a human rights reporting obligation for companies. A company must publish an annual human rights statement by June 30 that is publicly available on the company’s website. It requires sign-off by all Board members.

• Oversight and Enforcement

  The Norwegian Consumer Authority will be the public enforcement authority responsible for overseeing the Act’s implementation. It is responsible for publishing appropriate guidance and enforcement in the case of non-compliance by businesses, including by issuing orders and fines (amount is unspecified). So far, there has been limited guidance from the Consumer Authority on key elements of the Act.

Recommendations for Business

Based on its work on the Norway Transparency Act and UNGPs and OECD Guidelines, BSR has three recommendations for in-scope companies:

1. Conduct Due Diligence in Line with Internationally Recognized Standards

The Norway Transparency Act is one of several emerging mandatory due diligence obligations to come into effect across Europe. To future-proof their work, companies can build a human rights due diligence approach that is consistent with the standards set out in the OECD Guidelines and the UNGPs.

2. Prepare for the Right to Request Information

The Right to Request Information is a novel feature in the human rights due diligence legislative landscape and requires the development of a clear process for responding to requests.

• Define a process and procedure for responding to requests: Determine appropriate tool, function(s), and process for receiving, assessing, and addressing human rights request and criteria for instances when request may be refused. Mobilize stakeholders and resources internally to ensure they are prepared to respond to requests for information on how they address potential and actual human rights impacts. Key functions for examples would be Sustainability, Compliance, and Public Affairs.
• Enhance visibility over human rights due diligence efforts: Map human rights due diligence efforts and relevant stakeholders across the company to enable a prompt and comprehensive response within the timeframe. Anticipate through stakeholder engagement what issues could be of interest to the public and prepare internal reports accordingly.
• Build capacity on human rights due diligence across the company: Engage with all relevant functions (e.g., Legal, Compliance, Procurement, Public Affairs and Communications) to help them understand the philosophy of the Act and the benefits of a more proactive and detailed transparency about the company’s human rights due diligence efforts.

3. Monitor Implementation and Engage with Regulatory Bodies

Lack of certainty remains around the scope of several of the Act’s key elements, including the Right to Request Information, the inclusion of living wage in the definition of decent working conditions, and requirements for downstream due diligence. The Norwegian Consumer Authority has indicated that producing clear guidance will be a key focus when the law enters into force and that it encourages businesses to come forward with any questions.

Human Rights and Sustainability functions can also work with colleagues in their regulatory teams to engage with the Norwegian Consumer Agency to keep abreast of the latest developments.

The construction of a risk-based human rights due diligence approach and transparency with external stakeholders on human rights efforts are foundational elements of the Norway Transparency Act. We encourage companies and members to follow the requirements above, not only to respond to the Act but to start building a robust architecture for human rights due diligence obligations to come across Europe. And who knows, full transparency may soon become the norm way beyond the beautiful Norwegian fjords.

Blog | Wednesday June 29, 2022

The Housing Crisis: Key Priorities for Investor Action

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We are in the midst of a startling global housing crisis, with 100 million people homeless due to a lack of adequate and affordable housing. In the United States (US) alone, 23 million people—including children, seniors, people with disabilities, and veterans—live in households that pay more than half of their income on rent and utilities in 2019.

Population growth, wage stagnation, a lack of public investment and government oversight, and decades of local opposition to the building of new affordable housing have all played a role in the housing crisis. Yet one factor has come into focus: the role of institutional investors.

In the first 3 months of 2021, 1 in 7 US homes were purchased by institutional investors—including private equity firms, pension funds, and publicly listed companies. In Europe, the rate at which institutional investors are buying up housing is also accelerating, driving up housing prices. Financialized landlords often rent out or sell these units to new buyers at inflated rates—causing individuals to divert funds from other basic needs like food or clothing to avoid eviction.

Earlier this month, The Shift Directives: From Financialized to Human Rights-Based Housing were launched in the EU Parliament, which call on governments to regulate financial institutions in the housing market. Regulatory and public policy pressure is also growing, and organized political and social movements against financialized housing are emerging. Meanwhile, widespread media coverage is zoning in on investors’ role in the housing crisis.

As investors increasingly consider environmental, social, and governance (ESG) principles that are aligned with UN Responsible Investment Principles (PRI), Limited Partners’ (LPs) expectations, and emerging due diligence and disclosure regulations, there is no better place to start than with housing. The Universal Declaration of Human Rights sets out adequate and affordable housing as a fundamental human right.

Unanimously endorsed by governments in the UN Human Rights Council, the UN Guiding Principles on Business and Human Rights (UNGPs) clarify that all companies, including institutional investors, should take action to respect human rights. The UNGPs provide a process-based due diligence framework that helps investors identify and address human rights risks, recognizing that where risks to people are greatest, material risks to business often follow.

The most effective efforts will be founded upon a human rights-centered approach to housing that considers how the purchase, maintenance, and sale of real estate assets impact people—including renters, homeowners, and community members at large. Here are key actions for investors to consider:

1. Make A Public Commitment

Commit to upholding adequate housing as a core policy commitment that is integrated into investment-level policies and subsequently integrated into ESG screenings, including human rights risk assessments, real estate asset allocations, and stewardship. Ensure third-party operators also commit to these principles. 

2. Assess Risks and Impacts by Engaging Stakeholders

Listen to the people most impacted by housing shortages and rising costs, including tenant associations, renters and homeowners, NGOs, and local officials. Come to the table not to defend your investment portfolio, but to learn about systemic risks to adequate housing, the role your investments may play, and workable solutions grounded in people’s lived realities.  

3. Establish Fair Housing Practices, including: 

• Fair Rent Levels—Set rents commensurate with income levels (e.g., no more than 30 percent of wage levels), and the costs associated with housing should be at such a level that other basic needs are not compromised.
• Tenant Protections—Establish tenant protections including missed payment grace periods, rental freezes for warranted cases (e.g., sickness, temporary joblessness), and the removal of ‘hidden’ fees, such as administration fees and payment convenience fees.
• Pathway to Ownership—Create a path for renters to become homeowners, including via rent-counting, fair and transparent rent-to-own models, financing options for tenants, and waiving of early termination fees. 
• Accountability and Access to Remedy—Ensure tenants can easily identify who owns and manages their home, can raise grievances and receive remedy in a timely and efficient way, and have an active say in housing decisions affecting their lives. Hold third-party operators accountable for their human rights performance. 

4. Align Policy Advocacy

Support pro-housing affordability policies and be transparent via external and internal communication where policy dollars are being spent related to housing issues. 

5. Track and Disclose Performance

Track and disclose, on a consistent basis, efforts to ensure adequate housing, as well as efforts of third-party operators. Such disclosure should be accessible and decision-useful for affected communities and LPs. Specific metrics for disclosure should include rent levels (compared to median wages), grievances/complaints received, and tenant engagement activities.

The housing crisis is not the fault of institutional investors alone and can only be solved through systemwide approaches. However, with their unique financial leverage, investors have both a responsibility and an opportunity to play a key role in the solution.

We look forward to further engagement on the solutions proposed, and we invite all institutional investors who are interested in responsible and human rights-respecting investment to contact us to learn more.