Demystifying the ‘S’ in ESG
Matt Haworth and Ed Cox of Impact Reporting unpack the abstract world of wellbeing and reveal the key to strengthening your social impact
Post-COP26, sustainability and ESG have been on business leaders’ minds. There is a renewed pressure on organisations to do their part for people and planet. However, while these terms are commonplace across industries, we are still seeing one critical component left behind. Unlike its counterparts, the ‘S’ in ESG – Social – is far less understood and prioritised.
Matters of environment, social, and governance are all interconnected. There is no way to target one without influencing another. Climate change affects people and communities, whether it is impacting mental health, reducing biodiversity, or leading to the loss of homes and livelihoods in vulnerable regions. There is also a significant people aspect to governance, with labour laws, eradicating slavery from the supply chain, diversifying the workplace and boardroom, and leadership all affecting communities where businesses operate.
The social aspect is about impacting people and society. Before we consider good business governance or reduced environmental impact, the most basic first step a business can take is to look at how it affects people. After all, this is what underlines everything else. If all roads lead back to people, shouldn’t more attention and resources be given to the ‘S’ in ‘ESG’?
The challenges of ‘Social’
On one hand, social impact can feel nebulous and abstract. But, on the other, it is immediate and innately understandable. It is how fulfilled we feel on a daily basis. How happy we are. How much our children are thriving.
One of the biggest challenges with the social side of ESG is a lack of a common currency. When it comes to financial matters, we have pounds and pence – here in the UK, at least. Environmental disclosures have also had great developments after finding a common currency in carbon. However, measuring the wellbeing of individuals remains more difficult. Many organisations don’t know it is actually possible to measure and quantify wellbeing and social value in a currency-like way.
Another challenge is the lack of legislation surrounding ‘Social’ compared to ‘Environmental’ and ‘Governance’. While the Social Value Act and recent PPN 06/20 have given an immediate incentive and requirement for organisations bidding for public sector contracts to prioritise their social value, we are still lacking a similar incentive for other industries. The bottom line is if organisations don’t have to, many of them often won’t.
Likewise, by focusing too heavily on financial metrics, you can end up excluding valuable aspects of your social disclosures and concentrating on the interventions that drive the largest numbers, rather than delivering the most sustainable value to communities. This prevents the holistic stories from being told and your reports will continue to lack the deeper understanding of what real-life impacts your actions are having on the people they are trying to benefit.
Proxy values are used as a way of creating economic equivalency. Or, in other words, how much of a pay rise you would have to pay the average employee to improve their wellbeing to the same degree as the intervention itself would for the beneficiary. But general estimates of the wellbeing impact of an intervention might not apply to your stakeholders, locality, intervention, or product. Also, an economic intervention in a wealthy area will have far less impact than in a poorer one. The value banks used for calculating financial value miss all of this nuance.
Moving beyond numbers alone
The future of ‘Social’ lies in wellbeing as opposed to arbitrary financial values alone. But moving beyond numbers isn’t about leaving them behind altogether. Instead, it is about focusing on what those numbers represent.
In the UK, for example, we have emerging systems such as WELLBY – a more robust, nuanced, benchmarkable way to establish the impact of social interventions on an individual’s wellbeing. Systems like WELLBY use survey questions to ask people how their lives are affected by what you do. You gain insight from beneficiaries directly, rather than simply making assumptions.
While you can use general proxy values in value banks in place of these conversations, they will never fully and accurately reflect the depth of your social impact in the same way as asking the people you are helping directly.
What does this look like in practice?
The good news is that a lot of social value will already be created by your existing activities. A great place to start is performing a review of what you are already doing. Interventions like the Living Wage and flexible working will already be generating social value. Then you want to work outwards to your community and surrounding areas.
You also need to look at what your organisation is doing – or could be doing – that is affecting people negatively. This allows you to identify opportunities for improvement and additional positive impacts.
When it comes to improving ‘Social’, you want to remove the guesswork. Instead of relying on vague figures from value banks, you need to take a stronger approach. You wouldn’t use a simple spreadsheet for financial metrics, and if you are looking to prioritise your social impact, you will need a more robust way of capturing, analysing, and reporting on your outcomes (not just outputs). The survey functionality we mentioned can be great for this. It allows you to gather qualitative and quantitative data from a wide spread of beneficiaries at different stages of interventions.
This helps you move past direct inputs and outputs and truly understand the difference those volunteer hours make in the local community and on individuals’ wellbeing. This outcome will be a much bigger value than a percentage increase or financial equivalent alone.
If not now, when?
Reputation is everything in business. How organisations engage their stakeholders and uphold complete transparency is paramount. The ‘Social’ side of ESG is where some of the most compelling elements of change occur. Change that is compelling to prospective talent, existing employees, and new customers.
We are already seeing a massive shift. Take staples like chocolate and coffee. Tony’s Chocolonely’s key message (and brand USP) is that their chocolate production is guaranteed as entirely slavery-free. Another example is Kenco, with their campaign ‘Coffee vs Gangs’. In Honduras, where gangs are a large concern for young people, they are providing the opportunity to live and work on coffee farms, providing the opportunity for a different life path. Not only does this form part of their ethical, sustainable supply chain, but it transforms communities.
Organisations need to understand that brands can easily become toxic, and that this is an almost impossible reputation to shake. If people are being mistreated or overlooked, others will be quick to highlight it.
It is impossible to separate the ‘S’ in ‘ESG’ from your business because it is fundamental to good business today. Our efforts are critical to making communities across the globe happier and more resilient. It is the same side of the coin as environmental initiatives, which look to preserve people’s communities and welfare.
Organisations who don’t engage with it risk getting out-paced by competitors that are. A new generation of disruptive startups are going to overshadow bigger companies, winning more public sector contracts, securing larger market share, and telling better stories to attract greater talent. Where is that going to leave you?
About Impact Reporting
The Impact platform is transforming the approach taken towards ESG measurement. The only platform capable of both qualitative and quantitative evaluation of Social and Environmental initiatives, Impact takes the guesswork out of your interventions and impacts. By embedding the WELLBY wellbeing system and integrating survey functionality that automates and streamlines the data collection process, businesses can capture nuanced stories and quantify exactly how their interventions have helped real people. With Impact, organisations can easily see the thread from initial action to tangible, real-world social change.
About the author
Matt Haworth and Ed Cox are the Co-Founders Impact Reporting
matt.haworth@impactreporting.co.uk | ed.cox@impactreporting.co.uk
For further information:
impactreporting.co.uk