Measuring the social impact of a company

Companies have been drawing on robust methodologies and frameworks to measure and manage environmental and climate change impacts for a number of years. In contrast, measures for the social aspects of environment, social and governance (ESG), particularly impact measures, remain immature. There are several reasons for this,
says Catherine Ensor, as she explores the practicalities of measuring the social impact of companies.

The global financial crisis of 2007 called great attention to the shortcomings of the existing economic system, specifically its preoccupation with short-term financial information, failure to consider business’ non-financial impacts and disregard for long-term sustainability. Since then, the emergence of stakeholder capitalism has seen business acknowledge its larger role in the world and move away from maximising profits and shareholder value to creating long-term sustainable value for all stakeholders.

At the same time, investors, regulators and other stakeholders want to know what impact companies are having on people and the environment. However, it is significantly more difficult and complex to measure and report on social impact, than it is to measure financial returns or greenhouse gas emissions. And there are not yet any
globally accepted standard measures.

Defining social impact

Social impact is the long-term positive or negative effects on people and communities arising from the action or inaction of a company, organisation or entity. Social impact can be the outcome of conscious decisions and the consequence of activities, projects, programmes, policies or other operational undertakings. It can also be the result of intentional lack of awareness and inaction.

Because no company can exist in isolation from people and the communities in which it operates, it will inevitably have a social impact. Doing business in a way that benefits society and protects people’s lives has become a universal expectation. It informs our evaluation of how businesses conduct their operations, our investment decisions, our purchasing choices and even where we seek employment.

As social impacts become increasingly important, it is in the best interests of companies to measure their social impact, curb negative effects and be able to demonstrate their positive contributions to stakeholders. From an operational perspective, having an informed view of its social impact gives a company the information it needs to
fine-tune its activities to improve performance in an iterative process.

Reach of social impact

Wherever a company’s actions or inactions touch a person’s life, they have a social impact. Social impact is therefore extremely broad in scope and embraces a diverse range of stakeholders, who may be affected directly or indirectly in negative or positive ways by a company’s actions.

The concerns and priorities of various stakeholders can differ vastly and can also conflict. For example, while government will focus on collecting taxes and legal compliance, customers will be looking for product quality and value, employees will focus on benefits and wages, and communities and civil society may be concerned about
job opportunities and social investment.

What gets measured

Social impact can be considered at the level of a sector or industry, a company, an investment, or a project. The further up this hierarchy, the more difficult it is to measure. The social impact of projects, for example, are frequently assessed, and standard monitoring and evaluation frameworks and methodologies can be used. There are also various methodologies and standardised metrics available for investments. Examples include the Global Impact Investing Network’s (GIIN’s) Impact Reporting and Investment Standards (IRIS) and the International Finance Corporation’s (IFC) Anticipated Impact Measurement and Monitoring (AIMM) system.

At the level of company and sector, measurement becomes more complex. Because social impacts are so broad, they can’t all be addressed simultaneously, and it is necessary to evaluate and prioritise those that are most important. However, doing so is an inherently subjective process and unlike environmental objectives, which can be based on science – for example, measuring carbon emission reductions – social impact priorities are often based on measures that are not objective and may be difficult to quantify.

Some social impacts are easier to quantify than others – the value of employee wages and taxes paid are typically captured in the value-added statement in companies’ financial reporting. Others may be easily quantified as inputs – the value of social investment, employment equity ratios – but more difficult to quantify as impacts. How does one quantify the impact of a more diverse workforce? Or product accessibility and customer privacy?

Various reporting guidelines and tools include metrics for social impact. For example, The Global Reporting Initiative (GRI) Standards, the world’s most widely used sustainability reporting standards, provide a flexible framework for reporting across universal, sector and topic standards. The standards’ intention is to enable organisations to understand and report on their impacts on the economy, environment and people in a comparable and credible way that provides transparency on their contribution to sustainable development.

However, in the drive for universal applicability, the GRI Standards have created their own challenges. The GRI’s social indicators, for instance, are spread over 18 categories, ranging from labour relations and non-discrimination, to customer privacy and socioeconomic compliance. Each category has a number of disclosure requirements, and organisations must report on these according to their relevance, describing their actual and potential negative and positive impacts. The level of detail and complexity arising from this is reflected in the fact that the social requirements take up 213 pages of the 868-page Consolidated Set of the GRI Standards.

Social impact measurement methodologies

Different stakeholders have different priorities in terms of which social impacts are measured and how they are measured. These differences are evident in the range of social impact methodologies and frameworks that have been developed in the last few years. In this article, we consider three prominent ones to highlight their
application and relative advantages and limitations.

International Finance Corporation’s Anticipated Impact Measurement and Monitoring

The IFC is the largest global development institution focused on the private sector in developing countries. Its AIMM system was developed to enable the IFC to estimate the expected development impact of every project it funds, set ambitious yet achievable targets and select projects with the greatest potential for development
impact, as well as financial returns. The system has an extremely broad scope that goes beyond social impact to include environment, climate and systemic considerations.

The IFC has rated all new investment projects using AIMM since 2018, providing a numeric score for each investment that represents the project’s expected development impact. The system relates directly to specific, measurable outcomes tied to market creation and the degree to which projects unlock private investment. It also examines how a project will enhance competitiveness, resilience, integration, inclusiveness and sustainability.
AIMM is broad, detailed and complex, as one would expect from a system intended to guide investment decisions.

World Economic Forum Stakeholder Capitalism Metrics

The World Economic Forum (WEF) released a white paper on measuring stakeholder capitalism in September 2020. Aimed at improving how companies measure and demonstrate their contributions to society and the environment, it was developed in support of the WEF’s view that companies that hold themselves accountable to their stakeholders and increase transparency will be more viable – and valuable – in the long term.

The white paper introduced a new approach to measuring stakeholder capitalism in the form of Stakeholder Capitalism Metrics (SCM), the world’s first standardised ESG measurements. The metrics draw on existing frameworks and standards with the scope of measurements categorised into four pillars: governance,
planet, people and prosperity.

Each pillar is comprised of themes relating to the most important issues facing it, and that are universally relevant to all companies. Each theme is critical to a comprehensive understanding of its pillar, and groups together corresponding metrics and disclosures to measure company performance and sustainable value creation.
The SCM is made up of 21 critically important ‘core’ and 34 ‘expanded’ metrics and disclosures.

While the SCM goes some way to achieve alignment among existing ESG frameworks, and streamlines the number of indicators needed to measure social impact, it also has shortcomings, including that it measures outputs rather than outcomes and doesn’t recognise that stakeholders in different industries have different information needs.
By attempting to simplify and standardise indicators of impacts that are essentially complex and specific to each company, the SCM is by its nature a compromise. That’s not to say it doesn’t have value: in September 2022, the WEF reported that more than 120 multinational companies had adopted the SCM in their ESG reporting, with many others expected to follow.

European Union’s social taxonomy for sustainable finance

The taxonomy for sustainable activities (green taxonomy) was adopted in 2020 to help meet the European Union’s (EU) climate and energy targets. The taxonomy provides definitions and a classification system to evaluate the environmental performance of specific economic activities.

To support the social aspects of the EU’s ESG agenda, a social taxonomy for sustainable finance was due in 2021, but it is yet to be published. The social taxonomy is geared toward banks, businesses and regulators in order to classify and guide sustainable investments.

An EU advisory body released a report on the social taxonomy in February 2022 that proposes a structure focused on the protection of human rights and direct, positive social impact on businesses’ three main stakeholder groups: employees, customers and communities. Three overarching objectives are identified:

• Decent work (including value-chain workers)
• Adequate living standards and wellbeing for end users
• Inclusive and sustainable communities and societies These objectives support a comprehensive set of sub-objectives designed to ensure that various aspects integral to these objectives can be addressed.
• The report also puts forward requirements for future social criteria and indicators, together with ideas about the next steps towards completing the social taxonomy. However, despite the progress
  made, the finalisation and implementation of the taxonomy continues to be beset with challenges, and the project hasnow effectively been put on hold, at least until the end of the European Commission’s current term of office in 2024.

Recommendations

The developments outlined above highlight the difficulties of creating universal standards for measuring social impact, which are clearly still a work in progress. However, those seeking to measure and make disclosures on their organisations’ social impact should not feel overwhelmed or disheartened, and should rather take
advantage of the opportunities on offer:

• Make a start – Social impact measurement and reporting cannot be perfected overnight. Like other aspects of sustainability, this is a journey. Start by mapping the social impacts of the company, both positive and negative. Stakeholder input, and frameworks and metrics most relevant to your company or industry can help
  with this.
• Prioritise materiality – Understand and prioritise social impacts that are most material to your business. There is no shortage of codes and standards that provide examples, but use those that are most relevant to your material impacts.
• Measure your inputs – Quantifying your social inputs (investments in priority areas) only tells you the first part of the story, but is a useful point of departure in evaluating social impact. If comparable information is available across peer companies, you can also benchmark your contribution (see box on measuring social inputs).
• Focus on outcomes – Consider the outcomes you want to achieve for each social impact and the desired impact you are seeking. Describe it, even if only qualitatively at first.
• Aim to measure outcomes – For each intended social impact, devise a means of assessing outcomes, qualitatively or quantitatively. You can reference other standards or methodologies, but ensure that the measures you put in place are relevant to your organisation and, where possible, aligned to
  recognised social impact measures.
• Be transparent – Trust is vital to the success of every organisation and this is built on a foundation of honesty, consistency and credibility. Not every metric reflecting social impact, or other ESG factor, is going to cast an organisation in a positive light. When this happens, being honest can build trust.

Source: The Trialogue Business In Society Handbook 2022 (25th edition)