Making sense of the ‘S’ in ESG
ESG has hit the mainstream. For the many people who have dedicated our careers to improving business practices relating to the management of social and environmental impacts this is welcome relief. The energy required to constantly make the case for change has diminished. However, there is a risk that much of this energy is instead consumed navigating the ESG hype, noise and confusion rather than being directed towards meaningful change. This is particularly the case for the social dimension of ESG, which is less defined and more difficult to account for than the environmental and governance aspects.
So how does an individual organisation make sense of the ‘S’ in ESG? To begin with there is a need to clarify the value and relevance of different terms. Social risk, social impact, social value, social capital, social licence and social performance are all increasingly common terms in the business lexicon and are often used synonymously, but there are some important distinctions.
Whilst there are different and sometimes competing interpretations, our own working understandings are:
- Social risk typically considers how social issues might adversely affect business operations or financial performance. In some cases, it also considers ‘risks to people’, particularly in organisations where mature human rights due diligence frameworks are in place;
- Social impact focuses on the people most affected by an organisation’s operations, activities and decisions and can include direct and indirect, and positive and negative impacts. It often focuses on impacts occurring within local communities but social impacts also arise in your workplace, supply chain, or customer base;
- Social value applies a broader societal lens to the social changes attributed to or influenced by an organisation and can be both created and destroyed. Social value is commonly linked to the UN Sustainable Development Goals or other broader societal frameworks;
- Social (or relational) capital relates to the strength of the organisation’s relationships with relevant communities and stakeholders and overall levels of trust. It is intangible and continually changing and can therefore be difficult to measure;
- Social licence is the overall level of acceptance or approval of an organisation, its sector, products and/or activities. Social licence can exist at multiple scales concurrently. For example, there may be strong community acceptance of your business at a local level but low acceptance at a broader societal level and vice-versa. Social licence can also exist at an industry-wide level where the business practices of your competitors affect acceptance of your own activities. Like social capital, a social licence is intangible, dynamic and relationship based.
- Social performance relates to how effectively your organisation manages its social risks, impacts, value creation, stakeholder relationships and/or social licence. In certain industries it is also the name given to the dedicated business unit or function with the specific technical capabilities for supporting these aspects of business strategy and risk management.
These are all important aspects of the ‘S’ in ESG. Each fulfills a different purpose and addresses the needs of different stakeholder groups. Organisations that focus too narrowly on one aspect at the exclusion of the others may fail to meet evolving stakeholder and societal expectations. Addressing them all concurrently is a complex challenge that requires specialist capabilities grounded in social science expertise.
We still find it surprising and intriguing that social science expertise remains undervalued and underutilised in the search for solutions to the ‘S’ in ESG. Social and cultural geographers, sociologists, cultural theorists, political ecologists, social entrepreneurs and social anthropologists are just some examples of professionals specifically trained in making sense of social complexity across a range of different contexts. When KPMG Australia established a human rights and social impact practice through the acquisition of Banarra, it brought these capabilities inhouse and over the past six years the Banarra team has applied these capabilities helping to transform not just our clients but also KPMG itself.
Whether your primary driver is to address the risk of harm to people, to identify and respond to the evolving expectations and emerging needs of your stakeholders or to develop responses to social issues that can affect business value, it is important to consider all aspects of the social dimension of ESG including its intersection with environmental management and governance. Relevant social issues, risks and opportunities may relate to:
- Your industry, products, services and business relationships
- Specific places of operation and the local operating context
- People affected by your operations and activities, including vulnerable stakeholder groups
- Alignment between your social purpose, values, priorities and performance, the evolving needs and expectations of your stakeholders, and emerging societal expectations.
If your business is struggling to get a grasp of the ‘S’ in ESG it may be due to a capability gap or a failure to listen to your stakeholders and to the relevant experts within your own business. If you don’t value this capability or proactively bring it in to decision-making processes, then you may inadvertently compromise your overall ESG ambitions.