The initial focus on environmental sustainability makes sense. Measuring carbon footprints and other quantifiable impacts is relatively straightforward. Because the social dimensions of business are ill-defined and often challenging to measure, social impact is often underplayed in the ESG conversation. Much more can be done to address this key component of a sustainable future.
Global trends put social impacts in stark relief
The covid-19 pandemic intensified pre-existing divisions within and between societies, intensifying long-standing injustice, rights violations and disparities in labour standards. Examples include unequal access to health care; economic marginalisation based on gender, race and other identities; and substandard working conditions among people with lower incomes or other disadvantaged statuses.
Shifting global power structures and the war in Ukraine have also introduced new concerns about where and with whom companies do business. Sanctions on Russia and popular opinion in Europe and North America forced many corporations to make significant and rapid strategic decisions in early 2022. China has long posed dilemmas for certain companies, but the past three years of lockdowns as well as Beijing’s dramatic approach to tech regulation have complicated the landscape, causing some business leaders to re-evaluate their relationship with China. As they did so, some focused more attention on rights violations that civil society groups have been calling out for years, such as mass detentions and forced labour, limitations on free speech and unpredictable rule of law.
The culture of accountability has also changed. Companies are facing pressures around their social impact from investors, employees and customers that they cannot ignore. C-suite executives must juggle these competing concerns alongside traditional considerations of shareholder value. Without a widely accepted benchmark for how to measure social performance, leaders are often left adrift.
How to effectively address the “S” in ESG
The challenges are real, but solutions are possible. Companies from Lego to WarnerMedia have taken their social impact seriously, and implemented concrete change to mitigate the harms.
One step is to devote executive time to identifying the social risks posed by business and how they can be managed. In order to take social impact seriously, leaders must go beyond counting inputs like the number of leaders of colour, focusing instead on outputs such as remedying abuses in the supply chain.
Companies should also define what social risk means in the context of their operations and industry, and use that to identify where a change in how business is done can have the greatest impact. Ben & Jerry’s ice cream saw that dairy farmers in its value chain were suffering human rights abuses, and took action to support initiatives to improve their livelihoods. After the 2018 school shooting in Parkland, Florida, Dick’s Sporting Goods decided it would not risk contributing to the next tragedy—despite having had no role in Parkland—and pulled assault weapons from all of its shelves. Neither of these efforts eliminates every societal threat, but the focus on the most critical risks puts the emphasis on making the greatest possible difference.
Third, companies can find ways to measure social risk in addition to environmental risk. The indicators are harder to generate and inherently must be more business-specific. However, once those that are material to your business are identified and measured effectively, they can help ensure the accountability necessary to generate positive change. AI techniques including machine learning, deep learning and neural networks present an exciting new opportunity to improve the quality and amount of usable data, and to analyse it more effectively. Integrating social impact data into reporting frameworks like the International Sustainability Standards Board (ISSB) can help improve planning and correlate social impact performance with financial performance.
If more companies engage in serious thinking on social impact, employee retention will improve, customer returns will go up and cheaper capital will be more accessible. Employees and customers will be proud to associate themselves with the business, investors will know what they are supporting and more people’s lives will improve.