How Organisations Can Make and Measure Their Social Impact with ESG

Much of the conversation around ESG focuses on reporting and how to satisfy regulatory requirements, avoid fines, protect reputation, and keep stakeholders happy. However, it is fundamentally about organizational responsibility and accountability and is motivated by stakeholder concerns over corporate greed, corruption, public health, climate change, depletion of natural resources, and social and economic disparity.

ESG indicators are used to inform ethical investment choices with optimal returns. They go beyond a traditional financial profile. To make well-informed decisions, leaders, managers, investors, employees, customers, suppliers, taxpayers, and neighbors need to know how well the entity is governed and controlled through its leadership, values, and culture, and how it impacts people and the environment.

Within ESG, the emphasis has typically been on environmental and governance factors. In this article, I want to explore the importance of social impacts and how we can improve our actions and disclosures, highlighting some examples of social projects that have real, measurable impacts. As internal auditors, we can make a valuable contribution to raising our collective attention toward people and society and ensuring claims made in reports can be substantiated.

S is for Social

Environmental impacts can be quantified in data about carbon footprint, renewable energy, water usage, recycling, pollution, and so on. Likewise, governance can be evaluated against any number of codes and standards. Social responsibility, however, is proving harder to measure and report.

S reflects who is impacted by organizations – staff, customers, vendors, the wider community, even future generations – and how they are impacted in terms of social cohesion, inclusion, fairness, diversity, health, and well-being.

Inaccurate or incomplete information (referred to as “greenwashing”) has damaged confidence in reporting but the pressures on organizations to get it right are getting tougher with a tightening of rules. Organizations discovered making unsubstantiated or inaccurate claims are liable to feel a sharp backlash. For example, when Hyundai launched the Nexo in the UK, it claimed the vehicle “purified the air.” However, the Advertising Standards Authority found this to be misleading given the release of pollutants by Nexo’s tyres and brakes. Other well-known brands – Asos, Boohoo, and George at Asda – are under investigation for their sustainability claims. New fines of up to 10% of global turnover for greenwashing are being introduced.

Why is “Social” Important?

It is not enough to pursue business objectives without causing harm – organizations are increasingly expected to take positive action. For many, this starts with a focus on staff and DEI (diversity, equity, and inclusion) from which CIPD identifies three main areas of advantage:

• Reputation: important for attracting and retaining employees, customers, investors, and others.
• Appeal: people want to be associated with an organization that is interested in physical, mental, and social well-being.
• Results: attention to DEI yields “enhanced innovation, creativity, productivity, reputation, engagement and business results.”

However, the S of ESG goes beyond DEI and organizations can benefit from supporting wider community projects. Steps to increase social and economic participation from excluded groups contribute to a greater pool of talent from which the organization can draw while reducing the burden on the state and the taxpayer.

Measuring and Reporting S

To avoid making unsubstantiated claims it is imperative organizations seek review by legal counsel or internal audit before publishing. From my experience, between 40 to 60% of claims end up being redacted before making it to print because claims on the initial draft cannot be substantiated.

Measuring impact is hard which is why organizations tend to count inputs – pounds donated to good causes, staff days spent supporting local charities, apprentices hired, hours of coaching given, and so on. These, at least, are auditable but how effective are they? Too many organizations do not attempt to measure real outcomes and so their value remains unknown.

Programs like the examples given below aim to reduce inequality, enhance social cohesion, and increase participation by under-represented groups. The results can be tracked over the long-term and reported. They are quantifiable and therefore auditable but, more importantly, they can add real value for individuals on the programs, the companies that engage in the space, and society at large.

Example: The Science, Technology, Engineering, Maths Passport (STEMP)

There is a significant shortfall of graduates for STEM jobs (Science, Technology, Engineering, and Maths) of which there will be 6.2 million unfilled worldwide by 2030. 80% of all future jobs will require basic digital skills even if they are not in the STEM arena but only 2% of graduates will have the right qualifications.

This looming skills crisis can adversely impact the economy and widen the opportunity gap between the haves and the have-nots. Most noticeably, women are under-represented among STEM graduates, especially those from socio-economic deprived backgrounds (SED) who are more likely to end up in low-paid, low-potential jobs and remain entrenched in poverty.

STEM Passport is an example of how organizations can engage in a meaningful way. Through sponsorship from industry, female students from SEDs are given the opportunity to follow STEM courses to gain credits for university. Organizations can support such projects by offering donations, mentoring, internships, and ultimately employment. This project has tangible outcomes that can be validated and confidently reported as part of an organisation’s disclosures regarding social impacts.

Example: New Futures Network (NFN)

NFN helps ex-offenders in the UK get employment. The vicious cycle of offending, punishment, unemployment, and reoffending costs the UK tax-payer £15 billion every year. Most offenders want the opportunity to turn their backs on crime and having a job helps them get their lives back on track. When employers are given the opportunity of engaging ex-offenders, over two-fifths report that it has helped them address diversity and inclusion and fill important skills gaps. It is also proven to reduce reoffending by at least 9%. NFN prepares offenders before they are released and enables relevant training to start in prison, thus removing some of the burden from employers 92% of whom say they are motivated by enhancing their reputation and in some cases gain competitive advantage. 

The Future of S and a Role for Internal Auditors

In their consultative role for senior management and the board, internal auditors can help promote the importance of establishing and/or contributing to social programs while guiding their organization through the potential hazards and pitfalls. DEI is a good place to begin if well-meaning gestures are translated into genuine consideration for work/life balance, flexible working arrangements, job design, an inclusive culture, and employee well-being. It is easy to demonstrate the benefits of mental health in terms of productivity and reductions in absenteeism and “quiet quitting.” Auditors can also advise on how organizations can quantify and track inputs, outputs, and outcomes.

Internal auditors should maintain a watchful eye on legislation and regulation to alert management about any impending compliance issues. There are many discussion forums devoted to this topic and organizations can learn from each other. There are various tools available to support the process of reporting and continuing to benchmark and evolve the maturity of ESG programs.

Moving beyond concern for the workforce, auditors can help identify opportunities for wider engagement in the social space over the long-term with benefits for investors, customers, and the community. A broader, more diverse, and more highly skilled pool of talent that organizations can tap into, providing opportunity and dignity for people from lower socioeconomic backgrounds and other excluded groups helps reduce the burden on the state and enriches our lives. 

Based on the foundational principle of “leave no one behind,” the UN Sustainable Development Goals provide a pathway “for peace and prosperity for people and the planet, now and into the future.” This is surely an objective we can all get behind.