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Quantifying and modeling the S part of ESG

ESG is increasingly measured, standardized, and reported on by financial organizations across the globe but with a focus on environmental and governance factors, social impact lags behind. In one survey by BNB Paribas, 51% of investors cited the “S” as being the most difficult to analyze and the most difficult to embed in strategy.

With no clear metrics of what good social performance is and no standardization around those metrics, S can quickly become nothing more than a check-the-box exercise with no real value being produced. At the same time, financial organizations want and need to invest in social good as part of ESG. At ACE + Company, we see our clients working towards creating a more positive impact on the world around them, and we’d like to help by offering insight into the Social aspect of ESG.

ESG Metrics Don’t Define or Encompass the “S” Very Well

If the nature of managing social risk is to create actions, policies, and investments that positively impact people’s lives, focusing on risk measurement and avoidance quite simply is not enough to meet social goals. Social factors can include quality of life, privacy, safety, diversity, digital inclusion, and equality. Yet, many organizations focus on material goals. E.g., in the telecoms sector, MSCI, one of the leaders in ESG standards, identifies privacy and data security, labor management, and access to communications as primary points in social strategies – all of which can be linked to fiscal outcomes.

Other common factors like diversity, employee engagement, and feelings of belonging all increase employee satisfaction within the company – but do little to showcase social responsibility outside the company.

Social Responsibility Can’t Exist without Environmental and Governance Responsibility

The current focus on Environment makes sense in light of new and pressing regulations surrounding sustainability and carbon emissions. The focus also makes sense, with science-based targets, data, and the ability to create clear goals, E is relatively simple to map, model, and create projections for.

At the same time, one does not exist without the other. Social overlaps with governance (think cybersecurity, data privacy, labor agreements, procurement policy) and environment (think quality of life, access to food and water), and vice versa. Environmental decisions become complicated by social decisions, because, for example, while it would be environmentally responsible to simply cut fossil fuels, doing so would reduce the quality of life for the millions of people depending on those energy sources for heat and fuel.

Nowhere is that overlap more evident than following the conflict Russia started in Ukraine, in which sanctions against Russia resulted in a crisis of fuel shortages across Europe.

Any model for ESG has to be integrated, with all three taken into account at every step.

Embedding S into Strategy

One of the key problems for financial organizations looking to embed the “S” into their strategy is defining what S is to begin with. At ACE, we often find that those questions can be simplified by redefining “Social” as “Stakeholder”, allowing you to better set and narrow stakeholder groups to define what impact is and how it works.

  • Every company defines, measures, and reports on social impact differently. Overcoming this means setting internal standards, while simultaneously creating monitoring to ensure that companies in your portfolio measure and report in a way that aligns with your own metrics
  • It’s good to start by evaluating your own supply chain. What companies are you procuring goods and services from and where do they stand on social aspects? Do they have policies in place to protect their workers? Do they evaluate their sub-suppliers? Are they complying with the 10 principles of UN Global Compact and ILO? Engaging tools such as the EcoVadis platform might be very helpful. It not only enables companies to assess suppliers, it also helps to start a conversation with those suppliers regarding areas in need of improvement
  • When it comes to investments and own portfolio, developing a Social scoring system for  potential companies on your radar can help you to identify whether that company introduces new social risks, while giving your organization a map for good social investments. Here, it’s important to understand not just whether a company scores badly but also why they do – as that may heavily impact your eventual investment decisions
  • S goals vary significantly by industry and region meaning that no ESG goal will be universal. Assess organizations based on goals relevant to them
  • Measuring organizations based on outcomes with impact metrics in place could help to create more precise and relevant standards for S
  • Developing internal risk mitigation and KPIs for SDGs is necessary for financial organizations wishing to improve S in their organization. With no industry-wide best-practices, now is a time to be a leader in the field. E.g., Citibank simply excludes companies that breach its policies, but there are many other ways to meet social goals
  • Focusing on social initiatives with materiality or measurable value can increase buy-in from stakeholders while providing strategic goals but the nature of S means positive impact, not just revenue

No strategy can succeed without accountability and measurable goals. Focusing on defining and broadening your S strategy should always include ways to measure, trace value, and see results. At the same time, achieving buy-in by clearly communicating purpose and goals to stakeholders, supporting S goals with a bottom-up culture shift, and giving clear direction for achieving S goals are all crucial.

Social good is at the heart of what ESG is, which is outlined by just how many of the UN Sustainable Development Goals are social-oriented. At the same time, building those goals into your strategy often means starting by defining them based on what is relevant, measurable, and achievable for your industry, region, and stakeholders.

If you’re struggling with quantifying and modeling the S as part of your ESG, drop by ACE and start a discussion, we’re happy to help you on your way to building the S into your ESG strategy.