The measurement of companies’ environmental, social, and governance (ESG) practices is thankfully here to stay. But when it comes to social issues, we need to start measuring the actions that are most impactful instead of what’s convenient.
Over the past decade, environmental, social, and governance (ESG) issues have steadily gained traction in the corporate environment. As a means for measuring the sustainability and social impact of an investment, ESG has slowly transitioned from the fringes of the responsible business community to being considered by mainstream investors when assessing the financial strength and resiliency of a company. The introduction of rankings and frameworks such as MSCI and SASB to catalyze change and increase corporate disclosures across these topics have fueled the drive for greater adoption of ESG in corporate reporting. There is no denying ESG is here to stay.
Yet, despite the accelerated growth in the past five years, the “S,” or social consideration of ESG, remains difficult to define, measure, and disclose. Perhaps more importantly, there is a genuine lack of agreement on what the “S” should include.
That has created a noticeable gap in corporate social impact measurement with some companies, like Mastercard and 3M, not always achieving high ESG rankings despite dedicating millions of philanthropic dollars to local communities. That highlights what is probably most concerning about this trend: the growing disconnect between the perception of what the “S” should tell us and the realities of how companies can deliver social impact. Companies with industry-leading philanthropy programs are falling short on ESG rankings because we are failing to consider the economic value creation of social progress.
In 2017, a study by the NYU Stern Center for Business & Human Rights revealed that the measurement of “S” largely focused on what was “most convenient” rather than what was “most meaningful.” Out of convenience, social issues reported in ESG disclosures largely focus on human rights, labor standards, and gender equality irrespective of a company’s sector or footprint. While the ESG movement has made great strides since that study and more social considerations, such as data security and employee engagement, are being explored, the challenges remain.
So what does all of this mean for companies invested in measuring and disclosing social issues?
At GlobalGiving, we work with hundreds of businesses on their corporate social responsibility (CSR) and philanthropic programs and see firsthand the incredible impact those investments have on individuals, communities, and society. While it is important not to conflate philanthropy with concepts such as impact investing by expecting financial returns, philanthropy can be a powerful tool in assessing the social value of a business. As companies continue to invest in ESG and push for metrics, philanthropy’s value in corporate impact measurement must not be lost.
Here are three ways companies can use their philanthropic activities to support ESG adoption and demonstrate social returns:
1. Drive stakeholder engagement.
Stakeholder pressure—from customers and, even more so, employees—has driven a significant increase in corporate philanthropy and sustainability activity. Businesses that invest in engaging their stakeholders are fostering trust and loyalty. Whether it is customers exercising their purchasing power or employees publicly speaking out against leadership, measurable social considerations are moving beyond labor standards to look at employee retention, employee development, and customer accessibility. Philanthropy has long served as a way to prioritize workers and acknowledge their value by giving and matching to the causes they care about. Today, companies are going further by encouraging active participation from employees and customers alike in their giving programs—whether it’s selecting grantees for a campaign fund or activating cause marketing campaigns in response to societal challenges.
2. Support local community investment.
Supply chain resiliency has received a great deal of attention in the past few years from business leaders—and for good reason. As corporate supply chains become more global and complex, they are also more vulnerable to natural disasters, geopolitics, and as we know now, pandemics. And all along these supply chains are local communities creating value. Companies are realizing the importance (and return!) of ensuring the health and stability of these communities. Some of these investments are measurable and generate returns, while others are better driven through an altruistic lens focused on speed and impact. PepsiCo is one excellent example of a company using both business and philanthropic models to drive social change.
3. Test the ground for investment.
When removed from the pressure of proving a return on investment, philanthropy can be a useful tool in exploring new approaches, issues, and communities in CSR programs. More importantly, when done correctly, philanthropy allows local communities to take the driver’s seat in determining needs and creating impact. These community-led approaches give companies the chance to better understand local dynamics and can lead to more effective investment opportunities.
The pandemic brought greater attention to social issues for the business community and renewed the sense of importance for resolving the “S” in ESG. It increased scrutiny of challenges from health care inequities to insufficient childcare systems. The interconnectedness of our global society was more evident than ever and philanthropic giving, particularly from companies, explored a global-local dynamic. With a focus on speed and impact, corporate donors increased unrestricted grants to local communities around the world, relinquishing earlier needs for more control and information.
This led to trust-based corporate giving programs that demonstrated a powerful business case for philanthropy that should not be missed.
The takeaway? Companies need to be brave in tackling social issues and creative in how to measure their impact—it’s the only way to create value and lasting positive change.
Contact us to learn more about how to get the most out of CSR and philanthropy programs.
Featured Photo: Green Phenix - Creating a circular economy by Friends of Sea Turtle Conservation Curacao