ESG is dead. Long live social value!
ESG or to call it by its full name ‘Environmental Social Governance’ is close to running out of headroom – not because it is in any way wrong or misguided, rather because it is being hijacked by those who want a quick fix and a shortcut to becoming ‘sustainable’. Even worse, it is seen by some as a proxy for proving social purpose.
It’s not that ESG does not have its place, it does, but we must not pretend that it is able to tell the whole story.
To understand my positioning on this, we need to go back to the start.
The term ‘ESG’ was first used in the 2004 United Nation’s Freshfield Report “Who Cares Wins’’ which promoted the idea that businesses that properly manage social and environmental issues well, will outperform those that don’t (hardly a big surprise in this day and age!). The report had a specific focus on the importance of managing risk and calls on all analysts ‘’to better incorporate environmental, social and governance (ESG) factors in their research where appropriate’’.
The good news is that analysts have been taking this call to action seriously, specifically focusing on screening out businesses that fail to meet minimum standards, based on their exposure to environmental and social risks. In other words; compliance and accreditation.
For instance, does the organisation have an anti-bribery and corruption policy and does it manage it well? Does the organisation assess its supply chain for modern slavery or the use of child labour?
These are all massively important issues, but a business should not be given a medal just because it does not have children working in its supply chain. Clearly ESG minded investors should absolutely not be investing in any business that has not assessed this risk.
And woe betide the business in this day and age found to be claiming ESG standards yet failing to deliver them in full, as well known retailers H&M and Decathlon recently found when the Netherlands ACM investigated their ‘unclear and insufficiently substantiated’ sustainability claims.
My point is that just because a business is doing no harm, does not mean that it is doing more good.
We need to move the discussion onwards, looking at how businesses are making good go further, not only looking at how they are reducing ESG risk but also asking how they are creating value for society – in other words; social value.
So, what does this mean?
Social Value is a triple bottom line opportunity covering the additional social, environmental and economic value that an organisation creates for society through how it conducts itself in business. For instance, this could be in how the organisation gives local businesses work, or how it provides employment opportunities for disabled people, or by the fact it is investing into community projects - or taking extra steps to reduce carbon emissions.
So why has it taken so long to get here and what’s been the hold up?
The truth is that up until recently, there has been no way of measuring or valuing social value. The recent change has come with the development and launch of the National TOMs, a UK government endorsed social value measurement framework that has been specifically designed to allow organisations to measure and optimise the social value that they and their supply chain create. Effectively, we can now put a value on the ‘S’ in ESG.
The National TOMs is a result of intense cross-sector consultation with business and government involvement and for the first time provides a robust, repeatable and auditable means of measuring and valuing how an organisation contributes to society.
The framework comprises 5 core Themes, made up of 20 social Outcomes supported by a number of Measures (hence TOMs). Importantly each measure has an associated value that reflects community benefits.
The TOMs framework is not designed to measure risk, rather it is designed to identify how and where value is being created and allow organisations using the framework to do even more, improve their social performance and make good go further.
So what next and where do we go from here?
I have been banging the sustainability drum for over 25 years and now that ESG has finally risen up the agenda and despite my previous assertions, I do not suggest discarding the term ESG – too much like throwing out the baby with the bath water.
Rather, let’s build on it, but recognise that ESG will only ever tell us half of what we are looking for and that for a full picture of business we must also embrace social value as a key indicator of success.
About Social Value Portal
Social Value Portal is an online solution that provides precise, standardised reporting to enable organisations to quantify and maximise the social value generated - making good go further. It provides the tools to measure, manage and report both financial and non-financial data in a meaningful, robust and transparent way for all stakeholders.
Social Value Portal launched the National TOMs Framework in 2017, alongside the independent National Social Value Taskforce. The Framework provides a minimum reporting standard for measuring social value, integrating the standards into their measurement approach as a minimum. Twitter: @socialvalueport