After years of making progress on environmental issues—the E part of ESG, or environmental, social, and governance—businesses are increasing their attention on the S: social issues.

Problem: While some social issues are clear-cut (forced labor is exploitative in any setting), other aspects of corporate social impact are broad, contextual, and frequently qualitative.

For example, what constitutes “fair” treatment of workers? A company might provide a living wage and a safe work environment according to what is customary in a given region, or it might go above and beyond regional standards. The same company can be both a good and bad neighbor in the communities where it operates—paying taxes, creating jobs, and supporting volunteer work while simultaneously driving out small businesses and turning a blind eye to corruption among its local business partners.

Simply defining the scope of what’s included in “social” can be problematic.

“There is no standard definition of social impact,” says Paul Brest, former dean and professor emeritus at Stanford Law School, who coauthored a chapter on measuring social impacts in the book Frontiers in Social Innovation with Stanford law professor Colleen Honigsburg. “Fundamentally, social impact is anything that affects people. That is an infinite number of things,” he says. This lack of clarity shows up in developing regulations as well, as more governments try to regulate businesses' social impacts, creating a patchwork of differing regional requirements.

Faced with these complications, companies struggle to get a handle on their social effects. While most of the 2,000 senior executives surveyed by Economist Impact in 2022 agreed that all three aspects of ESG were important, the survey found that companies haven’t made as much progress on social issues. Only 36% had incorporated social impact into corporate strategy, compared with 47% for environmental impact.

For executives, it’s hard to know what to do, but acting today will be key for positioning themselves to take advantage of future developments. Here, we detail progress that has been made, some promising approaches to measurement, and how organizations can make smart decisions to have a more positive influence on society while mitigating and remediating their negative effects.

Defining scope and terminology

As Brest notes, corporate social impact spans a wide range, including how a business:

• Affects the local community, both its people and its resources
• Makes sure it does not engage in unethical behavior, such as bribery or slavery
• Guards against discrimination

The category of human rights has emerged as a priority, but even that is not well defined. Many organizations base their definition on the Universal Declaration on Human Rights, adopted by the United Nations (UN) after World War II. This legal document sets out 30 fundamental human rights to protect, forming the foundation of international human rights law. Among them are the right to life, freedom from torture, the right to a fair trial, and freedom of movement.

However, says Salah Husseini, director of human rights at Business for Social Responsibility (BSR), “Today the business and human rights field considers rights that are not explicitly called out in the declaration.” BSR is a business network and consultancy with about 300 multinational corporate members (including SAP, which is also part of the BSR Human Rights Working Group). To illustrate Husseini’s point: The declaration includes the right to privacy, for example, but today the right to digital privacy might be considered as well. The declaration also includes freedom from discrimination, but some organizations might include discrimination based on gender orientation or immigration status, while others might not. And some companies, including SAP, put AI ethics in the category of human rights.

Changing societal views and norms mean these definitions are likely to keep expanding over time. Traditionally, companies and investors viewed them through the lens of potential risks to business. If a company violated an anticorruption law, for example, it could pay both financially and reputationally, hurting profits both today and tomorrow. But a company’s effect on society is now viewed in a broader context as part of its overall sustainability efforts, says Namit Agarwal, social transformation lead at the World Benchmarking Alliance (WBA), a nonprofit organization started in 2018 to measure how businesses contribute to the UN Sustainable Development Goals (SDGs). These goals provide a framework of 169 subtargets and more than 200 key performance indicators that can be applied by businesses. WBA uses those goals, plus guidance from other international bodies, in its metrics. Its social transformation framework, for example, draws on work from the International Labour Organization, the UN, the Organisation for Economic Co-operation and Development (OECD), and Transparency International.

Making sense of patchwork regulations

Meanwhile, the lack of a standard vocabulary contributes to a lack of clarity and, in some cases, inconsistency in existing and developing regulations.

For example, the UK’s Modern Slavery Act 2015, one of several regulations around the world aimed at reducing human slavery in supply chains, requires UK companies with global turnover of more than £36 million to publish an annual statement on slavery and human trafficking. But an analysis in early 2023 by the UK's Chartered Institute of Purchasing and Supply found that only 29% of companies covered by the slavery law submitted their required statements for 2022. Among those, a quarter lacked basic information about steps the companies were taking to prevent slavery.

Such failures are partly due to confusion about what to include and how to measure it. A recent report on human rights regulations from the Danish Institute for Human Rights notes, “The [regulatory] measures vary in the degree to which they align with human rights or business and human rights standards. Further, the measures approach their shared objective from slightly different angles, each potentially forming a ‘piece of the puzzle.’”

New regulations clarify some things but muddy others. In many cases, they also seem to lack teeth.

A non-exhaustive list of social regulations

• EU Corporate Sustainability Due Diligence Directive: calls for certain companies to set up mandatory due diligence practices to identify, prevent, or mitigate adverse impacts of their corporate activities on human rights as well as the environment
• EU Corporate Sustainability Reporting Directive: requires that companies give investors and other stakeholders the information that they need to assess investment risks related to sustainability
• EU Digital Services Act: mandatory human rights due diligence for social media companies
• EU AI Act: mandatory human rights due diligence for companies providing and using AI
• German Supply Chain Due Diligence Act (LkSG)
• UK Modern Slavery Act 2015
• Canada Modern Slavery Act
• Australia Modern Slavery Act

The EU’s Corporate Sustainability Reporting Directive (CSRD), for example, specifically requires companies to publish information on adverse social impacts connected to the companies and their value chains, including both qualitative and quantitative information. According to the Final Report on Social Taxonomy from the EU’s Platform on Sustainable Finance advisory body, companies must cover these specific topics: gender equality, equal pay for equal work, training and skills development, employment and inclusion of people with disabilities, and working conditions. Yet the regulation is vague on exactly how companies are to gather and report specific data, even as it requires independent auditing of the processes that companies use to collect data. This goes back to the heart of the problem for business: what to measure and how.

Choosing data and metrics to make real progress

To a large extent today, corporations decide for themselves which social issues to track, how to measure them, and what to do to mitigate them. Here are a few approaches recommended by various organizations focused on the issue:

Define metrics based on your company and industry.

BSR has chosen not to apply a standard measurement for all companies. “In human rights, an attempt to standardize metrics or measurements is not the right way to approach it,” says Husseini. Because context is so important, the approach can depend on the company, the industry, and even the individual circumstance. Companies need to identify and address specific problems within their own businesses and supply chains, he says.

“That means companies survey the landscape of influence that they have, their own operations, their business relationships, and their extended supply chains and then assess what kinds of risks and impacts are most significant,” he explains.

Then the companies decide how to prioritize and remediate problems. This isn’t always a simple exercise.

Husseini describes a recent BSR project with a global jewelry company that sources one particular gemstone from just one mine in Africa. Even though the mining company leases from the government the right to mine that gem on that land, the local people who've lived there for generations don't always recognize that right. Rather, they feel entitled to that natural resource, so they enter the property to mine it themselves. “These artisanal miners face health and safety hazards because they dig very shallow mines which sometimes collapse,” he says. “They also risk encounters with security forces that guard the mines.”

In some ways, the jewelry company is removed from the supply; it doesn’t own the mine or necessarily have influence with the local government. BSR has recommended a multiphase plan that includes an agreement between the jewelry company and mining company on a training program for the security forces. The program focuses on more constructive engagement with the local community and artisanal miners and involves tracking metrics such as the numbers of security training sessions, body cameras deployed, and negative and positive interactions with the community.

"It's a whole ecosystem of actions that will take many years to implement, but we hope to see progress over time,” says Husseini. “This whole world of business and human rights is all about identifying leverage and using it to exert some amount of influence.”

Adopt a third-party framework.

Other organizations have developed their own benchmarks or frameworks for measurement. WBA’s approach, based on guidance from several international bodies, scores companies based on five measurement themes, each of which uses a complicated methodology. Its social transformation framework, for example, rates companies on 12 key expectations grouped into three categories: human rights, decent work, and ethical conduct.

The Value Balancing Alliance (VBA) views sustainability in a broad way that aims to help executives make meaningful business decisions. Founded in 2019, the nonprofit counts more than 25 multinational companies (including SAP) among its members. VBA tries to value and measure impacts across environmental, social, and economic areas so that companies can see the combined effects on sustainability, says Michael Verbücheln, its director of methodology development. “In sustainability, you can’t just look at it from one particular angle,” he says.

“For example, if your aim is to reduce CO₂ emissions and you base a decision on that alone, you may miss effects on land use or water use. So with our approach, you can see the trade-offs" between social, environmental, and economic value, Verbücheln notes.

VBA members have already piloted this methodology. South Korean company SK Incheon Petrochem Co., Ltd., a producer of petrochemical products, used it to decide what to do with waste heat from its plants, according to VBA's recent report on pilot studies. Rather than continue releasing it into the air, even though it had no adverse impact on the environment, the company partnered with a local power company to provide low-cost energy to nearby residents, says the report. The plan is expected to reduce the cost of heating and cooling in 40,000 households by 70%.

SK chose this plan over a competing option—to reuse the waste heat for its own energy needs—even though that other option would have cost the business less money. “From a purely economic perspective, the first option looked to be a safe approach with less economic burden,” says the report. “But when taking a holistic view covering economic and environmental aspects and comprehending the impact on SK and the local communities, SK concluded that the second option is more sustainable because it creates economic and environmental value beyond SK’s own operations.”

A non-exhaustive list of organizations developing social standards and metrics

• UN Global Compact
• Global Steering Group for Impact Investment
• UN Guiding Principles Reporting Framework
• Global Reporting Initiative
• Sustainability Accounting Standards Board (recently subsumed by the International Financial Reporting Standards Foundation Sustainability Standards Board )
• International Labour Organization's Core Labour Rights Conventions and Recommendations and Impact Reporting and Investment Standards
• UN Guiding Principles on Business and Human Rights
• OECD Guidelines for Multinational Enterprises on Responsible Business Conduct
• OECD Guidelines for Multinational Enterprises on Responsible Business Conduct
• UN Universal Declaration on Human Rights
• ISO 26000 social responsibility standard
• Impact-Weighted Accounts Project at Harvard Business School

Work toward using the universal language: money.

Brest and Honigsburg suggest that companies could use money as a universal metric. They propose that social impact reporting, accounting, auditing, and regulation could be standardized in the same way that financial accounting has evolved over decades, with government agencies, such as the U.S. Securities and Exchange Commission, and standards bodies, such as the International Accounting Standards Board, overseeing the process.

“Just as conventional financial reports are intrinsically monetized, monetization of environmental and social factors provides a common value for comparing a wide variety of financial, environmental, and social effects,” they write. “Monetization is essential for understanding the inevitable trade-offs among the goals of various stakeholders.”

While some organizations, such as the VBA, have proposed—and some companies have adopted—certain ways of monetizing social impact, there is no standard across industries yet. Brest acknowledges that placing dollar values on social issues is a difficult task.

First steps for today

Whatever approach your company adopts, and no matter how standards and frameworks evolve, the following recommendations can help any business start taking steps now to improve its measurement and management of social impact.

• Embrace an aspirational strategy. Go beyond what regulations may ultimately require. The most important thing is recognizing how sustainability, including social issues, can be key to an innovative business strategy that delivers long-term value to both the company and society. Rather than doing the minimum required by regulations, progressive leaders aim high—for example, by taking guidance from the UN Guiding Principles on Business and Human Rights. Failing to do so risks credibility and brand reputation.
  
  Aspirations can lead to action and inspire others to act as well. Example: In 2021, Novartis, recognizing race-based disparities in healthcare results, committed $33.7 million to create the Beacon of Hope initiative in collaboration with a number of Historically Black Colleges and Universities in the United States. Goals include providing scholarships and educational support to train more Black physicians and researchers as well as increasing diversity in clinical trial participants. Merck, Amgen, and other companies have since joined the effort.
• Increase board and senior management involvement. Board members and executives need to recognize and understand how important sustainability, including their companies’ social impacts, has become. They should play an active role in developing their companies’ business strategies. A recent WBA report found that elevating human rights responsibilities to the board and senior management level resulted in more effective human rights due diligence. In addition, regulations such as the German Supply Chain Due Diligence Act, as well as current drafts of the EU Corporate Sustainability Due Diligence Directive, specifically state that the ultimate responsibility lies with the board.
• Establish information integrity. Start developing consistent practices to collect and report relevant data and qualitative information, both for internal use and for reporting to regulators and the public. Ultimately, standards will coalesce, and having consistent processes will go a long way toward preparing for them.
• Promote an overarching sustainability mindset. Every part of your business needs to understand your sustainability policies, including their importance to business strategy. For example, monitoring a supply chain for human rights violations won’t be very effective unless you get support from procurement and logistics. That may be the reason so many companies fail to follow up with their suppliers to ensure that they comply with antislavery requirements.

Regardless of how regulations, standards, and metrics ultimately evolve, companies that take their social impacts seriously today will be well prepared to improve both their businesses and the communities they work in tomorrow.