The difficulty of assessing the “S’ in ESG

Fri, 2 Dec 2022

By Rebecca Moriarty, Project Manager, Philanthropy Australia

When global corporations turn their attention to ESG – environmental, social and governance – priorities, investments and decisions, there is one particular part of the acronym that poses challenges: the “S’ or social element.

 The B4SI (Business For Societal Impact) recently held its annual conference with the theme, ‘Framing the Future of Social Impact.’ The keynote address given by Naho Nakakubo from S&P Global Sustainable highlighted the challenges of assessing the ‘S’. This was followed by an active panel discussion with Janet Luo, Head of Social Impact, ANZ, and Jo Osorio Chief of Staff from Edelman Impact and ESG.

S&P’s involvement in the ESG field is extensive, spanning many years and reaching a large audience. Since 1999 S&P has been undertaking annual evaluations of companies’ sustainability practices through its ‘Corporate Sustainability Assessment’ (CSA).

More than 10,000 companies are assessed, and the benchmarking data is used by companies worldwide with a total value of $26 trillion USD of assets under management.  Given this depth and reach, it’s critically important to make meaningful sense of the ‘S’ in ESG.

The panel reflected on the raised profile of social issues in corporate decision-making over the last 20 years. Some of the trends contributing to the shift included change in leadership culture, employee activism, the interconnectedness between climate change and social issues and the recognition that corporates should assess ‘double materiality’; issues that affect the organisation’s financial bottom line but also the impact on wider society and the environment.

The afternoon panel discussed the business case for the ‘Social’ in ESG. The panel consisted of Dr Sara Bice, from the Crawford School of Public Policy at the Australian National University, Sarah Downie, CEO of the Shared Value Project, Linda French, from Beach Energy and Mindy Leow, from B Lab Australia & New Zealand.

The panel noted there is a clear business case for the environment compared to the social aspect. The challenge for business lies in how these social elements are understood and measured. There are many components of this challenge. One risk is the ‘measurability’ bias of issues explored in the Partners in Recovery Series (Centre for Social Impact and Social Ventures Australia). Another risk is that a stated outcome is not really an outcome- a common experience SmartyGrants has found for some grant makers. There are clear business risks and opportunities to getting the social investment right – better alignment with values, talent attraction and retention, compliance, reputation, higher profit and competitive advantage to name a few – but how can business know they are making the right decisions?

The panel reflected on the trajectory of environment assessment by business: beginning with awareness, then being a siloed business activity for a while before casting a wider net and becoming more embedded into the business-as-usual. Deep, long-term partnerships, often with new partners, are needed to appreciate the real-life issues and consider how a business can make an impact. There is a ‘compression effect’ where executives, staff and other stakeholders meet at a similar point and speak a common language.

The opportunity for impact is large. In recent years philanthropic community contributions from major corporates in Australia are around 0.79% to one per cent of net profits.[1] An increase of just one percentage point to two per cent of net profit from the top 50 corporates in Australia is estimated to be equivalent of an additional $1.3 billion per year.[2]

The interdependencies between environmental, social and governance issues is often explored in the philanthropy and not-for-profit sector. These complex relationships are the day-to-day operations of many organisations. Philanthropy’s Australia’s Blueprint to Grow Structured Giving articulates how philanthropy, not-for-profits and business can work together to grow giving in Australia from $13.1 billion – with about an estimated $5 billion coming from the corporate sector[3] – for a more generous and inclusive Australia with better outcomes for all.

[1] Miles, J, 2021, ‘Giving Large 2021 Report’, Strive Philanthropy, McLeod, J, 2022, ‘The Corporate Support Report’, JBWere, B4SI Annual Review 2022

[2] Miles, J, 2021, ‘Giving Large 2021 Report’, Strive Philanthropy

[3] McLeod, J, 2022, ‘The Corporate Support Report’, JBWere