Why social impact is needed in ESG

Klara Koslov, head of the Big Issue Impact Advisory, discusses how ESG is falling short – particularly in social impact measurement. This is an adapted version, for Big Issue Invest, of her article originally published on Pioneers Post

Current challenges of ESG

Investors are increasingly considering ‘ESG’ – Environmental, Social, and Governance. These factors identify risks and growth opportunities as part of their investment decisions. Businesses more generally are using ESG metrics to measure their impact on the world, provide transparency, and boost their reputations. But, ESG is falling short, particularly in social impact. This is because many treat it more as a reputational issue than actively measuring its positive, material contributions.

ESG is due for a rebrand. Instead of tired controversy over relevance, the debate has moved on to how to measure the impact of investment decisions on people’s lives. Increasingly what investors – professional and private – want to see is ‘I’, real impact, independently verified.

Additionally, to assuage the critics, a raft of regulation and legislation, from the UK’s Sustainable Disclosure Requirements (SDR) to the EU’s Sustainable Finance Disclosure Regulation (SFDR), is simultaneously increasing scrutiny on ESG whilst trying to bolster trust. There’s nothing like solving a crisis of confidence in one acronym by suggesting a few more.

Delivering sustained positive change

By its very construct, ESG represents a siloed approach to tackling environmental and social issues. Whilst we increasingly see investors supporting the ‘Environment’ through recognised standards and benchmarks, with a shared understanding of carbon emissions (Scopes 1, 2, and 3, as defined by the Greenhouse Gas Protocol), addressing the ‘social’ side – the human aspect – has proven more complex.

The challenge for all organisations, particularly fund managers, against a backdrop of consumer and investor scepticism, is demonstrating real impact on what many people connect and relate to most – their communities and those who live in them. The next step is to replace purpose-driven, conceptual narratives with independently verifiable, real-life data, monitored and reported over time, against ambitious yet realistic indicators. 

Much of the reporting on the ‘S’ in ESG still relies on companies publishing policies, using negative screenings (often related to controversies), and showcasing one-off initiatives. Corporate websites often use the ubiquitous phrase “we have changed lives,” but many fail to substantiate it with metrics that allow comparison to industry peers or demonstrate measurable progress against standards. It’s time to shift from focusing on controversies to understanding how we can deliver positive change.

Lessons from family offices

We see family offices and endowments making a serious contribution to the impact investing agenda. The Global Family Office Report 2023 by UBS found that family offices allocate approximately 19% of their total investment portfolio to sustainable or impact investments and this is on the rise. According to the Global Impact Investing Institute (GIIN), 85% of family offices report high satisfaction with the social and environmental outcomes of their impact investments. Can the institutional investment and corporate community now emulate their example, and come out from under the ‘social washing’ mantel?  

What’s missing from existing social impact in ESG?

The things missing in many aspects of social impact in ESG are consistent:

1. Comparable monitored data with clear performance indicators and measures of progress.
2. It is often subordinated to Environmental and Governance issues and monitored for reputational concerns. Instead, these should be actively measured for positive, material contributions.
3. It often lacks anchoring in a geographical context. This overlooks the specific needs of the communities where businesses are rooted and gain their license to operate.
4. Those most affected by investment, be that the customer, consumer, or community, are often voiceless. Apart from purchasing power, there’s little understanding of how, as a recipient, they have benefited – or not – from the investment.

We know that what motivates people to care is seeing their communities flourish, both on a global and local scale. People want to see investment in areas leading to a healthier economy, like job readiness, social mobility, and transport infrastructure. For example, the WEF’s EDISON Alliance, brings public and private partners together to focus investment and initiatives. It has an ambition to improve the lives of 1 billion people through affordable and accessible digital services by 2025. Currently, 2.6 billion people are offline impacting their access to education, health services, and economic activity. As of January 2023, 454 million people around the world had their lives positively impacted by the Alliance’s efforts.

How to identify the social impact problem in ESG

It is possible to tackle the social impact question in ESG. We need to start from the bottom up and ask ourselves these simple questions:

• ‘What is the problem we’re trying to solve?’ in our communities and for our planet.
• And then ‘How can we solve it?’ using existing market mechanics and sustainable, commercial approaches.

For example, the Columbia Threadneedle UK Social Bond Fund, developed in partnership with the Big Issue Group, focuses on investing to address the main areas of social need where social exclusion is particularly evident. The fund’s impact is all about the people affected by socio-economic and environmental issues. It shows what’s achievable when social impact is built in at the start and applied across its value chain supporting industry best practices.

In failing to introduce proper social impact, we risk divorcing our ESG efforts from the fundamental realities of people’s lives. We must recognise that standalone environmental solutions ignore a crucial part of the equation – the people driving or impacted by our shift to a greener economy. If we fail to demonstrate the relationship between people and the planet to achieve sustainable growth, then we risk polarising the debate as a series of trade-offs rather than an inclusive opportunity for all. With forethought, fresh perspectives and a more bottom-up approach, asset managers have an opportunity to:

• Deliver new propositions.
• Appeal to a wider audience.
• Drive long-term value that brings the planet and people together.

To find out more about social impact at the Big Issue Group please contact Klara.Koslov@bigissue.com.To learn about social impact investing more specifically at Big Issue Invest, please contact lars.hagelmann@bigissueinvest.com.