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The Social dimension is not a black box. We know how to measure it, so what’s stopping us? The OECD WISE Centre calls on businesses and investors to explore new ways of measuring social performance.
These days, there is much to do about the “S” in ESG. Given that this one letter (short for “Social”, although some have suggested it could also stand for “Stakeholders”) is expected to capture all of businesses’ dependencies—and also increasingly their impacts—on people and society, it is not surprising that companies, investors and regulators struggle over how it might be measured. A burgeoning landscape of frameworks and metrics has emerged, and forthcoming regulatory initiatives will provide some much needed harmonisation and clarity. The OECD has previously shown how ESG ratings vary significantly from one provider to the next.
Indeed, persistent inequalities and the urgent need for a fair transition to a more sustainable economy strengthen the case for measuring and reporting risks and impacts (either voluntarily or mandatorily).
More and more investors are interested in going beyond assessing ESG (environmental, social and governance) risks that companies are exposed to themselves—they are also considering business impacts on society and the environment. Some jurisdictions, like the European Union, want to go beyond mandating businesses to disclose financially material ESG risks by including such impacts in forthcoming disclosure standards. Indeed, persistent inequalities and the urgent need for a fair transition to a more sustainable economy strengthen the case for measuring and reporting risks and impacts (either voluntarily or mandatorily).
It is worth emphasising that to some extent, the social performance of firms is relevant for both society and for financial performance. For example, take business impacts on the workforce. Existing research, combining over 300 studies and almost 2 million employee observations, has overwhelmingly demonstrated that happy and healthy workers are more productive and boost business performance. Evidence shows that this is a causal relationship, as well-being in the workplace spurs morale, reduces absenteeism and facilitates cognitive processes.
Read more: “New Networks”, by Julia Hobsbawm, Author, The Nowhere Office
Unfortunately, the market has not yet zeroed in on robust ways to measure business’ social performance. Regardless of the materiality perspective (“outside in” or “inside out”), there remains significant scope to strengthen metrics. One explanation for the lack of comprehensive measurement of social performance is that there is an apparent bias towards data that businesses already have on their books, rather than measuring what really matters to business stakeholders.
The Social dimension is fundamentally about people. Metrics should reflect the outcomes that matter to stakeholders. But even among those standards that focus on business impacts, the emphasis is placed on what businesses (say they) do, rather than actual outcomes or impact. This neglects decades of social science on how we should measure progress and the well-being of people. Collecting data on the outcomes that matter to stakeholders is not rocket science. For example, to understand how people are doing, a good way is to ask them.
In fact, interpersonal relationships and having an interesting job have been shown to predict job satisfaction more than wages.
Through stakeholder surveys, it is possible to get a much more comprehensive picture of how people are faring, and expose the multi-dimensional barriers that people face in society and in the workplace. Gender inequalities, for example, extend beyond pay and boardroom representation, into areas like perceived social support, or whether people feel they have a voice in decision-making processes. Such outcomes cannot be measured through HR data; it requires workers to shed light on their own experiences. We know that workers care about non-material aspects of the job. In fact, interpersonal relationships and having an interesting job have been shown to predict job satisfaction more than wages. Regrettably, few existing businesses or standard-setters consider proven survey-based measures to inform business sustainability performance.
For over a decade, the OECD has worked with national statistical offices in Member countries to improve the way we measure social progress. This global measurement effort has yielded a set of authoritative guidelines in use by statistical offices around the world, and we continue to work on harmonising such metrics internationally. These guidelines, as well as their applications in the form of a wide range of well-being metrics and tools, can inform the measurement and reporting of businesses, investors, standard-setting organisations and regulators interested in social performance.
At the OECD WISE Centre, we hope to encourage practitioners and standard-setters to place the well-being of stakeholders, and inequalities therein, front and centre in social performance measures, in line with our recent framework. Complementing existing measures of business practice with outcome-based measures can strengthen the quantitative underpinning of ESG and impact metrics. Importantly, such metrics can be useful for all investors, whether they are interested only in impact or profit or in better managing their impacts as well.
To complement this effort, the OECD and a number of other key organisations and standard-setters have built the Impact Management Platform, a platform to guide a range of practitioners, from corporates and investors to banks and development finance institutions, through the landscape of impact management. More than ever, in the wake of a global pandemic and against the bleak backdrop of war, we realise that resilient and inclusive societies, sustainable production, and economic prosperity all go hand in hand. Together with the partners of this platform, we intend to strengthen the tools for impact management and measurement, to allow business and finance to deliver for the Sustainable Development Goals and to achieve better lives for all, much in the spirit of the OECD’s mission.
Read the OECD WISE Centre policy brief Measuring the Social Performance of Firms through the Lens of the OECD Well-being Framework
Learn more about the OECD Wise Centre and its research!
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