Rosie Stock Jones writes for the Good Business Journal arguing that the impact investing community must learn from local government’s experience of social value in order to fast track the purposeful business agenda.

The ability to measure social impact is central to achieving a new vision for the role of businesses in our communities, yet the development of social outcome metrics for business investment purposes is far behind the measurement of environmental outcomes. This blog argues that the impact investing community must learn from local government’s experience of social value in order to fast track the purposeful business agenda.

The measurement deficit

In The business of belonging the Centre for Progressive Policy argues that the public, and increasingly businesses, want to see closer ties between businesses and their communities to support better jobs, vital social infrastructure and the environment. Central to achieving this new relationship where business play a more active role, is the ability to measure impact, yet CPP polling suggests that just 1 in 5 businesses review their local impact on a regular basis.

Not only does measuring social impact enable businesses to demonstrate their value to investors and customers, it also provides a way for them to better express their organisational purpose and a shared language for engaging with local government about social goals. Better measurement of businesses’ social impact also means that they can be held to account by customers, investors and public sector officials, providing increased incentives for businesses to deliver positive outcomes in the first place.

Whilst the ESG investment agenda has steadily been gathering momentum, the focus has largely been on environmental outcomes such as GHG emissions, resource use and biodiversity. This could be because social outcomes are harder to measure than environmental ones as they are less clearly related to outputs like carbon emissions. ESG fund investment in fashion retailer BooHoo - which was using factories with low pay and dangerous conditions - demonstrate the difficulties of measuring these outcomes. BooHoo scored highly on industry labour standards due to its UK manufacturing base, where standards tend to be better, but poorly on measures of transparency, which means that investors could not really claim to know what was going on.

The growth of the impact investing agenda, which sees investors trade some financial return for social return, has started to chip away at the social side of ESG and the global impact standards organisation GRI includes a number of social measures in their framework including average hours spent training and the proportion of suppliers screened using social criteria. However, in reality social ESG metrics are often limited to workplace safety incidents and the proportion of female employees. Environmental outcomes remain the focus of assessments and when a business’ social impact is measured, it is often at a national or global level rather than being grounded in a particular place.

Learning from local government

Councils across the country have been considering the local social impact of businesses they award contracts to for many years, facilitated since 2013 by the introduction of the Social Value Act. This act enables public bodies to secure wider social, economic and environmental benefits when they commission private sector businesses to undertake work and has been used by councils to promote local job opportunities and better pay. Interest in using procurement to deliver social outcomes has grown in recent years and the Cabinet Office recently published a new social value model which shifts the emphasis of government contracts further towards the wider benefits that suppliers can bring, such as tackling economic inequality and improving community health and wellbeing.

The 2020 National Social Value Conference put a spotlight on Islington Council, who have integrated social value into their planning processes. They stipulate that developers provide affordable homes and workspaces as well as student bursaries for disadvantaged young people and employment and training opportunities in order to tackle poverty and inequality in the borough. Outcomes like these are much more specific than those included in standard ESG reporting and the evidence suggests that they can help deliver positive social impact. In Manchester, the City Council’s work with their top suppliers to deliver social value created an additional 561 apprenticeships, 1,579 local jobs and brought over £100 million of social and environmental benefits to the area in 2018/19.

Due to the remit of councils, efforts to deliver social impact are typically centred in a specific place but their application could be broadened. In Leeds for example, 12 of the city’s largest employers have joined to form an anchor network which aims to use their employment and procurement power for the benefit of the city. The network has recently committed to improving workforce diversity by publishing their ethnicity pay gaps and creating a new tool that will publish comparable diversity data across organisations. These metrics provide a means of assessing how Leeds employers are providing opportunities for everyone to contribute to growth and could be extrapolated for use by national and global companies.

Academic institutions like the Centre for Regional Economic and Social Research in Sheffield have built up a wealth of expertise evaluating the social value of public sector projects since the introduction of the Social Value Act. This knowledge is currently aimed at informing local government investment decisions but could be repurposed to inform business investment. For example, learning from local studies on the social returns to investment in public services – such as the importance of accounting for how long lasting outcomes are - could provide useful insight for investors looking to better understand businesses’ long term social impact.

A 2020 report by UK Green Building Council suggests collecting wellbeing data, being clear about who the beneficiary is, and developing industry benchmarks for social value as the evidence base grows, will all help to secure clarity for local decision-makers. These should also be the aims of those looking to advance the impact investing agenda by bringing the measurement of social outcomes up to speed with environmental ones.

We know that measuring social impact to feed into a business investment framework is possible because local authorities, and the businesses they work with, have years of experience in monitoring such outcomes. However, for company level ESG metrics to be meaningful and direct investment in a way that is socially optimal, they need to be more detailed. This brings challenges around standardisation but if the impact investment community can use the wealth of existing knowledge gained at local government level to take this challenge on, they can short cut to supporting the inclusive society we would all like to see.

This blog was also published by the Good Business Journal.