Why Investors Should Seek Social Transformation
By Dmitri Kharitidi, Santiago Monroy, Sabrina El-Chibini
Contributors: Margarita Caycedo, Sayandeep Basak, Sauraj Gambhir
The “Social” element of the ESG (Environmental, Social, and Governance) equation remains the least understood and likely the most undervalued by investors.
This area however brings with it unprecedented opportunities to unleash workforce potential and drive business and social transformation. This article aims to 1) pique investor interest in exploring the relationship between social purpose and profit from a human capital perspective and 2) provoke thought about the role of the investor as an agent of change and the value that is inherent to it.
The results of a specific approach to “corporate social transformation”, Transformative Community Involvement™ will serve as a concrete example to demonstrate how the Social element in ESG is really about investing in human capital inside companies and in communities.
1. The Elusive Nature of “Social” in ESG
Over the last decade, a major shift has occurred in the investing and corporate world as a result of climate change, social inequality and other social and environmental challenges.
This shift has led to a rise in responsible investment practices and a rapidly growing need for the evaluation of corporate non-financial performance as a means of attracting investor capital.
The status quo of non-financial performance assessment is evaluation of ESG factors of an individual company and publication of the results in the form of a public disclosure or report. This is in response to 73% of investors who now consider ESG parameters in the investment decision making process (1), and 90% of consumers who expect companies to act responsibly (2). Yet the evaluation of ESG performance is still not at par with the financial evaluation.
While standardizing evaluation parameters is possible for environment (E) and Governance (G) factors, it remains elusive for Social (S) factors. This is mostly due to the multidimensional and multifactorial aspect of social issues and programs, lack of reliable quantitative data, and the long-term nature of social program benefits (3).
2. Is this a problem or an opportunity for investors?
Perhaps the “Social” element in ESG carries with it the most opportunity for value creation because of its complex and multidimensional nature? Is it an ideal vehicle for developing people and solving difficult problems that are themselves complex and multidimensional? Perhaps the key for investors is to approach the Social element holistically and only then break it down into pertinent, measurable parts?
Consider the case of Transformative Community Involvement™ (TCI), a specific approach originated by The Collaboration Vector Inc. (TCV) that engages stakeholders, including employees, in solving societal problems (4).
Compatible with social transformation, it moves stakeholders from “transacting” with communities to “transforming” with them. The TCI approach is built upon the premise that holistically the “Social” element of ESG is about “people” and the realization of human potential inside companies and in communities. Broken down into relevant, measurable parts, it looks as follows:
Through TCI, we learned that when employees are empowered to assume leadership roles by engaging deeply and directly with non-profits and communities, they develop effectively and happily. Involved employees have higher engagement scores (5). There is a strong correlation between top talent and the willingness and enthusiasm to transform through social purpose. Simultaneously, measurable positive business, social, and environmental impact is realized (6) and community members flourish.
Employees with this higher sense of purpose have higher energy and a sharpened ability to problem-solve. Those attracted to working with the community over the long-term and to leading others in doing the same demonstrate more effective skillsets and traits in the work environment. 90% per cent of employees who engage in social transformation through employer programs are inspired to build a long-term career with their company as a result of their involvement (7). The number of actively engaged employees in TCV’s programs grew by 68% in 2017 as compared with 2016 (7).
3. Are investors leaving money on the table?
The benefit of employee engagement for business is undeniable: companies with stronger employee engagement metrics enjoy 17% better productivity, 20% more sales, 10% better customer satisfaction and are in general 21% more profitable (8).
Yet in the US only 33% of employees are engaged at work according to a recent report by Gallup (8) and there has been no significant change in that statistic over the past decade (+/- 3%). This is the state of employee engagement despite the $720M annual investment into engagement programs (projected to rise to $1.5B in 2020) and the known yearly cost of disengagement at ~$500B (9).
Talent development, retention and attraction are consistently at the top of CEO priorities. As a result, US companies spend $164B on training and development (10) and $6B on employee wellness programs, the effectiveness of which has been challenged (11, 12, 13). In addition, HR leaders increasingly prioritize improving employee engagement and employee health in their near future workforce development plans (16).
Given the significant expenditure on traditional approaches to human capital investment, the upward trend in these numbers, dismal employee engagement figures and a changing workforce demographic that is asking for purpose, investors have a vested interest in seeking social transformation as a complementary and/or alternative approach to combining the growing need for developing people with the growing interest in ESG performance.
4. The investor as an agent of change
It has been documented that sustainable companies become more profitable and generate higher returns in the long-term than their less responsible counterparts (15). Moreover, companies with strong CSR cultures have better employee indicators related to engagement and retention than companies with weaker CSR cultures (16). This is of particular interest for investors and fund managers willing to invest in sustainability and looking for strong ROI. In the Social element of ESG specifically, investors seeking value for business and society have an interest in becoming agents of change.
Through “transformative engagement” as long-term partners and collaborators, investors can provoke thought and movement by influencing meaningful results in the “Social” part of the ESG equation. They can impact directly through community organizations in the social impact evaluation process or indirectly through corporations via the ESG evaluation process. This would allow investors to “shape”, “own” and “connect” with desired outcomes of social transformation, themselves experiencing the beneficial effects of doing so, of becoming stronger leaders and legacy-builders.
As food for thought, the overriding question in TCV’s evaluation of the “Social” element of ESG for investors is the following: What evidence does the company have that its human capital investment has been effective in developing and optimizing human potential inside and outside the office?
Transformative social initiatives have a strong potential to boost employee engagement and workforce development, thus improving the bottom-line of businesses. If investors continue to demand strong ESG performance and increase their focus on human capital development they are more likely to have higher returns while contributing to sustainable community development.
Interested in learning more about transformative engagement, evaluation of the “Social” element of ESG and social impact studies? Contact TCV at firstname.lastname@example.org; 514-730-8433.
The Collaboration Vector Inc. (TCV) is a next generation strategy and service provider and originator of Transformative Community Involvement™ (TCI). The company specializes in TCI strategies, transformative employee involvement programs, proactive stakeholder mapping and engagement, transformative partnership designs, partnership facilitation, and impact measurement, reporting and communications. TCV has a team of strategists, business professionals, and researchers in health and wellness, economic growth, education, poverty reduction, entrepreneurship, leadership and climate action. The company works with clients in the private, non-profit, and public sectors.
©The Collaboration Vector Inc. 2011-2018. All Rights Reserved.
“Global Perceptions of Environmental, Social, and Governance (ESG) Investing 2017”, CFA institute, 2017
2015 Cone Communications/Ebiquity Global CSR Study
“Putting the “S” in ESG: Measuring Human Rights Performance for Investors”, Casey O’Connor and Sarah Labowitz, NYU Stern Center for Business and Human Rights, 2017
“Transformative Community Involvement: What it Means, What it Takes, What it Gives”, Sabrina El-Chibini, 2016
“Transformative Community Involvement™: How SeaLand and The Collaboration Vector Inc.Connected Business and Social Impact”, Thiago Covre & Sabrina El-Chibini, 2017.
“How Costa Recicla and SeaLand Boosted Recycling in Panama: A Case Study of Business, Social & Environmental Impact”, John McCormick & Sabrina El-Chibini, 2017
TCV Research 2017 - unpublished
“State of American Workplace”, Gallup Report, 2017
“Alarming Statistics on Employee Engagement for 2017”, Tim Ryan, 2017
ASTD’s 2013 State of the Industry report, 2013
“Workplace Wellness Programs Study”, Soeren Mattke, Hangsheng Liu, John P. Caloyeras, Christina Y. Huang, Kristin R. Van Busum, Dmitry Khodyakov, Victoria Shier, RAND, 2013.
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“Do workplace wellness programs work?”, Mark Taylor, Chicago Tribune, 2016
“Human Resources Trends for 2017”, Morneau Sheppel, 2016
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“Engaging Employees through CSR,” CBSR and Hewitt Associates webinar, 2010