The urgency of climate change and the special attention governance matters have drawn after the 2008 economic crisis, have naturally placed the E and the G in ESG on top of corporate concerns. In between those two, the S for “Social” has sometimes been defined as an overlooked middle-child.
This was facilitated by the fact that the two remaining criteria provided companies with clearer and more measurable parameters and lines of action when compared to those offered by social issues.
On the environmental side, companies can take part in several global and well-structured efforts aimed at promoting sustainability and preventing climate change, such as the Science Based Targets Initiative - SBTi. On the corporate governance side, intense debates were conducted for decades until a consensus was reached around some metrics to guide companies and investors, such as the G-index, the E-index and the Gov-Score index.
Know more about the E in ESG in the first part of this series!
When compared to the other two, the social side, however, is still considered difficult to develop. An ESG survey of institutional investors with a combined turnover of US$11.3 trillion found that 51% of them viewed social criteria as the most challenging to analyze and integrate.
However, this challenge must be faced. The global pandemic of COVID-19 was a milestone of new expectations regarding the behavior of companies, especially to the health of their employees and the community as a whole. Failure to comply with these hopes resulted in the severe questioning not only of some corporate practices, but also of the company's own place and purpose in society.
Today you will understand a little more about the concept of social impact in the context of the ESG criteria and you will identify how to implement and measure socially responsible activities with the support of Contract Lifecycle Management - CLM.
The Stakeholder Model: social impact on who?
Much debate has been conducted on whether the purpose of businesses was purely to generate profit to its Shareholders, on the so called Shareholder Model, or if other stakes should be considered by the Board and fiduciary agents when taking decisions on behalf of the company, on what was known as the Stakeholder model.
However, it is increasingly clear that there is not such a stark division between shareholders and the stakeholders. Companies are inserted in the community, and this same collectivity interacts with businesses activities in several ways. To a considerable extent, therefore, the fate of those two is largely entwined.
The Social Criteria supports the inclusion of Shareholder’s interests, in addition to the shareholders’, as an important element to consider while structuring a company’s business plan. Amongst the groups that should be considered are: workers; customers; commercial partners in the supply chain; as well as the community as a whole.
One key element to understanding these groups and their interests is diversity. Within workers and customers, for example, it is possible to recognize the particular needs of women, people with disabilities, racialized individuals, LGBTIQIA+, immigrants, and others.
Intersectionality is another aspect to be taken into consideration, since the fusion of different groups and their social needs might create distinct levels of social risk, as is the case of women with disabilities, for example.
Within the community it is also possible to consider those profiles, as well as to evaluate policies with regards to local, regional, national or international impact.
Once you comprehend which interest groups are part of the social criteria, it is also important to know how to evaluate the risks to which they are submitted and how businesses can collaborate to minimize any negative prospects.
The outlines of social risk
According to Robert Ludke, who has large experience in reputational management and crisis communications, social risk presents a few main characteristics:
- Human: it is associated with human beings and their context, such as economic status, social mobility, community environment and mental health;
- Dynamic: it is spurred by people’s reactions to facts, events or ideas. Hence, it is constantly evolving with the public opinion and the visibility of those issues;
- Dispersed and scalable: the ubiquity of fast communication methods, including social media, makes for the fast dispersion and scalability of any social issue;
- Distinctive: each company interacts with the community in different ways, so that each instance of social risk is different from another;
The dynamicity, dispersion and scalability of situations that manifest themselves in distinct ways for each context makes social risks particularly difficult to measure. It does not mean that it is impossible to identify those contexts and intervene on them to generate social value.
Recognizing the distinctive nature of social risk, a company can visualize the different forms through which it relates to a specific interest group, for example, the families of collaborators from one specific factory. Dynamic social conditions, such as violence and low education rates, constitute social perils that might influence this particular group, with a possibility of imperiling the worker’s incentives and morale within the unit.
An intervention that recognizes this specific social risk can generate concrete value to this interest group. It could be the case of investing in social projects aiming at culture, education and sport, which direct the leisure time of the worker’s families to contexts of higher social output.
Once the contours of social risks to each interest group have been verified, it is up to the company to map, within its specific context, the concrete ways in which it can counter those perils and create social value.
And to do so, businesses are especially well positioned and equipped, as we shall see next.
The differentials of business as drivers of social value
Businesses activities can reach high levels of capillary, derived from the fact that they are inserted on a long and articulated chain, that interacts with the community in different ways through labor, supply and procurement contracts.
This capillarity is one of the company's differentials when it comes to generating social value, since their activities have a cascade effect in the community that surrounds it. In this context, with small adjustments and targeted initiatives, an enterprise can promote generalized economic growth and social inclusion to all those in the areas of interaction.
However, as social value is not generated solely based on good will, structure and planning are needed.
Moreover, businesses are internally organized and managed with the purpose of driving excellence and efficiency to all activities performed. Hence, if it chooses to act as a promoter of social value, it will certainly carry with it all its experience with leadership and logistics.
These two differentials place the company in a unique position to promote social value. Mobilizing its capillary and articulation, with its experience on making projects work, it can choose to channel part of its efforts in order to generate social value and improve the community upon which it stands.
In this task, practices that promote consistency and efficiency, such as good contract management, are invaluable additions.
Generating and measuring social value through CLM
As we have seen, one of the differentials of companies when they chose to promote social value is the application of their knowledge about team and project management. Amongst the instruments that support such a distinctive approach are good contract management practices.
As businesses interact with each other and with their consumers through all sorts of documents and contracts, the same will also happen with regards to social impact initiatives.
Those contracts and documents may include:
- Articles of incorporation, to create a separate legal entity tasked to manage all social projects;
- Sponsorship Agreements, to support an already existing social program;
- Voluntary agreements, to formally establish the general duties and responsibilities of volunteers;
- Labor contracts, that can include diversity and inclusion criteria to support members of vulnerable groups;
- Supply agreements, to set on the acquisition of locally produced goods by the company;
- Donation Agreements, to receive external financial support from other individuals or organizations; and so on
Each of those instruments can arrange a direct impact in the local community, which furthers the generation of social value.
However, to fully realize their reality changing potential, the documents and contracts that drive social impact must be properly managed throughout their entire lifecycle.
CLM, or Contract Lifecycle Management, is a set of good practices applicable from request and elaboration all the way to signature and storage. When implemented through a comprehensive software, such as netLex, these practices can improve efficiency and security, all while generating intelligence regarding each step of a document’s lifecycle.
Here are a two examples of how can contract management softwares promote the generation of social value by your company:
Contract execution and intelligence: the key to measure social impact
When it comes to the S in ESG, the million dollar question is how to measure social impact. The lack of a sufficient answer is why investors think the Social criteria is the most difficult one to measure and analyze.
Nevertheless, if you structure the generation of social value through contracts, when generating intelligence regarding its execution, it will also be possible to measure its impact. To do so, it is important to build within the document all the parameters to be considered in this evaluation.
If the company chooses to sponsor the reform of a gymnasium, for example, the agreement may state that the execution of the contract will extend to a post inauguration period, to evaluate parameters such as number of families frequented the place before and after the reform, the new types of classes and gatherings possible after the reform, and even the results of a satisfaction pool and brand perception research with the beneficiaries. It is possible to establish goals to be reached that might be rewarded with small additional investments.
This evaluation is a part of contract execution, and can generate data to, in the end, measure the social impact of that activity. Within CLM softwares such as netLex it is possible to follow a document’s lifecycle all the way through execution, inputting data regarding the fulfillment of all obligations and generating intelligence reports.
Reducing costs through templates and automated workflows
Another recurring concern amongst managers who recognize the importance of promoting social value is these initiatives’ impact on the main company operations.
A CLM software allows for the optimal use of templates and automated workflows. Your legal team will have the initial task of preparing those templates, but when they are within the user-friendly platform, other areas of the company, or even the stakeholders themselves, will be able to use them with ease without constantly resorting to the lawyers.
Moreover, should the legal team be needed during any step of the process, it can have full access to all the information contained in that workflow, set in an easy to visualize way. Hence, they will be able to quickly take part and solve any doubt that might arise.
The efficiency of this allocation of the team’s efforts will likely reduce any impact on the overall legal matters that already exist within the department.
Generating social value via CLM
One of the great differentials offered by enterprises when choosing to generate social value is the efficiency-driven logic and experience they bring to the table. If a CLM software, such as netLex, is in the toolbox of those companies, it can be easily employed to manage contracts that generate social value.
Hence, it becomes possible to address the two primary challenges with regards to the social criteria of ESG policies: the difficulties to measure social impact and the generation of added costs to the operations.
A CLM software makes for the possibility of measuring the results attained through socially driven investments, while managing the operational costs of the company and ensuring that all involved in the transactions interact in an effective and comprehensive manner.
As the S in ESG is progressively gaining more relevance, companies that resort to well established tools will surely be at the forefront of this social endeavor.