ESG insights: ‘Many companies have been gathering data that could be used to measure social impact for more than 20 years’

Now that we’ve discussed the basics of CSR, ESG and sustainability, it’s important to get an up-close view of what these efforts really mean for the businesspeople implementing them and the business impact as a whole.

“As companies reflected upon social responsibility (CSR) and environmental impact (sustainability), the need for codes of conduct, due diligence and integrated systems for monitoring and data capture became apparent,” said Greta Matos, a responsible supply chain specialist at &Wider, which helps bridge the gap between workers in the field and the employers or suppliers that engage them. “In many ways, ESG (the environmental, social and governance field) is a maturation of the awareness that both social and environmental impacts are interconnected.”

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To learn more about some nagging questions, like how a company can start an ESG operation and what technology is really needed, we talked with Matos and got some real-world examples.

“The truth is many companies have been gathering data that could be used to measure social impact for more than 20 years,” she said. “They are just not used to looking at that data through the lens of impact — they are used to looking at it through the lens of risk.”

Q&A

Spend Matters: Why should businesses view CSR, ESG and sustainability as distinct areas? What are the basic differences that execs should understand?

Greta Matos: Although I agree that it is important for execs to understand the differences between CSR, ESG and sustainability, I also think that there is a need to understand how they are all interrelated as well. Too often I see these aspects of a business compartmentalized in a manner that keeps them disconnected from one another, which then leads to limited impact and siloed/disconnected efforts within the company. And perhaps more importantly, can result in competing goals with unmatched values between internal corporate divisions. So while they aren’t the same, I’d like to share a bit more about the opportunity companies have to ensure they speak to one another within any organization.

Traditionally speaking, CSR (corporate social responsibility) efforts were usually initiated within companies in a manner that related more to philanthropy rather than corporate strategy. Putting a part of profits toward social or environmental NGOs and community-related efforts helped build a company’s brand and aligned certain values with their customers. Most CSR projects in the early days were more related to social issues rather than environmental, but that obviously varied depending on the way the cause aligned with the brand.

This is a very externalized approach, and over the years as there was more transparency pressures about working conditions within these companies and throughout their supply chains, it became more apparent where there was incongruence. So began the opportunity for CSR to connect with HR and consider social conduct from a more internalized perspective.

As sustainability conversations were initiated in the business space, many companies considered focusing “under your own roof” and looked at how corporate headquarters could become more sustainable. Traditionally, sustainability also has been considered more through the environmental lens rather than social, but the reality is that they always have been interconnected. In my experience, the focus on the environmental opportunities related to sustainability was motivated by harvesting the lowest hanging fruit — environmental metrics, targets and input/output planning that results in improvements tend to be much easier and more practically manageable than social and human rights issues.

As companies reflected upon social responsibility (CSR) and environmental impact (sustainability), the need for codes of conduct, due diligence and integrated systems for monitoring and data capture became apparent. In many ways, ESG (Environmental, Social and Governance) is a maturation of the awareness that both social and environmental impacts are interconnected. The fact that a corporation has an impact both socially and environmentally is unavoidable, and therefore, what that impact is must be reflected upon in order to consider how to reduce the negative impact, neutralize it whenever possible and contribute positively where appropriate. When considering the impact of a company from this lens, one must take an internalized and externalized view, and this surfaces the vast opportunities for impact that exist within the supply chain of literally every corporation.

So, as you can see they are all closely related and interacting with one another and the broader corporate operations as well. All three have an essential role and vested interest in engaging in procurement’s strategic planning and sourcing relationships, given the immediate potential for reducing and neutralizing negative impacts among suppliers that support their environmental sustainability, and improving the lives of millions of workers by directing CSR funding toward supplier capacity building on social issues.

The “S” in ESG stands for “social,” not “sustainability” — but how do you measure the social component?

This questions comes up so often when I’m at sustainable business conferences, and I actually think the answer is quite simple. The truth is many companies have been gathering data that could be used to measure social impact for more than 20 years. They are just not used to looking at that data through the lens of impact — they are used to looking at it through the lens of risk.

The data I’m referring to is social compliance data gathered from hundreds of thousands of social compliance audits. The social compliance audit has become a default sourcing component for many companies in their attempt to evaluate and manage supplier risk through production cycles. The traditional model used is to gather data from the supplier in an SAQ (self-assessment questionnaire) and potentially require the supplier to “pass” a social audit prior to issuing a purchase order. The social audit covers a very wide scope of human rights issues, including topics like wages, working hours, child labor, abuse, discrimination and forced labor. We do need to consider that audit data is highly variable depending on the quality of the audit, and this can vary depending on the training of the auditor, the quality management systems of the audit firm and other aspects as well. Audits are also vulnerable to a variety of falsification tactics such as falsification of wage and working-hour records, age documentation, and the hiding or removal of certain vulnerable workers such as children or those in forced-labor conditions prior to the auditor’s arrival. So the data is by no means perfect. However, it does offer valuable insight about the social conditions that a corporation has potential to influence, should they choose to engage.

Here’s an example I like to use of how we can turn audit data and the compliance approach that is traditionally risk-averse toward an impact-oriented opportunity focused direction. Let’s consider minimum and fair or living wage and the No. 1 goal in the UN’s 17 Sustainable Development Goals — no poverty.

Wages have historically been a very tricky piece in the sourcing puzzle because this is the area where suppliers might cut costs in order to win a bid. Wages are also prone to other market pressures and in countries with less governmental oversight and regulation paying workers below minimum wage might be the norm. Additionally, as is the case in many states across the US, let alone in developing countries, the minimum wage might actually be far below a living wage and therefore even paying minimum wage might result in workers with full-time jobs living in poverty.

Many corporations have taken a hard stance on wage compliance, and this applied intense pressure on suppliers to demonstrate wage compliance, even if the market in which they were operating pays below minimum wage. As a result, we see the trend of wage record falsification in these particular sectors, rather than the result of this pressure leading to workers being paid a higher wage. Corporations are trying to manage risk by ensuring they don’t have suppliers in their supply chain paying below minimum wage, but as a result suppliers manage the risk of losing the PO by falsifying records. Meanwhile workers are still living in poverty.

Rather than seeing that a factory is paying below minimum or living wage and immediately denying purchase orders or cutting production altogether, a corporation has an opportunity to influence the poverty line directly by engaging with this supplier. This requires a good degree of maturity on the part of the corporation, because when they ask the supplier why workers are paid below minimum wage they might have to look in the mirror with regards to their own contracting and price negotiations; however, if there is genuine desire to dig into the “S” part of ESG, this is where we have to be willing to go.

What advice would you give to a new team that has been tasked with starting an ESG program? Can they build on CSR programs, other business data or enterprise risk plans?

Absolutely! I would say begin with a process of appreciative inquiry — take a look at everything your company has in place currently, what has been done over the years that has worked really well.

Ask what social and environmental initiatives resonated really well with employees, with C-suite leadership, with the local community, with customers and with suppliers (if applicable).

Then take a look at your business data and enterprise risk plans — how can this data and the story that it’s telling reveal opportunities for impact? How much visibility into your supply chain do you have, and where are your “blind spots”?

Remember that the blind spots require presence and budget, so I generally advise folks to have practical conversations about intention before investing a lot of money in gathering data without having a significant budget available to then respond to that data with training and capacity building initiatives.

When we start to shine light on the environmental and social impacts of a corporation, we often are shining light in the shadows, so we see a lot of dark, murky and very challenging things. What we don’t want to do is only budget for revealing the challenges — we need to budget for response as well. So bring your CFO into these conversations as well. That is the other piece: Collaborate and converse with other functions within your company. Internal buy-in is essential, especially when it comes to sales, procurement, compliance and finance. These areas of the business all have unique pressures that can overcome efforts related to impact if those pressures are not considered and addressed early on.

What new technology would be a game-changer in ESG reporting?

So over the years I’ve seen a lot of technology emerge in this space in an effort to streamline and focus impact. I think technology that has the capacity to integrate all types of data that connects a corporation to its supply chain is vital and is a must as a baseline. So for example, any data inputs related to ESG issues must also “live” within the same system procurement is using to evaluate and track/monitor a supplier’s performance related to cost/timeline/quality. Integration is key.

But beyond that what I find really exciting is the opportunities we have to bring feedback from the field and the factory floor directly into these systems from the workers themselves. And this can be related to social and environmental issues. For years we had to rely on secondary data sources, but with mobile-phone surveying, we have access to primary data source — insights gathered directly from workers themselves in a manner that assures anonymity. The piece on anonymity assurance helps us receive more candid and genuine insights. Essentially, we need more non-triggering channels to receive data; channels where there is safety to be transparent and honest about the tricky and difficult realities occuring on the ground. Suppliers can also engage with these systems in a manner that ensures they don’t feel as though they’ll be punished by being honest. This is the approach we take at &Wider, encouraging a broad industry shift away from the top-down policing model that encourages suppliers to hide the “bad stuff” and coach workers (leading to very polluted data) toward a much more relational engagement where we have capacity to hold space for vulnerability, imperfection and to celebrate a willingness to improve, even if those improvements do not result in immediate “compliance.”

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