Erb Institute Landscape Assessment: Social Sustainability

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S U S TA I N A B I L I T Y L A N D S C A P E A S S E S S M E N T:

SOCIAL SUSTAINABILITY


Introduction............................................ 3

SUSTAINABILITY LANDSCAPE ASSESSMENT:

SOCIAL SUSTAINABILITY

The Dimensions of Social Sustainability............................... 4 Identifying and Managing Areas of Concern................................... 6 Established Change Drivers ................ 12 Near-Term Disrupters and Game Changers................................... 15 Long-Term Developments.................... 16 Conclusion........................................... 18

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INTRODUCTION This landscape assessment is a companion piece to a series of toolboxes created by the University of Michigan’s Erb Institute for Sustainability in Business to inform and aid a wide variety of current and future sustainability practitioners. In contrast to the other deep-dive toolboxes, this document is a high-level assessment of social sustainability as landscape behind the other toolboxes’ application. Think of this assessment as more of a “what is it” than a “how to.” It is accompanied by a separate environmental landscape piece. In this landscape assessment, we review the current state of social sustainability, which is one part of a sustainable company’s “triple bottom line.” The other parts are:

ENVIRONMENTAL RESPONSIBILITY: how a company identifies and manages greenhouse gas (GHG) emissions, water, chemicals, waste and other environmental impacts

ECONOMIC HEALTH AND VALUE CREATION: how a company continually creates economic value for itself, its key stakeholders and society These three aspects of corporate performance are increasingly viewed together as integral to a company’s value to investors, reputation with customers and other key stakeholders, risk profile and ability to attract and retain talent. To some stakeholders, environmental and social aspects of corporate behavior are as important as financial health and good governance in reporting out on the business’s performance.

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THE DIMENSIONS OF SOCIAL SUSTAINABILITY Companies affect society in multiple ways. Some social impacts are positive, and some are negative; some impacts are mild, and some are profound. And social impacts exist both inside and outside of the company itself. Some impacts are very hard to identify—the identification and management tasks around social impacts can be even more challenging for companies than environmental or economic issues. In any event, we make the case throughout this assessment that social impacts are too important to be managed exclusively as philanthropic or charity concerns. Their importance begs integration into core business models, strategies and operations.

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The Dimensions of Social Sustainability

In a business, social sustainability usually falls into one of six buckets: • corporate philanthropy: company donations

• community volunteering: company-organized

to charity, including cash, goods and services

volunteer activities, including when an employee

(sometimes via a corporate foundation)

receives pay for pro-bono work on behalf of a

• socially responsible management practices: responsibly sourced and ethically produced products and services, with a strong focus

nonprofit organization • cause promotions: company-funded advocacy campaigns

on value chain • corporate social marketing: company-funded • cause-related marketing: donations to charity

behavior-change campaigns

based on product sales

In this assessment, we’re focused on socially responsible management practices. Managing for social sustainability can be particularly challenging for several reasons. First, social impacts have qualitative aspects that tend to require qualitative descriptors and data (for example, unsafe working conditions create qualitative effects such as those associated with increased stress). This makes the information/data collection task very different from monitoring environmental or economic impacts. And qualitative items can have trouble “fitting into” traditional corporate performance measurement protocols. Second, the hidden nature of many of these impacts— particularly those external to the company—make identification and accountability challenging. Today’s value chains tend to be opaque, making identification difficult. And transgressors are good at masking issues and bribing

or intimidating to keep issues quiet or fines at bay. Finally, some of the topics themselves are tough to deal with. Seeing fellow humans chained to their workstations can evoke strong emotions; if progress isn’t made quickly, well-intentioned managers can feel a strong sense of frustration. So, much remains undiscovered.

Some social impacts that business activity creates are innately positive, such as employment opportunities. In this assessment, however, let’s focus only on the impacts that are cause for concern.

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IDENTIFYING AND MANAGING AREAS OF CONCERN IN THIS SECTION, WE DISCUSS:

how companies identify the existence and the scope of social impacts in their operations and value chains, and

These are only two facets of managing for social sustainability in a corporate setting. Companies must also: focus their efforts on relevant issues (see Materiality Assessment Toolbox); engage a wide variety of stakeholders in their efforts (see Stakeholder Engagement Toolbox); develop and implement strategies (see Strategy Implementation Toolbox) and track and report progress (see Metrics and Reporting Toolbox).

specific impacts and relevant, currently available solutions.

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IDENTIFYING ISSUES, GENERALLY Identifying and Managing Areas of Concern

Identifying social impacts in business activity is as much art as it is science. And, honestly, it’s part luck. Impacts that are found likely to be “material” through a company’s initial materiality assessment are given priority. Others may be put into a “watchful waiting” status. Typically, following that screening, fact-gathering investigations determine the existence, frequency and seriousness of issues.

These analyses are done through a standard process that comprises: • a self-assessment/report by an internal or external partner (facilities manager, supplier representative)

It’s a highly imperfect system and, as mentioned elsewhere in this landscape assessment, this process can be very resource-intensive. Fortunately, new methods of identifying negative social impacts are emerging all the time. We discuss a few of these later, under “Near-Term Disrupters and Game Changers.”

• on-site auditing of selected factories, warehouses, distribution facilities and/or sales outlets to observe existing conditions and discuss findings with management. Audits are either announced or unannounced and may be conducted by company personnel or by third-party contractors.

Although the specific social impacts associated with each company are unique, there are some common issues that companies pursuing social sustainability face—and some commonly deployed solutions for those issues.

• an audit report that flags situations needing remediation. Suspected violations of laws or regulations are notified to authorities.

Let’s take a look.

MANAGING COMMON ISSUES HUMAN RIGHTS The focus on how business activity can endanger basic or universal human rights has intensified in the last ten years. With the advent of the “ethical consumer,” some high-profile transgressions and stronger public policy and regulation, the drivers to understand and manage human rights impacts are in full force for most businesses.

Discussions about human rights issues in a corporate context most often focus on: • modern-day slavery • human trafficking and sex trafficking • infringements on indigenous people’s rights • conflict enablement consequences

Each of these impacts contravenes well-recognized international human rights regimes as well as the concepts of universal human rights on which they are based. The United Nations (UN) Universal Declaration of Human Rights is the key framework in this area. It is given effect at the supra-national level by at least nine treaty bodies working to activate its meaning across the globe.1 Regional multi-issue regimes also exist, as well as regimes around single issues, such as minority rights and slavery.2 Thus, nation-states have distinct, affirmative obligations to protect human rights and provide remedies for abuse. Corporations are creatures of the stat1e. At the corporate level, the UN’s human rights regimes are given direct effect through (a) a business-focused framework designed by the UN (discussed below) and (b) the UN Global Compact (UNGC), a group of over 9,000 signatories (mostly corporations) that have committed to operate sustainably (www.globalcompact.org).

1 Donnelly, Universal Human Rights in Theory and Practice (3rd. Ed., Cornell University Press 2013), 164. 2 Ibid., 179 – 190. THE UNIVERSITY OF MICHIGAN’S ERB INSTITUTE | BUSINESS FOR SUSTAINABILITY

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Identifying and Managing Areas of Concern

The UNGC has published a set of principles, the first six of which focus on corporate social impacts, primary among them human rights issues. Companies signing onto the UNGC commit to protect human rights through policies, practices and advocacy. The UN’s framework for business management of human rights issues is known as “Protect, Respect and Remedy.” The UN has published guidelines that help companies implement this framework (www.unglobalcompact.org/library/2), which include both policy-level “Foundational Principles” and practices-level “Operational Principles.” A key foundational principle is a corporation’s responsibility to respect human rights. This means that a company should avoid infringing on people’s human rights and address negative human rights impacts in which it is involved. As a corollary operational principle, the UN states that the corporation should (a) make

a clear policy statement (signed by senior management and made public) setting forth its commitment to respecting human rights, (b) conduct due diligence around human rights issues, (c) communicate about issues it identifies as problematic and (d) conduct or participate in remedying these problems. Despite this robust framework, companies face real challenges in identifying human rights issues, and no easy solutions exist to remedy these problems. In a value chain context, although a company can put suppliers or others on a “no further business” list when violations are uncovered, this does not usually happen except in egregious or repeat circumstances (when transgressors may also be reported to local authorities). Instead, these business partners are usually given opportunities to improve.

CASE STUDY: TESCO TESCO, the U.K.-based mega-retailer, takes a focused approach to human rights issues. It expects to find the most troublesome issues in its suppliers’ suppliers, so it has adapted its approach to: •

focus on where risk in the value chain is greatest, not just where visibility is easiest

base risk analysis on key factors such as country risk, type of work and the supplier’s capability to manage the issues

complement the risk analysis with regular dialogue with nonprofits, trade unions and other independent bodies to gain further insight

take a partnership approach to supporting and driving improvement

Tesco has operationalized this commitment through 42 sourcing specialists who look specifically at certain commodities (currently, bananas, cocoa, shrimp and clothing). Tesco has also worked alone and with other programs focusing on issues in children’s education, women’s empowerment and access to health services.3

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TESCO: An update on our corporate responsibility commitments, November 2016. Available at www.tescoplc.com/tesco-and-society.

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LABOR RIGHTS

Common labor rights issues include:

But company managers must be aware that there are often deep-seated reasons for current conditions. For example, policy-makers may under-enforce child labor laws knowing that enforcement could take earners out of the market, disrupting families and contributing to social disharmony.

Identifying and Managing Areas of Concern

While the employment opportunities that businesses create are one of the primary positive social impacts, many aspects of employment can create problems.

Today, most companies “police” labor issues through the assess-audit-remediate paradigm. But it’s not perfect. First, it can be slow to create lasting change. Second, it’s resourceintensive. Finally, violators that are intent on evading prosecution have come up with numerous ways to avoid detection. In some parts of Asia, it’s possible for a factory to “rent” fire extinguishers for a short period, which is often done in anticipation of a visit by auditors.

• freedom of association (such as the right to form a union) • safe, healthy working conditions • fair wages • child labor In most developed countries, these issues are subject to stringent regulation with robust enforcement mechanisms (but don’t be fooled—transgressions can happen anywhere). There’s a significant concern, however, that much of the developing world lacks the resources, policies and cultural impetus to adequately protect and empower workers. This is where large global companies have a significant opportunity to contribute to improvements: working with suppliers and other business partners located in risk-prone areas to identify the issues, tease out the root causes, assist with reform and hold violators accountable.

Leading companies now augment their “stick” approach with a “carrot”—direct and indirect investments in labor rights in risky areas. Usually, working with local nonprofits that have on-the-ground experience and credibility, companies are teaching management good labor stewardship and rewarding those who show improvement. Companies are also going directly to the worker, using technology, social media and other means to gain real-time information on working conditions. This is a powerful tool for identifying issues, and it can create a sense of accountability on the part of company owners when used correctly.

CASE STUDY: Labor Voices Labor Voices, a relatively new player in social accountability, combines experience in labor relations, technology and international business to offer a system for workers to directly report labor conditions to major brands that are the penultimate customer for their products. Using their mobile devices, workers can photograph and describe in writing conditions that concern them. Labor Voices collects, bundles and makes anonymous this data and then sells it to global brands in a subscription model. This provides unprecedented visibility upstream—visibility that can’t be achieved under the assess-and-audit protocol. Labor Voices claims its mobile technology is deployed in 400 or more suppliers to global brands and covers more than 40,000 workers. Learn more by visiting www.laborvoices.com.

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GENDER EQUITY Identifying and Managing Areas of Concern

Societies often do not treat women as equal to men in many respects. To the extent that businesses reflect the values of their social contexts, they may be contributing to these problems. And it’s much more than a “glass ceiling” problem (restrictions on advancement in employment). Throughout the world, women are subject to violence, sexual and physical harassment, pay and opportunity inequity and other serious forms of gender discrimination. Some of these activities occur in the workplace, some do not. But wherever they occur, these circumstances can do great and lasting damage; at a minimum, they inhibit both women and businesses from reaching their full potential. At a high level, the UN Committee on the Elimination of Discrimination Against Women (UN CEDAW) gives effect to an important treaty: the Convention on the Elimination of All Forms of Discrimination Against Women.4 Ideally, this framework would serve as a “North Star” to guide national policy and, therefore, private-sector behavior. But it has yet to reach its full potential. Nonprofit organizations, however, are influential in motivating and helping businesses to do better. For example, in the United States, the Women’s Business Enterprise National Council (WBENC, www.wbenc.org) has established a certification program for women-owned businesses to gain business from institutional purchasers. WBENC’s corporate members get access to these certified businesses as well as training on gender-related issues.

Other company-specific solutions often include: • task forces or councils formed to address gender-related issues • governance-based initiatives, such as enabling female corporate leadership • anonymous hotlines for reporting gender-based discrimination • Diversity and Inclusion

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In a business context, diversity most often includes: • a representative workforce • a representative supply base • broad notions of what it means to be “representative” (regarding race, gender, nationality, age, sexual orientation, socioeconomic status for individuals; veteran-owned, minority-owned, women-owned, LGBTowned, small business, local business for business partners).

This is a challenging issue for every business. Questions arise, such as: • Who should be represented? • If a group is underrepresented, what remediation efforts are required? • How do we combat the perception that remediation efforts are “special treatment”? • How does the business identify and encourage candidates from underrepresented groups? • What constitutes success? Equally important to redressing numerical imbalances is creating fully inclusive opportunity for all. From the people given opportunities for advancement to the people chosen to clean the break room, underlying prejudices and biases create painful inequities. All companies are obligated to address the issue; companies seeking to be socially sustainable have a special burden. In many companies, diversity and inclusion are separate and apart from other social impacts. In part, perhaps, this is because they were identified longer ago as issues of concern and garnered dedicated resources and programs to address inequities. But one can argue that these issues rightfully are a part of the overall social impacts that business creates. This more holistic view could enable a better approach.

184 countries are “state parties,” three countries have taken no action and the United States remains only a “signatory” to the treaty. www.ohchr.org/EN/HRBodies/CEDAW/Pages/CEDAWIndex.aspx.

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SOCIAL JUSTICE

These ideas include:

At face value, addressing these issues may seem more altruism than business, and it’s true that some of this behavior often is rooted in a company’s desire to “do good.” But social sustainability requires businesses to manage these issues to mitigate risks, create opportunities and fulfill their license to operate.

Identifying and Managing Areas of Concern

Socially sustainable business behavior requires a business to understand and incorporate broad ideas of social justice into its policies and practices, at a minimum. (Ideally, they should be part of a company’s mission and vision.)

Companies deploy numerous solutions to address these issues. Some solutions may come from their philanthropy, while some may come directly from corporate. For example, a global food service company invests directly and in partnership with its employees in a “stop hunger” campaign. The company funds employee volunteer opportunities with local nonprofits and matches employee contributions to certain hunger-focused charities.

• fair and equitable treatment of all stakeholders • community engagement • meaningful access for all members of society to the opportunities and benefits the company creates

CASE STUDY: Chiquita Brands Chiquita Brands has a long, troubled history of engagement with its Central American banana-sourcing communities. Subsistence wages, poor working conditions, tense union relations and little concern for improvement are part of the company’s history in the region. But Chiquita, now a Swiss company, states it has a long, strong commitment to social and environmental sustainability and has attempted to remedy these wrongs. Chiquita offers details of its commitment here: www.chiquita.com/ about-chiquita/our-values. However, a frank assessment by Foundation Guile5 came to troubling conclusions: •

Chiquita’s long, troubled history undermines its sustainability proposition.

Chiquita’s low-margin business inhibits serious improvements in sustainability outcomes.

The fact that Chiquita must go head to head with FairTrade® bananas is a serious challenge.

Financial constraints on community investment and a long history of worker (and host-country government) dependence on “the company” don’t reconcile well with worker empowerment.

Many retailers selling bananas have shown ambivalence about social issues, letting Chiquita “off the hook.”

On the other hand, the report had some positive things to say: •

Many of the problems Chiquita faces are “inherently wicked,” making it tough for any company to find practical solutions on its own.

No company in the industry has shown sustainability engagement as deep and long-term as Chiquita has.

Today’s focus on sustainability represents a “huge opportunity” for Chiquita.

Chiquita has a comprehensive set of ways in place for stakeholders to examine its sustainability efforts.

Chiquita’s situation has been one of the most studied in the agricultural sector. Read Chiquita’s own story and the cited critique and others to draw your own conclusions. See www.chiquita.com/about-chiquita/our-values.

5 www.guile.org/wp-content/uploads/2015/06/Book-Interactif_300dpi.pdf THE UNIVERSITY OF MICHIGAN’S ERB INSTITUTE | BUSINESS FOR SUSTAINABILITY

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ESTABLISHED CHANGE DRIVERS REGULATIONS The world is waking up to the fact that regulations addressing corporate social impacts are necessary and can be meaningful drivers of change. But the long history of environmental and economic business behavior does not exist for social issues. Many regulatory frameworks addressing the thorniest social impact issues are still rooted primarily in disclosure; even disclosure of inaction is acceptable to regulators. Too many regulations have minimal penalties for noncompliance and lack focus on remediation.

Nonetheless, there are some signature regulations that businesses must understand and comply with if they are socially sustainable. A few examples: • Many nations have laws and/or regulations forbidding child labor, such as the U.S. Fair Labor Standards Act of 1938.6 Many of these regulations entirely forbid employment in any form by children under a certain age (in the United States, it’s 14 for non-agricultural work) and add hours restrictions for children above that age. Most of these regulations carry stiff penalties for noncompliance, but in certain geographical areas, enforcement is extremely lax. In these areas, these rules may not be significant drivers for improving social performance.

• The United Kingdom’s Modern Slavery Act of 2015 7 and the California Transparency in Supply Chains Act of 2010 8 are similar disclosure regulations meant to compel certain companies doing business in those jurisdictions to disclose their efforts to identify and eradicate human slavery and human trafficking in their value chains. Although many companies have made the requisite regulatory filings and public disclosures on their websites, critics say that these laws don’t have much bite to them (disclosure only, few penalties) and that there is little or no focus on helping victims of abuse. Despite criticisms about the U.K. act, the government has undertaken several prosecutions under the act.9

6 www.dol.gov/whd/flsa 7 www.legislation.gov.uk/ukpga/2015/30/contents/enacted 8 https://oag.ca.gov/SB657 9 For an assessment of the act one year on from its introduction, see www.gov.uk/government/publications/modern-slavery-act-2015-review-one-year-on.

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STANDARDS AND CERTIFICATION Standards governing corporate social and labor impacts are generally classified as • supra-national frameworks such as UN and International Labor Organization (ILO) conventions, • process frameworks such as ISO 26000 (social responsibility management) or ISO 20400 (sustainable purchasing), or

Established Change Drivers

Finally, other social impact standards and certifications are issue- or sector-specific, such as the Fairtrade set of standards11, which are aimed at reducing poverty, and the Equator Principles12, which cover the social and environmental impacts of the financial services sector.

SPOTLIGHT:

• fair trade and other issue-specific protocols. The supra-national frameworks serve as North Stars, directly aimed at molding national policies, which cascade into the business community through laws and regulations. Many of these conventions entered into force after World War II and are considered treaties by countries around the globe. Process frameworks focused on social sustainability are much newer and have had less time to mature into serious influencers of corporate behavior. For example, the International Organization for Standardization (ISO) recently issued its ISO 26000 standard, Social Responsibility.10 The standard gives companies guidance and tools for how to behave ethically and in a socially responsible manner, but it’s not possible for a company to “certify” against the standard as a third-party “seal of approval.” Unlike other ISO standards that are certifiable, ISO 26000 has not yet garnered widespread acceptance in the business marketplace.

ISO 20400, released in 2017, is ISO’s standard for Sustainable Procurement. A consensus-based directive (which is not certifiable), this standard provides principles and guidance to institutional purchasers on how to purchase for economic, environmental and social sustainability. The premise behind the standard is that institutional purchasing represents a significant lever for behavior change—if the trillions of dollars spent on purchasing goods and services can be directed to sustainable goods and services sourced from responsible suppliers, progress in sustainability will be accelerated. The standard requires that an organization • understand the fundamentals, • integrate sustainability into purchasing policy and strategy, • organize the purchasing function around sustainability and • integrate sustainability into the procurement process.13

STAKEHOLDER DEMANDS Customers, investors, lenders, business partners, current and future employees, the media, regulators, suppliers— all of these stakeholders are increasing their vigilance about corporate social impacts and demanding improved performance. The “ethical consumer” movement has gained traction. Candidates for employment ask questions of potential employers about their social sustainability practices, and these answers feed into their decision-making about which jobs to pursue. Traditional and social media increasingly scrutinize corporate behavior and publicize problems. Are these demands sufficient pressure for most companies? It’s unclear. Many consumers still buy primarily based on cost, leaving little room or incentive for brands or retailers to undertake the initiatives necessary to improve performance.

In some markets, employees are not vigilant about corporate behavior or don’t have access to the information. And media focus on short-term issues, while these problems are systemic and require a long-term focus.

NOTE: Best-in-class companies do pay attention to stakeholder demands and include them in their assessments of what areas to address and when to address them. Companies that don’t keep track of stakeholder concerns about social sustainability and use their best efforts to inform them of policies, practices and outcomes may pay a price. See the section below on risk mitigation.

10 For more information, visit www.iso.org/iso-26000-social-responsibility.html. 11 www.fairtrade.net/standards.html 12 www.equator-principles.com 13 A summary of the standard’s requirements can be viewed at: www.iso.org/obp/ui/#iso:std:iso:20400:ed-1:v1:en.

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RISK MITIGATION All companies have an innate tolerance for risks, including the risks associated with social impact concerns.

aspect of best-practice value chain management. Companies spend resources, obtain expertise and deploy solutions to anticipate and avoid social impact risks.

Established Change Drivers

They include: • financial risks • legal and regulatory risks • reputational and brand risks • supply risks • physical risks For example, a company may manage its reputational, brand and supply risks by avoiding sourcing from countries with few or no labor regulations. Or it may avoid certain suppliers with track records that lack transparency about human rights issues. Risk management of external social impacts is a key

NOTE: Companies are increasingly focused on risks embedded in their value chain, including those associated with social impacts. Supply managers work closely with compliance teams, legal departments and outside experts to understand the scope of social impact risks in certain geographical areas, industries or suppliers. More third-party tools are available that can help companies assess vulnerability to these and other risk issues. (Most of these are software services that analyze and report on risks.)

OPPORTUNITIES It is certainly not all gloom and doom. Companies have innumerable opportunities to create strong, positive social outcomes from their business activities. Some of these opportunities come from internal sources, but many come as the result of collaboration with industry peers, suppliers,

nonprofits, regulators and even activists. Opportunities that create economic value and strongly positive social outcomes are especially welcome.

CASE STUDY: Sodexo

Sodexo, the global food services company, serves over 75 million consumers around the world daily.14 A part of its focus on social impacts is ending world hunger, one of the UN’s 17 Sustainable Development Goals. Sodexo invests directly in anti-hunger initiatives and indirectly by subsidizing employee volunteer activities. It also redistributes food throughout its network to areas of greatest need and educates about nutrition. Sodexo’s focus on eliminating hunger sustains and grows the demand for food and food services. This demand creates economic opportunities for Sodexo, its employees, its suppliers and other key stakeholders. Since much of its work is done in partnership with local experts and nonprofits, opportunities to create knowledge and value often arise at the local level.

14 www.sodexousa.com/home/corporate-responsibility/hunger.html

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NEAR-TERM DISRUPTERS AND GAME CHANGERS SOCIAL MEDIA The explosion of social media in the past five years has changed the game for every business. Social media are platforms for real-time feedback from customers and other stakeholders, sometimes even employees. Not all content is aimed at social sustainability issues, but some is. We’ve seen social media fuel outrage over airlines’ treatment of minority passengers as well as videos showing animal cruelty in pharmaceutical testing. Companies have no choice but to

respond, which has created an entirely new function in many businesses: social media management. It’s not clear whether social media posts about social issues result in one-off responses or actually change corporate behavior. In some publicized instances, corporate policies have been amended and violators have been terminated and/or handed over to authorities. At some point, the social media voices become loud enough to create lasting change.

TRANSPARENCY AND VISIBILITY Although business processes are still opaque, gains are being made in transparency and visibility. And this is improving stakeholders’ ability to see a business’s social impacts. Some of this transparency is in response to laws and/or regulations (for example, the U.S. Securities and Exchange Commission requires publicly traded companies to discuss an increasingly broad range of risks in their disclosure documents). Some of the transparency is being enabled by well-regarded sustainability reporting platforms, such as the Global Reporting Initiative (GRI). When businesses can coalesce around a reporting standard, all players feel that they are on a level playing field with their peers and

competitors. And companies see both internal and external benefits of increased transparency and public reporting on sustainability issues, including social sustainability.15 At the B2B level, there’s an intense need for better transparency and visibility to address social impact issues. Opacity hides many ills. But sourcing and purchasing managers are using tools such as publicly available sustainability reports and supplier questionnaires and scorecards to better understand upstream and downstream risks and opportunities.

THIRD-PARTY RATERS In the last five years, there’s been a huge uptick in the supply of social impact and other sustainability information available (for purchase) from third-party “raters” of business performance. Commercial platforms such as Ecovadis and Resilinc offer subscription-based services that provide subscribers with raw and analyzed data about other value chain partners (which provide the data to the raters at low cost and to avoid having to answer multiple direct requests). Some of these platforms assign ratings for environmental, social and economic performance, which are based on

proprietary algorithms. Many companies have found these ratings useful as a proxy for their own due diligence. But not all rating systems are created equal. Some are staffed by experts and grounded in best practices, while others are less robust. At this point, it’s a case of buyer beware—and it is sometimes difficult because raters don’t usually disclose their data sources and/or methodologies. It’s gotten so complex that there is an organization that rates the raters.16

15 GRI lists some of the potential benefits from using its platform on its website: www.globalreporting.org/information/sustainability-reporting/Pages/reporting-benefits.aspx. 16 The Global Initiative for Sustainability Ratings. Visit www.ratesustainability.org. THE UNIVERSITY OF MICHIGAN’S ERB INSTITUTE | BUSINESS FOR SUSTAINABILITY

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LONG-TERM DEVELOPMENTS IMPROVING DIVERSITY + INCLUSION Inside many businesses are a nondiverse culture and leadership and management systems that reflect longstanding societal biases. This situation creates a certain lens through which companies see social impact issues. Sometimes, this lens inhibits empathy and true understanding of the issues’ complexity and the benefits of having an “insider’s” ability to craft and deploy solutions. So, to the extent that companies can become more diverse and inclusive internally, it will likely accelerate their ability to identify and solve many social issues: • A company with gender equity in leadership (at both the board and management level) may feel more responsible for identifying—and empowered to resolve—genderrelated impacts of its business activities.

• A company whose mission and vision embrace diversity and inclusion may be more likely to see certain negative social impacts from the start and avoid the expense and risk of untangling themselves from negative situations. Diversity in key areas outside of a company can improve outcomes as well. Companies focused on social sustainability often work diligently to diversify their supply base, engaging with minority-owned, historically underutilized business (HUB), women-owned, LGBT-owned and small suppliers. A business with a diverse supply base will have access to the skills and talent in these suppliers and will simultaneously create economic opportunity for diverse groups.

NEW BUSINESS MODELS Entrepreneurs, venture capitalists, innovators, social entrepreneurs and risk takers often seek to avoid some of the encumbrances that go along with “traditional” business models. And while many of these existing models have the advantage of mature legal and financial structures, today’s changing world is offering those looking to improve social outcomes in business a variety of new business models that can help them achieve their goals. These range from new financing tools (microfinance, single-project low-cost finance, sustainable investors) to new types of corporate entities. Over 34 U.S. states now legally allow incorporation as a Benefit Corporation (a “B Corp”). This hybrid form of incorporation has the traditional financial structure of a corporation. However, the legal structure specifically

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protects managers and directors from shareholder lawsuits based on claims that financial returns were not maximized because investments were made in things like social sustainability. This governance model differs from that of traditional corporations, in which directors and officers stand liable to shareholders if they manage for outcomes other than maximizing profit. The B Corp movement is creating space for managers (backed by their boards) to include environmental and social sustainability concerns in their business planning, right alongside managing the enterprise’s financial well-being. And while we don’t see many existing enterprises re-incorporating as B Corps, thousands of new companies are being formed using this model. For more information on B Corps, visit www.bcorporation.net.

THE UNIVERSITY OF MICHIGAN’S ERB INSTITUTE | BUSINESS FOR SUSTAINABILITY


S U S TA I N A B I L I T Y L A N D S C A P E A S S E S S M E N T: S O C I A L S U S TA I N A B I L I T Y

CHANGING VALUES

Much has been written about the “ethical consumer,” who makes purchasing decisions not just on traditional attributes like price, quality and availability, but also on attributes like the ways companies treat their employees and the people

in the communities where they operate. Opinions about the impact of this development on corporate behavior are mixed.17 Although most of today’s consumers’ purchasing habits are not motivated by these issues, that’s highly likely to change within the next decade.

Long-Term Developments

The impact of changing values on business behavior is more than anecdotal. From millennials insisting the companies they work for disclose and remedy social or environmental shortcomings, to consumers in emerging markets gaining access to social media that informs about trends and problems, forces in the markets for products, experiences and employment favor businesses that invest in social sustainability. There are both generational-shift and transparency-action dimensions to this phenomenon: Younger generations worldwide ache for ethical, humanistic corporate behavior, and many people worldwide, regardless of age, can see human rights and other social impacts in ways never seen before and demand change. Governments, nonprofits and businesses are all affected by changing values.

Similarly, how younger and future generations assess employment opportunities is changing rapidly. Evidence suggests much less tolerance for poor social performance; job candidates ask questions about human rights and labor practices and want detailed answers. They may even choose less pay for an ethical employment experience.18 If candidates continue to “deselect” companies with little transparency or bad track records from consideration, this could be a significant driver of advances in corporate sustainability.

FUNDING SOCIAL IMPACT AT SCALE Except in rare circumstances, business is about the bottom line. Fortunately for social outcomes, it’s increasingly about the triple bottom line. As capital flows (equity and loans) are increasingly directed toward sustainable enterprises, there’s an impetus and reward for change.

This shift requires: • a large set of investors whose investment philosophy includes social returns on capital • a reliable, thorough flow of near-real-time information on social impacts related to business behavior • corporate analysts schooled in environmental, social and governance (ESG) topics and motivated to ask the company management tough questions in these areas, the answers to which feed into their equity valuations

Socially responsible investing (SRI) is at the forefront of this movement. At scale, this is represented by investmentmanager-sponsored funds, such as those from Morgan Stanley, Goldman Sachs and numerous other financial institutions. According to the Forum for Sustainable and Responsible Investment, $8.72 trillion was invested in socially responsible funds in 2016, representing about 20 percent of professionally invested capital in the United States.19 But there is room for more growth in SRI and opportunities for non-SRI investing strategies to take account of social impacts of business behavior. For example, the media company Bloomberg provides its subscribers with ESG information on over 11,000 companies, enabling investors to make informed choices. Nonprofits are accelerating their partnering with owners of capital to inform on the issues. Private-equity and venture capital firms are better schooled every day in social performance issues. When economic capital truly flows at scale toward responsible companies and away from others, a paradigm shift will occur on a grand scale.

17 A good analysis from a few years back can be found here: http://econ.au.dk/fileadmin/Economics_Business/Currently/Events/PhDFinance/Kauttu_The_ myth_of_the_ethical_consumer_-_do_ethics_matter_in_purchase_behaviour.pdf. 18 An often-cited Stanford University study of MBAs revealed that almost all polled would forgo an average of 14 percent of their compensation to work for a company that had a “better reputation” for social responsibility and ethics. See www.gsb.stanford.edu/insights/mba-graduates-want-work-caring-ethical-employers. 19 www.ussif.org/sribasics

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CONCLUSION Social sustainability is one part (out of three) of a company’s overall sustainability challenge. It’s also one opportunity for a company to improve performance, reduce risk, burnish brand, increase revenue and attract high-caliber talent. It’s a complex task to address these challenges and exploit the opportunities—work must cover human rights, labor rights, diversity and inclusion, and social justice, at a minimum. And, for true social sustainability, the work must extend beyond the company’s four walls. This presents a special challenge for most companies, because many negative social impacts in a value chain are neither readily identified nor easily managed. We haven’t achieved what we should have. As sustainability guru Peter Senge said in his foreword to Jeffrey Hollender and Bill Breen’s The Responsibility Revolution, “Despite [corporate social responsibility]’s best efforts, for the most part, we still make the wrong products, powered by the wrong energy, driven by the wrong business models. A small number of corporations are starting to internalize the truly strategic implications of the changes that are looming, but even these few leading enterprises are far from truly integrating an expansive business mission into their daily operations.”20 It sounds bleak.

Fortunately, an increasing number of solutions—policies, practices, tools and other resources—can help a company meet its social responsibility challenge. The UN’s SDGs are taking hold in the private sector. Standards such as ISO 26000 (social responsibility) and 20400 (sustainable purchasing) are emerging. These may help companies create and deploy consensus-based frameworks for identifying and managing the issues. New and expanding regulations are creating behavior and transparency norms for business activity. And sustainability practitioners are sharing knowledge, best practices and tales of failure to teach others where to begin in social sustainability, what to shoot for and the art of the long game. But it’s still a significant challenge, and this isn’t likely to change for some time to come.

Sustainability practitioners are sharing knowledge, best practices and tales of failure to teach others where to begin in social sustainability, what to shoot for and the art of the long game.

20 Jeffrey Hollender and Bill Breen, The Responsibility Revolution: How the Next Generation of Businesses Will Win (Josey-Bass 2010), xiii.

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THE UNIVERSITY OF MICHIGAN’S ERB INSTITUTE | BUSINESS FOR SUSTAINABILITY


S U S TA I N A B I L I T Y L A N D S C A P E A S S E S S M E N T: S O C I A L S U S TA I N A B I L I T Y

THE UNIVERSITY OF MICHIGAN’S ERB INSTITUTE | BUSINESS FOR SUSTAINABILITY

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AUTHOR: CONTRIBUTING EDITOR: Robert W. Kuhn, Kuhn Associates Sustainability Advisors LLC February 2018

Terry Nelidov Managing Director, Erb Institute | Business for Sustainability


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