ESG and Social Value: What’s the Difference?

In barely 20 years, Environmental, Social, and Governance (ESG) has become a major factor in financial thinking. This is clearly a cause for celebration: the fact that markets and investors favour responsible companies is hugely welcome.

But there is a growing sense that ESG fails to account for important parts of what the corporate world could be – and often is – doing to create positive benefits. In this blog, we’ll show how Social Value can fill those gaps. 

ESG: From Compliance Harm Prevention towards  Doing Good

ESG has evolved from a finance and investment perspective, as a methodology for investors to identify businesses that take action to mitigate the negative effects of their activities.

The huge popularity of ESG investing – ESG funds account for more than $30 trillion of assets under management worldwide – is not exclusively driven by the desire to “do good” in the world. 2023 research from McKinsey, for example, shows that for businesses with strong fundamentals, ESG performance can boost Total Shareholder Return substantially. 

Until recently, ESG had a certification and standards problem, leading to accusations of “greenwashing” through claims that didn’t stand up to scrutiny. This is being addressed:

• In the EU, the Corporate Sustainability Reporting Directive (CSRD) requires extensive sustainability disclosures from large companies, with reporting due to start in 2025 for the 2024 financial year
• In the US, the Securities and Exchange Commission (SEC) has finalised “The Enhancement and Standardization of Climate-Related Disclosures for Investors” rule

Some people aren’t happy about this. There has also been a backlash against ESG and “woke capitalism” in some parts of the world. Several US states, for instance, have enacted laws to prevent public and pension fund money from being directed towards ESG-prioritising businesses. 

This reaction – and factors such as surging energy prices and geopolitical tensions – have combined to slow the evolution of ESG in practice away from compliance and harm reduction into something focused explicitly on driving positive outcomes. 

Social Value: Creating Positive Value

A longstanding criticism of ESG has been its relative neglect of the “S” (the social pillar) compared to the others. Social harm or wellbeing is difficult to define and quantify, and – unlike, say, reducing carbon emissions – it is almost always specific to time and place. 

Social Value comes from a very different starting point.

Here in the UK, it evolved out of efforts to improve public procurement that began with the Public Services (Social Value) Act 2012. Today, a weighting of at least 10% must be applied to “Social Value” benefits in awarding large central government contracts.

This history means that Social Value thinking has historically differed from ESG thinking in two fundamental ways: 

• Firstly, Social Value focuses on specific project outcomes
• Secondly, it is primarily concerned with positive value creation: Social Value undertakings in project bids must always be additional to what would have been achieved anyway

ESG has long been concerned with many of the same factors that Social Value priorities: supply chain management, employee rights and working practices, stakeholder engagement etc – are all cited in the Social Value Model as important indicators of a project’s value-add. But ESG has struggled to fix its attention on outcomes. 

As attention turns to the “S” pillar and the debate moves on from reducing negatives to creating positive value, many eyes are looking to the model Social Value provides.

Will ESG and Social Value Converge?

Just as ESG developed out of earlier understandings of Corporate Social Responsibility, I think we will see further evolution of the concept to better incorporate positive value creation and specific outcomes – that is, convergence between ESG and Social Value. 

Many investors today are looking beyond compliance-based ESG, and Social Value offers a blueprint of how that could develop. 

For example, in the field of construction and infrastructure, Social Value provides a framework for quantifying and ascribing a value to the positive effects that good design, reduced pollution, greater energy efficiency, etc have on the lives of individuals and communities. Rather than simply ticking the compliance boxes, practitioners can focus on both organisation-wide and project-specific improvements from their work.

And this should appeal even to the most single-mindedly financially-driven investor, because markets have a long history of accounting for intangible “goodwill” in company valuations. The good a business does – the jobs it creates, the community projects it helps to fund, etc – do far more for goodwill than the harm it avoids.

Social Value is also driving new business acquisition. Prioritising it allowed VolkerLaser to increase their contract bid scores by an average 20%, for example. 

In fact, a growing number of businesses are taking what they’ve learned from Social Value reporting and applying those lessons to the wider challenge of ESG reporting.

So, Social Value holds out a tantalising glimpse of what a truly impact-focused ESG could become – an ESG that gives “S” its due and that looks beyond harm reduction towards making the world a genuinely better place. 

Find out more about how Thrive can help you capture and report on the Social Value your business creates.