How do you value your social and human capital?

By

Christopher Thorn

EY Global Outcomes Measurement Solution Leader – Assurance, Climate Change and Sustainability Services

Accomplished financial services executive focused on building the impact investment and social finance market in Oceania.

9 minute read 15 Aug 2019

Show resources

Businesses looking to put a value on their natural, social and human capital should follow a six-step approach to outcomes measurement.

In a recent article, How to cut through the noise of outcome measurement, we discussed the concept of broader value creation, why it is getting so much focus, and the ways in which it is currently being used and is likely to evolve.

The article set out that in today’s society, businesses are under pressure to show that their profits do not come at the expense of the people and the planet. More shareholders and other stakeholders are challenging organizations on their nonfinancial impacts and to show that their purpose benefits society. To meet this expectation, organizations are trying to measure their nonfinancial impact and measure their intangible value.

Having set out the “what” and the “why,” increasingly organizations are shifting to the “how.” Rather than just recognizing that social and human capital are important, businesses are trying to work out how formally to measure and value their impacts and dependencies. Furthermore, they are using this information for decision-making.

This follow-up article examines the benefits of managing human and social capital more effectively and discusses the six steps for effective outcomes measurement.

Why should you measure social and human capital?

The World Business Council on Sustainable Development (WBCSD) refers to social capital as the networks around companies and their shared norms, values and understanding. It describes human capital as an individual’s knowledge, skills, competencies and attributes.

While managing social and human capital requires investment and resources, it can help create long-term business value by revealing key dependencies and risks and can also help facilitate meaningful communication and engagement with a broader range of stakeholders. Companies can achieve the following outcomes by managing social and human capital more effectively:

Increased value creation                                                                                                                                      

  • The shape of value has changed: Globally, the majority of market value is now defined as “intangible value.” Companies should review traditional metrics and update or replace these with metrics that can prove to investors that an organization is resilient and offers a purposeful proposition.
  • Sustainability investments: Investors are increasingly trying to understand what the impacts are from their investments or choosing to invest in thematic or impact investments funds.
  • Increasing stakeholder discernment: More than ever, consumers, employees and regulators are punishing those who deplete social and environmental value.
  • Access to capital and impact investment: Investors are rewarding those who provide credible outcomes data on how they have not only considered sustainability risks but are actively growing their true value by strengthening the human and natural resources underpinning their markets.
  • Value chain and market resilience: There is an upward pull for companies to address the social and environmental issues that intersect with their business as they can be rewarded by stakeholder prosperity and new growth opportunities. It is no longer plausible to leave a gap between short-term commercial decision-making and its wider impact on society.

Improved risk management                                                                            

  • Strengthen value chains: Organizations should work to make value chains more resilient, once social and environmental impact hot spots, dependencies and risks are identified.
  • Get ahead of government regulations that may internalize social capital costs and lower the profitability of certain activities.

Improved decision-making

  • Internalize previously externalized: Organizations should internalize their social and human costs in order to drive more value for stakeholders.
  • Critically assess, validate or enhance investments: Organizations should look to increase value creation in sustainability programs by focusing on investments.
  • Enhance business model components: Organizations may be able to increase the ability to create value for all stakeholders over the long term by looking across the business.

Engaged stakeholders

  • Understand impacts and dependencies: Organizations should better understand their value chain to identify the needs and value drivers of stakeholders.
  • Strengthen stakeholder relations:  An improved understanding of shared value creation and depletion may strengthen relationships with stakeholders.
  • Secure the company’s “social license to operate”: Organizations should work with local communities, employees and regulators to improve support for their operations.

More effective communication

 

  • Express the total value of a company’s activities: Communications should explain business model, products and services, and start framing intangible value in tangible terms.
  • Align reporting: Reporting should include value creation across multiple capitals (e.g., integrated reporting or long-term value (LTV)) and demonstrate how a company’s purpose delivers value for a wider range of stakeholders.

What guidance is available to undertake outcomes measurement?

While the demand for tools and frameworks is growing, only a few have been developed so far.

Standard setters and coalitions are responding to this gap by conducting research and providing guidance. For example, the WBCSD recently launched the Social & Human Capital Coalition as part of its Redefining Value program, which involves developing a protocol for recognizing the value of people and communities. The protocol will provide a consistent process for measuring, valuing and managing social and human capital, as well as a framework for collaborative action toward harmonized approaches. The business case of the WBCSD Redefining Value Board says, “Developing a credible and broadly accepted approach is essential, not only to demonstrate our performance to stakeholders and shareholders, but also to ensure the effort of measuring and reporting informs a continuous movement toward more socially sustainable practices. Only by working together can we ensure an outcome with the power to truly transform the way we do business.”1

As with financial accounting, harmonization of different approaches will take time. Academic research, feedback from first adopters, and input from professionals and practitioners will foster refinement and development of standards and frameworks.

What are the preliminary steps to undertaking outcomes measurement?

Despite the lack of uniformed standards, an increasing number of businesses are trying to assign a value on natural capital and, increasingly, on social and human capital. This supports the move toward an integrated vision of value creation, including the dimensions of shared value and externalities.

What social and human capital comprise of can vary from one organization to the next. However, organizations can take the following steps to conduct outcomes measurement:

  • Step 1: Determine what you want to measure
  • Step 2: Identify positive and negative project impacts
  • Step 3: Perform a materiality assessment
  • Step 4: Develop metrics
  • Step 5: Survey and data collection
  • Step 6: Reporting

Step 1: Determine what you want to measure

Determining the scope and boundaries of what you would like to measure depends on the objectives of your projects, programs and strategic activities. Logic models can be used to help identify input activities, outputs and outcomes to refine objectives and define the scope of measurement.

Step 2: Identify positive and negative project impacts

Once the objectives and project scope have been determined, you can map the potential positives and negatives of the project. This is also called “applying the theory of change” – a process to identify the causal links and the conditions that need to exist for change to occur across the identified outcomes, which can be enhanced or mitigated depending on their impact.

Step 3: Perform a materiality assessment

Once the theory of change has been developed, an organization aiming to make the most of its social and human capital should identify its priority impacts and dependencies and develop strategies for sustainably managing social and capital value. A first step in doing this is conducting a materiality assessment. This involves:

  • Engaging with internal and external stakeholders and seeking their input on what the organization’s social and human capitals encompass
  • Identifying the aspects where the company would have the most material impact and potential dependencies

Step 4: Develop metrics

For the most material topics, identifying what metrics are going to be used to measure the outcomes include developing criteria and reporting policies on how data will be collected. Despite the complexities, organizations might be further along than they think. Groups within the organization may already be measuring the return on investment (ROI) of existing social and human capital initiatives, such as training programs, relationships with standard setters and involvement with local communities. Leveraging any existing proofs of concept will give the organization a head start.

Step 5: Survey and data collection

Once the metrics have been developed, measurement frequency and survey tools should be determined to collate data for analysis. The collated data should be analyzed using an outcomes measurement framework that has been designed to meet the needs of the organization’s measurement objectives. While harmonization of outcomes measurement approaches is still nascent and evolving, the first principles advocated by the social ROI approach could be applied to ensure the core principles of outcomes measurement are factored in the measurement framework consistently.

Step 6: Reporting

Once the organization has defined its metrics to measure its social and human capital (including, if relevant, associated baselines and targets), developing an internal dashboard and external reporting framework should help the organization communicate on its strategy, progress and commitments to relevant stakeholders.

Whether organizations are attempting to value their social and human capital for the first time or focusing on better integrating these capitals within their business model, first movers will likely be at a distinct advantage in this area of change.

EY Outcomes Measurement teams can support you as you set up, or seek to improve, the effectiveness of your measurement and management systems that account for intangible value and the reporting of this value..

Certain services and tools may be restricted for EY audit clients and their affiliates to comply with applicable independence standards. Please ask your EY contact for further information.

Summary

Shareholders and stakeholders are increasingly challenging organizations on their nonfinancial impacts and to show that their purpose benefits society. This is demonstrated by the rise of impact-investing funds and an increase in sustainable investments over the last couple of years. To meet this expectation, organizations are trying to measure their nonfinancial impact and understand their intangible value.

About this article

By

Christopher Thorn

EY Global Outcomes Measurement Solution Leader – Assurance, Climate Change and Sustainability Services

Accomplished financial services executive focused on building the impact investment and social finance market in Oceania.