What is social capital and how is it relevant to business?
Without people, business cannot exist. Consumers buy products that maintain or increase their welfare. Employees work for companies by adding value using their knowledge and skills, with companies supporting their livelihoods in return. Investors finance companies that generate wealth.
The impacts and dependencies that business has on people can be thought of as influencing ‘social capital’. Social capital is a term that has been defined in a number different ways over the years. At its broadest, it describes the stocks of knowledge, skills, experience, health and wellbeing within people; as well as the stocks of relationships, institutions, shared values and norms that exist between people. Just like other forms of capital, social capital can be increased or decreased by the ‘flows’ of social capital - the social impacts - which result from business activity.
Business can positively influence how society operates. It can build and maintain social capital through its core operations; the goods and services it provides; and the activities supported through increasingly global and complex supply chains.
Skills can be maintained or built through work based training or products and services. Livelihoods can be supported both through employment and products – both domestically and in international supply chains and markets - which can contribute to poverty reduction, individual empowerment and increases in health and wellbeing.
But, social capital can be damaged or destroyed where governance breaks down, regulations are not enforced, risks are not managed, or when public standards about what is acceptable shift from the status quo. Business activities may cause physical or psychological damage to their employees through unsafe working conditions, neglect of labour standards and human rights, or unequal treatment of individuals or groups. Products may negatively affect consumers’ health and wellbeing. Businesses may put pressure on local infrastructure and on the communities in which they operate.
How do social impacts affect business?
Some of these social impacts may already be affecting the bottom line. Costs are increased by fines and compensation payments. Revenues are reduced when poor public opinion erodes reputations and customer stop buying. And, in extreme cases, companies may lose their ‘license to operate’ in a region completely.
Other social impacts may not be visible to a company through existing market signals, such as cost or revenue. These ‘externalities’ – hidden social costs and benefits – may affect the bottom line in the future at any time.
But where there is risk, there is also opportunity.
Companies who can demonstrate that they protect or create social capital – for example, through ethical supply chains that pay a fair price for commodities or which protect workers’ rights – can differentiate their products from competitors. Organisations who can demonstrate that their activities intentionally target specific social objectives, as well as provide a financial return, can access the growing Social Impact Investing (‘SII’) market. Companies who can show that their operations will enhance local communities - for example by providing educational opportunities that build human capital or by developing local infrastructure – are in a better position to engage with stakeholders such as governments and regulators. And companies targeting emerging markets are increasingly finding that inclusive business models, with operations and products that target the ‘bottom of the pyramid’ in these economies, can access large markets and deliver goods and services that increase the welfare of the most vulnerable.
How can valuing social impacts help business?
Measuring and managing social capital makes business sense. Companies that employ social impact measurement are able to understand which of their decisions lead to social impacts so that these can be managed; reducing negative impacts and increasing positive impacts. It means business is in a better position to engage with their stakeholders such as governments, regulators their customers.
Valuing social impacts allows very different impacts on social capital to be communicated in a way that can be widely understood and to be compared directly so that trade-offs can be made where necessary. Social impact valuation allows social costs and benefits to be properly identified and accounted for, meaning that long term benefits or costs can be measured and managed like any other asset or liability. Companies are increasingly seeing the value of social impact valuation, and are adopting approaches such as Social Return On Investment (‘SROI’) to do this.
We have helped a number of clients to measure and value their social impacts. Read our case studies to find out about some of these and contact us if you would like to discuss how we can help you.
Four TIMM quadrants
- Social Impact- Measures and values the consequences of business activities on society such as health, education and community cohesion.
- Environmental Impact- Puts a value on the impact business has an on natural capital eg. emissions to air, land and water, and the use of natural resources.
- Tax Impact- Values a business' contribution to the public finances, including taxes on profits, people, production and property, as well as environmental taxes.
- Economic Impact- Measures the effect of business activity on the economy in a given area, by measuring changes in economic growth (output or value added) and associated changes in employment.
