Social Performance: Definition, Example, and FAQs

Social performance refers to an organization's effectiveness in addressing its social impact and responsibilities towards its stakeholders and the broader community. This concept is a crucial component within the realm of sustainable investing, reflecting how well a company manages its relationships with employees, customers, suppliers, and the communities in which it operates. A robust social performance demonstrates a company's commitment to ethical practices, human rights, labor standards, and community engagement.

History and Origin

The evolution of social performance as a measurable aspect of corporate activity is intertwined with the broader history of corporate social responsibility (CSR) and the increasing focus on a company's impact beyond just shareholder value. While informal social considerations have long existed, the formalization of "social performance" began to take shape as stakeholders demanded greater accountability from businesses. Key moments include the rise of consumer and environmental movements in the mid-20th century, which pushed companies to consider their broader societal footprint.

In more recent decades, global initiatives have helped to standardize expectations for social performance. For instance, the United Nations Global Compact, launched in 2000, encouraged businesses worldwide to adopt sustainable and socially responsible policies, aligning their strategies and operations with universal principles on human rights, labor, environment, and anti-corruption. These principles serve as a foundational framework for assessing a company's social performance, emphasizing its contribution to broader societal goals, such as those outlined in the Sustainable Development Goals (SDGs).¹²

Key Takeaways

• Social performance evaluates an organization's impact on its employees, customers, suppliers, and communities.
• It is a key pillar of ESG criteria and sustainable investing.
• Strong social performance can enhance reputation, reduce risks, and attract ethically minded investors.
• Measuring social performance often involves qualitative and quantitative indicators related to human rights, labor practices, and community relations.

Interpreting Social Performance

Interpreting social performance involves assessing a company's actions and policies against recognized standards and societal expectations regarding its human capital, community relations, and ethical conduct. Rather than a single numeric score, social performance is often evaluated through a combination of metrics and narrative disclosures. Investors and analysts look for evidence of fair labor practices, such as competitive wages, safe working conditions, and diversity and inclusion initiatives. They also examine a company's approach to stakeholder engagement, including how it manages relationships with suppliers and addresses consumer concerns.

Furthermore, a company's social performance extends to its impact on local communities, including philanthropic efforts, local employment, and responsible resource management. Positive social performance can contribute to a company's long-term financial performance by enhancing brand loyalty, attracting talent, and mitigating risk management associated with social controversies. Robust reporting standards, such as those from the Global Reporting Initiative (GRI), provide frameworks for companies to disclose their social impacts, allowing for more transparent interpretation.

Hypothetical Example

Consider "GreenHarvest Foods," a hypothetical organic food company. GreenHarvest aims for strong social performance.

1. Employee Welfare: GreenHarvest implements a living wage policy, exceeding minimum wage requirements, and offers comprehensive health benefits and paid parental leave. They invest in employee training and development programs to foster career growth.
2. Supply Chain Practices: The company conducts thorough due diligence on its suppliers, ensuring fair trade practices and verifying that no child labor or exploitative conditions exist in their agricultural supply chain. They partner with small, local farms where possible.
3. Community Engagement: GreenHarvest dedicates 1% of its annual profits to a community fund that supports local food banks and educational programs focused on sustainable agriculture. Employees are given paid time off for volunteer activities.
4. Customer Relations: The company maintains a transparent process for customer feedback and swiftly addresses any product concerns, ensuring product safety and clear labeling.

By actively pursuing these initiatives, GreenHarvest Foods demonstrates its commitment to strong social performance beyond merely selling organic products. These efforts contribute to a positive brand image and foster loyalty among employees and consumers who value ethical investing.

Practical Applications

Social performance is increasingly relevant across various sectors and investment strategies. In the realm of portfolio management, investors integrate social performance metrics into their decision-making processes, often as part of broader ESG criteria analysis. This allows them to identify companies that are not only financially sound but also contribute positively to society.

• Investment Screening: Asset managers use social performance data to screen potential investments, excluding companies involved in controversial labor practices, human rights violations, or significant community disruptions.
• Impact Measurement: For impact investing funds, social performance is a direct measure of their success. These funds specifically aim to generate measurable social and environmental benefits alongside financial returns.
• Corporate Strategy: Businesses integrate social performance objectives into their core strategies to enhance their brand reputation, attract and retain diverse talent, and build stronger relationships with their customer base.
• Reporting and Transparency: Organizations like the Global Reporting Initiative (GRI) provide widely adopted frameworks for sustainability reporting, including detailed social performance indicators. These standards help companies communicate their impacts on issues such as human rights, labor practices, and community development.¹⁰, ¹¹ Such reporting enhances investor relations and allows for better comparison among peers.
• Public Sector Initiatives: Governments and international bodies, such as the World Bank, also consider social performance and social sustainability in their development projects and funding decisions. The World Bank, for instance, focuses on "putting people first" by promoting social inclusion, empowering citizens, and building resilient societies.⁶, ⁷, ⁸, ⁹

Limitations and Criticisms

Despite its growing importance, the assessment of social performance faces several limitations and criticisms. One significant challenge is the lack of universally standardized metrics, making it difficult to compare the social performance of different companies directly. While frameworks like GRI exist, companies have flexibility in what they report, leading to inconsistencies.

Another criticism revolves around the potential for "greenwashing" or "social washing," where companies may present a favorable image of their social initiatives without substantive, verifiable action. This can mislead investors and stakeholders who are genuinely seeking companies with positive societal impacts. The subjective nature of some social metrics, such as community engagement or employee satisfaction, can also make objective measurement challenging. Some critics argue that the broadness of ESG, including social aspects, can make it an "ESG mirage," where the promises are alluring but the underlying data and verification are often insufficient.¹, ², ³, ⁴, ⁵

Furthermore, the concept of social performance can sometimes conflict with traditional financial objectives, leading to debates about the appropriate balance between profit maximization and social responsibility. Measuring the direct financial return on social investments can be complex, and the long-term benefits may not always be immediately apparent, leading to skepticism from some investment circles. Integrating corporate governance alongside social and environmental factors is meant to provide a more holistic view, but challenges in data consistency persist.

Social Performance vs. ESG Criteria

Social performance is a key component of ESG criteria, but they are not interchangeable. ESG is a comprehensive framework that evaluates a company's performance across three distinct, yet interconnected, pillars: Environmental, Social, and Governance.

• Environmental (E): Focuses on a company's impact on the natural environment, including carbon emissions, resource consumption, pollution, and biodiversity.
• Social (S): This is where social performance resides. It encompasses human capital management (e.g., labor practices, diversity, health, and safety), product responsibility, community relations, and human rights in the supply chain.
• Governance (G): Pertains to a company's leadership, executive compensation, audits, internal controls, shareholder value rights, and transparency.

While social performance specifically delves into a company's societal impact, ESG criteria offer a broader lens, considering how environmental and governance factors also influence a company's sustainability and long-term viability. For example, poor corporate governance can undermine social initiatives, and environmental degradation can have severe social consequences. Therefore, social performance contributes significantly to a company's overall ESG profile, reflecting its commitment to the "people" aspect of the triple bottom line.

FAQs

What does good social performance look like?

Good social performance often involves fair labor practices, a commitment to diversity and inclusion, strong community engagement, ethical supply chain management, and high standards for product safety and customer satisfaction. It reflects a company that prioritizes its people and external communities.

Why is social performance important for investors?

For investors, social performance indicates a company's ability to manage non-financial risks, enhance its reputation, and attract talent, all of which can contribute to long-term stability and value creation. It's a key factor for sustainable investing and those interested in how their investments contribute to societal well-being.

How is social performance measured?

Social performance is measured using a variety of quantitative metrics (e.g., employee turnover rates, diversity statistics, incident rates, charitable contributions) and qualitative assessments (e.g., human rights policies, community impact assessments, stakeholder engagement effectiveness). Frameworks like the GRI Standards provide guidelines for reporting these metrics.

Can a company have good financial performance but poor social performance?

Yes, a company can achieve strong financial performance in the short term while having poor social performance. However, this often exposes the company to long-term risks, such as reputational damage, consumer boycotts, labor disputes, or regulatory fines, which can eventually impact its financial stability.

What is the difference between social performance and Corporate Social Responsibility (CSR)?

Corporate Social Responsibility (CSR) is a broader concept referring to a company's commitment to operate ethically and contribute to economic development while improving the quality of life for its workforce, their families, and the local community and society at large. Social performance is the measurable outcome or execution of those CSR commitments, focusing on quantifiable aspects of a company's social impact.