Humans are a precious resource. Hence we need social accounting
In a similar vein as ecosystem accounting, social accounting gives back to people instead of just extracting value
TLDR: Companies are created by humans, for humans. They are structures which help streamline work that humans do and distribute the value they create. As such, they have an obligation to bring benefits to all involved parties — employees, customers, and stakeholders. Many companies are starting to take their responsibility seriously, and are using dedicated frameworks to quantify their social impact. Many such frameworks, however, have a limited use because describe the world from the point of view of the company only. Instead of doing this, companies must view themselves as part of a broader ecosystem, which they take resources from and must give resources back to. Similar to the fundamental ideas of ecosystem accounting for environmental issues, it is appropriate to introduce social accounting for people-related issues.
The expression Human Resources has gotten a bad rap as of late. Humans are people, corporate boards are realizing, and are hence re-baptizing their HR departments to people departments to emphasize the change in their thinking.
To some extent, this is a very welcome evolution. It paves the way to thinking of humans as beings of their own right, beings that freely choose to contribute to the operations of a company because doing so brings them joy and purpose, aside from a pay check at the end of the month.
Human Resources as a term sounds depersonalizing. When workers get treated like expendable resources, like cogs in a big machine, they feel that their contribution is insignificant. As a result, their productivity goes down.
Humans want to be treated wholesomely. They want to be able to develop plenty of different aspects of their skills and their personality at work, and want to be seen for who they are. When that is the case, they tend to be more creative and more collaborative with their teams.
This, however, does not contradict them being a resource. A manager can appreciate who one of their subordinates is as a person and what unique kind of work they are delivering. At the same time, the manager can understand that somebody else might be able to do a similar kind of job in a similar or even better way.
This does not lead them to treat their subordinate any worse. A good manager knows that people like them are scarce, and that the cost of replacing them is huge. They also know that treating their subordinates badly is not going to ensue in better results, and that good human treatment often does not cost much, if anything at all.
Humans are hence a resource, yes, but a very precious one. Handled with care and respect, this resource can deliver beyond expectations.
Because the availability and treatment of talent is so intricately tied to their performance, and hence the performance of any corporation they work for, it is worth trying to quantify it. This is what social accounting does: It tracks human involvement with companies, its quality, and the outcome of said involvement.
Human society is an ecosystem
Similar to natural biotopes, human communities can be viewed as ecosystems of their own. Different groups of humans have different functions within these ecosystems, for example construction, food preparation, or selling insurances. The ecosystem as a whole is healthy when each of these functions works well and integrates well with other functions. Every ecosystem has its own style and culture, which makes it unique from any other ecosystem.
Of course there are limits to this imagery. An ecosystem is never limited to one species like the human race. To describe a full ecosystem, one should therefore count in all pets, livestock, surrounding vegetation, and other environmental factors. In practice, however, interactions among humans are already so complex that it makes sense to focus on just them. Where interactions with non-humans are of particular significance, they can be added. For the sake of simplicity, however, they will mostly be left out.
Corporations, in this view of the world, are part of the human ecosystem in the sense that they group certain people together, organize their work, and distribute the output of that work to other groups of humans. Corporations accelerate value creation in an ecosystem.
The humans that own these corporations are often rewarded with a certain fraction of the created value. Doing so acknowledges the fact that corporation owners have an outsized role in enabling value creation, and incentivizes them to keep putting their capital to work.
In all of this, it is important to recognize that we are talking about a very complex system with a variety of human and corporate actors. Like in ecosystem accounting, the aim is not to quantify the system from the lens of one human or one corporation, but to keep a birds-eye view on it as a whole.
The status quo on social impact quantification
Barely any existing framework takes the holistic stance described above, which is the approach our team at Wangari mostly uses. Nevertheless, it can be instructive to understand how organizations around the world are quantifying their social impact from their point of view.
At the end of the day, corporate reporting data is a key input for Wangari’s more holistic models. Understand how it is structured is therefore essential.
Social impact is often measured in outcomes that a company has achieved through certain activities, which in turn were possible because of the resources a company had at its disposal. Such resources might include funding, staff, material assets, and existing networks with other companies. These can be used to enable various activities, such as social projects, events, or communications. It also, however, includes every product and service that results from corporate activity. Outcomes might include improved health and wellbeing, economic development of a community, or environmental preservation.
When a large amount of companies discloses their resources, activities, and outcomes, this can help feed a birds-eye-view. This might lead to a deeper understanding of the impact that each company has on its surroundings, and might generate insights about why some companies perform better than others across certain metrics.
Corporations have adopted various systems to guide their social reporting. Some of these follow below, although this is not a complete list.
B Corporation
Any corporation can register to become a B Corporation if they satisfy certain criteria. Their framework spans five categories:
Governance: Corporate structure, control, shareholder rights, shareholder diversity and inclusion (D & I), and distribution of shareholder value to employees
Workers: Fair and just labor practices, compensation, workplace diversity, employee volunteering, and culture indicators
Community: Corporate interactions and impact on the broader community
Environment: The company's sustainability practices, measurement, and environmental impact and footprint
Customers: Customer-centricity, measurement of customer success and satisfaction, key partners and customer groups
Most B Corporations are small to mid-sized companies which lack the capabilities to build their own sustainability framework. Some larger corporations have adopted the label as well, however, such as Danone, Eileen Fisher, and Patagonia.
IRIS+
IRIS+ is short for Impact Reporting and Investment Standards. It is a system for measuring, managing, and optimizing impact along the UN Sustainable Development Goals.
It is used by some non-profits and social enterprises. Larger companies have refrained from using this framework because it is quite unwieldy with its 594 different potential social impact metrics in its reference set. Its methodology in itself is interesting, but it has clear drawbacks in terms of usability.
GRI
The Global Reporting Initiative (GRI) is more geared towards large enterprises and aims to support a global common language for non-financial sustainability reporting and disclosures. It has not gotten the large support that SASB (see below) has, but nevertheless remains a mainstay in sustainability reporting.
Social standards are one of four pillars in the GRI framework. The others are environmental, economic, and so-called universal standards, the latter of which includes governance-related aspects.
SASB
The framework laid out by the Sustainability Accounting Standards Board (SASB) has the most rigor of all existing sustainability standards, and the biggest interoperability with financial reporting. It has become part of the International Financial Reporting Standards (IFRS) and is being included in many mandatory sustainability-related disclosure legislations that are in the making around the world.
The SASB standards start with 77 distinct groups of companies that each have a distinct exposure to sustainability-related risks and opportunities. A company that wants to use the SASB standards must therefore first determine which group it falls into.
For each of these groups, different sustainability-related criteria apply. All these criteria fall into five groups:
Environment: GHG emissions, air quality, energy management, water and wastewater management, waste and hazardous materials management, ecological impact
Social capital: Human rights and community relations, customer privacy, data security, access and affordability, product quality and safety, customer welfare, selling practices and product labeling
Human capital: Labour practices, employee health and safety, employee engagement, diversity and inclusion
Business model and innovation: Product design and lifecycle management, business model resilience, supply chain management, materials sourcing and efficiency, physical impacts of climate change
Leadership and governance: Business ethics, competitive behavior, management of the legal and regulatory environment, critical incident risk management, systemic risk management
Each of these criteria carries different weight depending on the group the company falls into. The sub-criteria and sub-sub-criteria are adapted to each of these groups.
What is great about the SASB standards is that it is very compatible with financial reporting. This makes it one of the best standards out there. Its point of view, however, remains looking at the world from the lens of a company, instead of aiming to model something much larger.
Wangari faces two challenges in the coming weeks and months: First, translating such frameworks, particularly SASB, to social and environmental accounting from an ecosystem-centric perspective. Second, translating findings from this perspective to financial conclusions for individual corporations and for society as a whole.
Corporations exist because they add value to society as a whole. If they fail to do this, then they should not exist.
By failing to consider society as a whole and only considering the point of view of individual corporations, investors risk overvaluing those that do not add much value, or even subtract a net value to society, and undervaluing those that create tremendous value. This is essential because in the long run, only smart investors and value-creating companies can win.
People are a precious resource. Corporations should not not waste it
By modeling the behavior not only of people inside their company, but also outside, companies can get a much better view on what their social risks and opportunities are. They might spot previously overlooked talent pools, understand their customers’ needs better, or be able to attract more suitable investors.
Applying the logic of ecosystems to human behavior might seem like a stretch, but it carries through surprisingly far. In addition, blurry borders that do not exclude other actors like pets, livestock, or plants per se, add the benefit of being able to go into as much detail as wished.
This point of view has a key advantage for employees at all corporations too: Once corporations realize that their people are indeed a resource, but a very precious one, they will be able to treat them better.
This is not about making Human Resources great again. It is, however, about making corporations make sense. Financially, environmentally and socially. Now and in the future.
What we’re reading at Wangari
From now onwards, you will be getting a curated reading list from us, included in your newsletter every Friday. It is a short roundup of stories that our team at Wangari has particularly enjoyed recently.
A candid interview with an oil-and-gas worker turned social activist James Hiatt, led brilliantly by
. It vividly shows how many oil and gas corporations, supposedly fueling the world with affordable energy and lifting millions out of poverty each year, really just live off an extractive business model and mindset.How relatively simple environmental intervention might help an entire world region come back to life. A beautiful interview by
with Kevin Adkin, a USAID Regional Environment Specialist posted to Kazakhstan.It sounds like a crazy idea at face value, but its potential upside cannot be understated: Seaflooding is
’s brilliant defense of a concept so insane it might just be a beacon of hope. Wherever a useless piece of land is beneath sea level, one could build pipelines to fill it with water from a nearby ocean, and thus create mini-Mediterranean seas. I honestly do not understand why such a mini-sea has not been created yet.An enjoyable breakdown about just how good (or bad) the corporations of today are doing, scored against the UN Sustainable Development Goals.
shows how public data can help with this, and presents a simple public framework that assesses how good corporations are doing. How good, may you ask? Check for yourself.How one of the greatest economies that have ever existed might be heading towards a slow decline.
shows, in simple and clear terms, how China has achieved the un-achievable by industrializing within decades. The sad part is that the rulers that brought China here might be cracking down too much on its citizens’ ingenuity, hence putting the brakes on the fantastic growth the country had experienced up to this point.