Guy Battle, CEO of Social Value Portal, examines how sustainable finance initiatives are driving businesses to consider wider parameters when assessing success.
The world of investment is currently experiencing a significant transformation as the metrics to evaluate success expand beyond pure profit to encompass environmental, social and governance factors too.
This is a pattern emerging across the world, with the Global Sustainable Investment Alliance (GSIA) reporting a 20% rise in sustainable assets under management (AUM) since 2020 and over US$30 trillion invested in sustainable assets overall.
In the UK, Social Value has steadily (and in fact more rapidly in recent years) risen up the list of priorities since the Public Services (Social Value) Act was introduced in 2012. The Act requires all public sector contracts to carry a minimum 10% Social Value weighting – and we have seen this rise to as much as 30% in some cases.
This in turn has led suppliers to the public sector to make their own commitments to Social Value. hey see the potential benefits extending beyond winning new contracts to areas such as recruiting and retaining a talented workforce, improving brand reputation and reducing harmful effects on the environment..
Understanding Social Value
Social Value is the term used to describe the value an organisation creates for individuals, communities, and society as a whole. It is intended to encourage us to look beyond our first priority – profit- and consider our impact on a wider scale.
Examples of Social Value initiatives include donating staff time for volunteering, committing to sustainable procurement practices, offering apprenticeships and training programmes, buying and employing locally, and reducing carbon emissions.
Where Environmental, Social and Governance (ESG) reporting ensures compliance and prioritises risk management, Social Value goes a step further, focusing on creating longer term prosperity and wellbeing for communities.
On a global level, the UN’s Sustainable Development Goals provide a pretty good proxy for Social Value.
The power and potential of sustainable finance
Just as the public sector has been the main driver of Social Value in the UK, the finance sector is recognising that it has a similar opportunity to drive positive change on a global level.
By making investment decisions that consider the wider value an asset will bring to society, sustainable finance will help organisations and their governments to hit their sustainability and climate objectives.
In fact, Social Value and sustainable finance can work together to great effect, and the Sustainability Linked Loan (SLL) is one of the key ways that this is already happening.
The SLL refers to any lending instrument that incentivises borrowers to achieve predetermined sustainability objectives, with the borrower’s performance measured through Sustainability Performance Targets (SPTs).
By including Social Value in the metrics assessed as part of SLLs, lenders can drive even greater results for communities, acting locally yet thinking globally.
This growing trend of using finance as a lever to encourage organisations to prioritise having a positive environmental and social impact is long overdue and very welcome.
Accuracy, transparency and accountability are key
The financial world depends on accurate and transparent reporting, so it is no surprise that the measurement and reporting of Social Value and sustainability performance in finance will come under intense scrutiny.
No brand wants to be accused of greenwashing or value washing, so it’s important to plan for the measurement, evaluation and reporting of outcomes from the outset. Firmly established in the UK already, the Social Value TOM System ™ is a methodology for measuring Social Value which incorporates four key themes:
- Work
- Economy
- Community
- Planet
This system monetises the Social Value created by calculating a financial proxy value from authoritative data sources, enabling users to provide validated, qualitative evidence and a well-rounded account of Social Value commitments and delivery that will withstand the scrutiny of a financial expert.
With 2024 Financial Conduct Authority rules requiring firms to ensure their sustainability related claims about their services and products are clear and not misleading, this added credibility is essential.
The future of investment
Addressing and finding a remedy for the current climate crisis is everyone’s responsibility. Issues such as social inequality and resource depletion need addressing fast if we are to preserve the world we currently inhabit, so the role of Social Value and sustainable finance in investment will only grow in importance.
It is becoming increasingly clear that the future of investment is not just about maximising financial returns. It is about creating a more sustainable and equitable future for the generations to come.