SocialImpactValuationWhitePaperJanuary2017 1

SocialImpactValuationAsocialimpactmodelofemploymentandNestlécasestudy

Credits@DanLong2008

January2017Authors:SamuelVionnet,SustainabilityExpertandFounderatValuingNaturesv@valuingnature.chDuncanPollard,StakeholdersEngagementinSustainabilityatNestléduncan.pollard@nestle.com

WhitePaper

SocialImpactValuationWhitePaperJanuary2017 2

BackgroundCompanies, throughtheiractivities,canhavebothpositiveandnegative impactsuponsocietyandtheenvironment.Whileattemptshavebeenmadetomeasuresuchimpacts(e.g.greenhousegasandaccidentrates), they aren’t currently available in financial units and can therefore not be captured in financialreportingstandardsnormanagementaccounting.Somecompanieshavehowevernowstartedexpressingtheir impacts inmonetary values, and some investors and insurance companies are beginning to usesimilarapproachestoevaluaterisks.Thefirstworkonimpactvaluation(themeasurementandmonetaryvaluationofimpacts)beganwiththeenvironment.2016sawthelaunchoftheNaturalCapitalProtocol1thatprovidesaframeworktoguidecompaniesonthevaluationandreportingofimpactsupontheenvironment.2016alsosawthelaunchofaninitiativetocreatea“SocialCapitalProtocol”2.Todatethisareaislesswelldeveloped,withonlyafewcompanieshavingattemptedasocialimpactvaluation,andhavingrestrictedtheiranalyseslargelytohealthandsafety,skillsandemployment.Itisclearthatamorecomprehensiveapproachtosocialcapitalvaluationwillberequiredforittobecomerelevant.Methodologieswillneedtobeexpandedtocoveremploymentconditionsandlabourstandardssuchasworkingtime,accommodation&basicserviceneeds,livingwage,childlabourandforcedlabour.Thereareethicalconcernsrelatedtoassigning a monetary value to certain of these impacts – some are, after all, basic human rights.Nevertheless,theconceptofassigningmonetaryvaluesisappliedinsomeofthesetopicsbyinsurancecompanies, international organizations and government agencies, and we are convinced that suchapproacheswill helping to drive engagement on the human rights agenda and add value to decisionmakingwithincompanies.TheSustainableDevelopmentGoalssetoutaseriesofsocietalgoalsthatcompaniescancontributeto–inshortwecansummarisethemas“tolivealonglifeingoodhealth”3.Thisisanimportantstartingpointas commonmetrics tomeasurehumanhealthexist:DisabilityAdjusted LifeYears (DALYs) andQualityAdjustedLifeYears(QALYs).OneQALYequatestooneyearinperfecthealth,whilstDALYisameasureofyearslostduetoill-health,disabilityorearlydeath.QALYsandDALYsarewellunderstoodunitsusedbygovernmentsandUNorganisationstoguidepolicydecisionsaroundhealth.TheWorldHealthOrganization(WHO)hasforexamplepublishedanextensivestudy -“GlobalBurdenofDiseases” -ofall sourcesofDALYpercountry linkedtocauses. IncorporateimpactvaluationthereisanemergingconsensusthatDALYsarethemostappropriatemeasureforhealth&safety,ietheimpactofaccidentsandhealthrelatedworkissues.Theuseofsuchmetricsishowever,muchlesscommonforassessingothersocietalissuessuchaschildlabourorlivingwages,butwebelievethatDALYsorQALYscanprovidemeaningfulinsightstotheseissues.Usinghumanhealth (expressed inDALYsorQALYs) toevaluatesocialperformance isan improvementcompared tomeasuring employment and job creation in terms of added economic activity, valued ineconomic terms. Whilst the latter is easy and simple to do we believe that it is too simplistic, andpotentiallydoesnotreflecteither impactsorthebasicpremiseofhumanrights.Forexample,apurelyeconomicapproach countsall employmentasapositive.Webelieve that this isnot the case - clearlyworkerswhoareworkinginslave-likeconditions(orlivingofftheminimumwage)arenotabletoenjoyaqualitylife.

1http://naturalcapitalcoalition.org/protocol/2WBCSD(2016)TheSocialCapitalProtocol–Illustratedwithexamplesonthesubjectsofskills,employmentandsafety(draftMay6th2016)3SeetheSustainableDevelopmentGoals(andtheirindicators),especiallySDGs1,2,3,4&5

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OurstudyobjectiveandscopeNestléandValuingNaturehaveinvestigatedhowhumanhealth(measuredinDALY/QALYs)canbeusedtomeasuresocialissues,withtheambitionofincludingalltherelevantsocialissuesandhumanrightsinNestlé’ssocialcapitalimpactassessment.Figure1showsthelistofthesalienthumanrightsissuesidentifiedbyNestléandhowtheywerematchedtodirectandindirectimpactpathwaysinourpilotstudy.Notallofthemwereexploredatthisstageoftheproject, although aswe explain later, there is the potential to cover themajority of themwithin thisframeworkandmethod4.Directpathways implythatthespecifichumanrightstopichasadirect impactonthehealthofpeople(e.g.,safetyandhealth,accesstowaterandsanitation,etc.).The indirectpathwaysdonotallowustodrawadirectlinkwiththehealthofpeople,onlytoindirectlylinkthroughamorecomplexcauseeffectchain(e.g.,forcedlabour,childlabour,workingtime,livingwage,etc.).Somehumanrightsissuesmightinfluencethehealthofpeoplethroughbothpathways.

Figure1-SalienthumanrightsidentifiedbyNestlématchedwithpathwaytype(directorindirect)andtheircoverageinourpilot.

This paper details the approach taken for the living wages5 and more broadly for the theme ofemployment,which is oneof the key impact of businesses. Wedetail in this paper theprocess, andprovidesomefindingsandobservationsfordiscussion.

4Notethatinadditiontothehumanrightslistedafullassessmentwouldalsoincludeskills.Wedidnotlookatskillsinthisstudy.5Notethatinthispaperweusethetermslivingwageandlivingincomeinterchangeably

Freedomofassociationandcollectivebargaining

Workingtime

Workers’accommodationandaccesstobasicneeds

Safetyandhealth

Livingwage

Dataprotectionandprivacy

Childlabour

Forcedlabour

Accesstowaterandsanitation

Accesstogrievancemechanism

Landacquisition

Directpathway

Indirectpathway

DALYs

Covered inthepilot

Notcoveredinthepilotbutinfluencingthepathwaysconsidered

Notcoveredyetinthepilot

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ApproachtovalueemploymentandwagesimpactWeassessedtherelationshipbetweenthehealth(lifequalityandexpectancy)ofgroupsofemployeesandtheir work environment and conditions (in particular, their income), which is part of the socialdeterminantsofhealth.Thelatterfieldhasbeenwidelystudied(WHO2008&2014)6andusedinpublicpolicy. This work has demonstrated a correlation between a population’s health status and socialinequalities,includingworkingconditionsandincome.Itshowedamongothers,thatformostdevelopedanddevelopingcountries,social impactismorecorrelatedtoinequalitiesinincomeswithinacountry7,ratherthantotheirabsolutenationalincomelevel.Based on existing statistics linking inequalities of income toinequitiesofhealth(Eurostat20108and2013),wedevelopedasetof characterization factors9 to value social impact related toemployment.Theworkingconditionsincludeincome,benefitsandworkingenvironmentwhicharelinkedtopsychologicalandmaterialconditions. The working environment (management styles, non-financial rewards & working conditions) are importantdeterminants, sometimes even more than income, in determining social impact. The use of incomeinequalitiesasageneralproxytoemploymentconditions,shouldnothidethefactthatanyresponsestothefindingsmightalsofocusontheworkingenvironmentaswellasincome.The characterization factorsare defined for deciles10 ofincome inequality (see figure2). These are expressed inDALYper yearorper incomeunit(e.g.,USD).Thesefactorsare then used with the totalvolume of incomes perincome levels (arrived at bymultiplying the number ofemployeesbytheirrespectiveincomes).Thebaselinedefinitionisimportantandleadstothetranslationofthesameresultsintoeitherpositiveornegativesocietal impacts.Thecharacterizationfactorsrepresented in figure2useabaselineassumingthathumansshouldlivetotheirfullpotential(equivalenttohavingincomesrelatedtothe9thand10thdeciles).Thishoweverleadstoonlynegativeimpactsaswedonotlivetoourfullpotentialonaverageieweexperience income inequalities.Webelievethat this isanunrealisticbaseline- there isnosocietalexpectationthatallemployeesearnasalarythatisatthecurrent9thand10thdecilelevel.

6WHO (2008) Closing the gap in a generation – Health equity through action on the social determinants of health. Commission on SocialDeterminantsofHealth.FinalReport.WHO(2014)ReviewofsocialdeterminantsandthehealthdivideintheWHOEuropeanRegion:finalreport.UCLInstituteofHealthEquity7IntheUSforinstance,thelifeexpectancygapisnearly15yearsbetweenthelowestandhighesteducationlevels(correlatedtoincomelevelstoo).WhilethelifeexpectancygapbetweencountrieshavingaGNI/capitaof5’800(e.g.,Cuba)vs55’000(e.g.,USA)canbeinexistent.8Corsini(2010)Highlyeducatedmenandwomenlikelytolivelonger–Lifeexpectancybyeducationalattainment.Eurostat.Statisticsinfocus9Acharacterizationfactoris,inthiscontext,afactorthatisusedtotranslateaninformation(e.g.,incomedata)intoasocialimpact.10Adecileisanyoftheninevaluesthatdividethesorteddata(e.g.,population)intotenequalparts,sothateachpartrepresents1/10ofthesampleorpopulation

Figure2-CharacterizationfactorsperincomedecileinDALY/yearofworkperincomedecileforaselectionofcountries.

Noteonterminology:Inequalities:unevendistributionInequities:lackoffairness

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Inconsideringwageswealsoseeanissuewithassumingthatanywageispositive,whichwouldbethecaseifweuseofaminimumincomebaseline.Statesmandateaminimumwage11,thoughforcompaniestoemploypeopleatthisratestillplacesaburdenuponsocietyintermsofincomesupportorincreasedhealthcarecosts,whichshouldbevaluedasanegativeimpactatthecompanylevel12.Thishasledtotheemergenceoflivingwages13whichmaysetamorerealisticbaselinefromwhichtomeasureimpact.Tosummarize,thetwoalternativebaselinesthatcanbedefinedare:• Livingwagebaseline:thisbaselineassumesthatthereisathreshold(thelivingwage)belowwhicha

negativeimpactoccursandabovewhichapositiveoneoccurs.Thisbaselineseemsthemostalignedwithcurrenttrendsinpublicandbusinessessocialpolicies.Intheabsenceofactualdataonlivingwageweusedmedianwage(ieroughlyequivalenttothe5thincomedecile)assumingthatinthecountryforthestudythatthesewerelikelytobesimilar.

• Minimum income baseline: this baseline assumes that all income provided above the minimumincome in a country brings a positive impact. It is close to the current vision of economic impactassessmentstudies.Howeverwearenotinfavorofthisbaseline,forthereasonsmentionedabove.

Inthecasestudypresentedhere,thelivingwagebaselinewasselectedtopresentthesocialimpactresults.TheNestlécasestudyUsingtheconceptoutlinedaboveweconstructedasocialimpactmodel(the“model”)toinvestigateaNestlébusinessandlookedatthevaluechainfromvegetablegrowing(farmers),intermediateprocessing(supplier1)andfinallytheNestléfactory(Nestlé).Thestudytimeframeisoneyearofproduction.Figure3showsthenumberof full timeequivalent (FTE)employeesper incomedecile (leftgraph), theeconomicimpact(middlegraph),andthesocialimpactascalculatedbythemodel(rightgraph).Thesocialimpact results have been translated into Euros using the DALY concept. A positive value indicates anegativesocialimpact.Therearevariouspointsofnote:highincomescontributerelativelymoretotheeconomicimpactthanlowerincomedeciles,aligningwellwiththenumberofjobsineachdecile;incontrast,thesocialimpactmodelusingDALYsdemonstratesthatthehighestincomesdon’tshowanypositiveimpact.Wages lower than the living/median threshold have a relatively higher negative impact. Low incomeworkers at the farmshave typically ahighernegative social impact,whileNestlé factory’s employees’incomearehighenoughabovethemedianincometoshowapositivesocialimpact.Thesocialimpactresultscontrastclearlywiththeeconomicimpactresults,evenwhendifferentbaselinesareselected.Figure4presentsthesocialimpactresultsaccordingtothethreebaselines,knowingthatthemedianincomewasusedasaproxyforthelivingwage/incomeinourcasestudy(middlegraph).The baseline closest to the one implicit in the economic impact assessment is the minimum incomebaseline. In this case thehighestpositive impact is achieved for the intermediate incomeandnot thehighestones.

11https://www.theguardian.com/uk-news/2016/apr/01/the-national-living-wage-and-what-it-means12https://www.theguardian.com/sustainable-business/2015/apr/20/taxpayers-spend-11bn-to-top-up-low-wages-paid-by-uk-companies13Alivingwageistheminimumincomenecessaryforaworkertomeettheirbasicneeds(Wikipedia).

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Figure3-Illustrationoffulltimeequivalentemployees,economicimpactandsocialimpactperincomedeciles.Resultsare

limitedtothedeciles3rdto10th.Notethatsocialimpactpositivevaluesrepresentanegativeimpact.

Figure4-Socialimpactresultsexpressedusingthethreedifferentbaselines.Resultsarelimitedtothe3rdto10thdeciles

In terms of using the insights provided to determine interventions, the model has highlighted thatrelativelymodestinvestmentsinthewagesofworkerscanhavethebiggestpositivesocialimpact.

-20,000 0 20,000 40,000EUR/y

Social impact(living income baseline)

0 400,000 800,000 1,200,000EUR/y

Economic impact

Farmers Supplier1 Nestlé

0 20 40 60

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IncomedecilesinSpain(10=richest)

Number of fulltimeequivalent employees

0 20,000 40,000 60,000 80,000

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IncomedecilesinSpain(10=richest)

Full potential baseline

-60,000 -40,000 -20,000 0

EUR/y

Minimum income baseline

-20,000 0 20,000 40,000

EUR/y

Living incomebasline

Farmers Supplier1 Nestlé

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DiscussionThismodelhighlightsaquestionaroundwhat is the correctbaseline to chooseagainstwhich impactsshouldbemeasuredandvalued.Notallemploymentisentirelypositivefortheindividualandsociety.Weproposethattheconceptoflivingwagecouldbethebaselineagainstwhichtojudgewhetheracompanyisgeneratingapositiveornegativeimpactuponsociety.Thisimpactwillvarydependingonthecountryand the respective social context. The social impactmodel we have created leads to higher negativeimpacts for countries with higher social inequalities, in particular linked to working conditions. Thestatisticsusedaccountpartlyforcontributingfactorssuchassocialsecurityandtheeducationsystem.Aswehavearguedinanearlierreportonimpactvaluation14,webelievethatafullpictureontheimpactofacompanycanbepresentedthroughnotjustan“absolute”baseline,butincomparisontobusinessasusual(e.g.usingcurrentsectorsaverages)andovertime.Ifdataisavailableoncompanyremunerationpolicyversusthatfromalternativeemploymentinaregion,themodelcanbeusedtocomparetheimpactofthecompanyversusotherswithinthesameregion15.Comparisonsovertimearestraightforward.Themodelhasproventobeabletovaluetheimpactofremuneration,relatedtohealthandlifepotential,beyondsimpleeconomicimpactmetrics.Webelievethatitcanalsobeusedtovalueotheremploymentconditionsandlabourstandardssuchasworkingtime,accommodation&basicserviceneeds,childlabourandforcedlabour.Todothis,thedirectandindirectpathwayspresentedearliercanbeused,ie:• Directpathways:worker’saccommodationandaccesstobasicneeds,safetyandhealth,childlabour,

accesstowaterandsanitation.• Indirect pathways: all human rights apart from safety and health which is focused on the direct

pathway.Theindirectpathwaycanbeassessedthroughstudiesofthesocialdeterminantofhealth,aspresentedinthiswhitepaper,combinedwithotherimpactpathways.

Howwouldthiswork?Failuretorespectthefollowinghumanrightsaffectspeoplecapacitytoenjoygoodworking conditions, to obtain a living wage and to get full access to life opportunities: Freedom ofassociationandcollectivebargaining;workingtime; livingwage; forced labour;and landtenure.Thosefactorscanbemeasuredinequivalentincomegapwhichcanbelinkedtothesocialimpactmodel.As an example, in the case of child labour, health and development issues (the direct pathway) arerelevant,asistheindirectpathway:childlabourreducesthefuturecapacityofthechildtoobtainalivingincome by reducing his or her education level. Again, the income gap can be linked to the incomeinequalitiesmodel(presentedinthiswhitepaper).Toconclude,webelievethatthemodelpresentedinthiswhitepapercancomprehensivelymeasuresocialoutcomes and impacts. It goes beyond simple economicmeasures that can bemisleading or lack thecapacitytoinformabouttherealunderlyingissues.ItalsothereforeprovidesabetteralignmentofsocialimpactmeasurementwiththeSustainableDevelopmentGoalsthanapureeconomicmodellingapproach.Muchmoreworkisneededinthisareaandthiswhitepaperisonlyonestepinthisdirection.Bysharingthiswhitepaper,wehopetosupport thecommunityofcompanies,academics,NGOsandconsultantsaimingtoprogressinthisfield,andthefuturedevelopmentoftheSocialCapitalProtocol.

14http://www.valuingnature.ch/resources/galeries/20/MeasuringValue_Public_March2015c.pdf15Thisaspecthasbeendevelopedinourcasestudybutnotshownhere