Social sustainability – formal obligation or competitive advantage?

By Thomas Ogilvie

Over 50 years ago, prominent economist Milton Friedman famously wrote that the primary responsibility of business is to maximize shareholder profits – often paraphrased as “the business of business is business.” This idea remains an anthem for private companies, especially publicly listed ones, as they share a common focus on profit generation. Therefore, management teams must act credibly as custodians of their owner’s invested capital, as shares can be easily traded and alternative investment opportunities are abundant.

While these pillars of capitalism remain true, capital today is invested at the speed of a fingertip, driven either by the desire to maximize returns or constrained by the investment policies, standards, and value propositions of private investors, institutional investment companies, or pension funds. 

The same mechanisms apply when companies interact as suppliers and customers, with the customer side – often led by procurement teams – seeking the best quality but prioritizing the best price. Identifying the best price (in nominal terms) is straightforward when comparing two offers, but assessing quality or credibility is far more complex when determining the best value for money. Product or service quality, along with reliability and assurance of availability, are key variables in this equation. 

In recent years, however, another important factor has begun to shape and influence negotiations between enterprises: sustainability.

While there are consumer expectations for companies to do good – or at least do no harm –a tightening set of regulations and standards is pushing companies to comply with sustainability requirements.

Until now, the focus on sustainability has been largely on the environmental dimension of ESG, with efforts centered on addressing climate change through decarbonizing business practices and reducing pollution and waste. The introduction of a standardized metric for GHG emissions, along with categorization into different scopes, has made the environmental aspect of sustainability measurable, comparable, and tradeable – particularly with the established pricing mechanism for per-ton GHG emissions and the mandatory, auditable reporting requirements.

In contrast, social sustainability lacks a clear, standardized leading metric to measure the baseline, set targets, identify gaps, and track progress in closing them. Social sustainability is a multi-dimensional concept of various elements, including occupational health and safety, inclusion and belonging, human rights across the value chain, and strong leadership and development opportunities. Nevertheless, an examination of the regulatory landscape shows that similar reporting standards, control obligations, and public oversight bodies are emerging for social sustainability, much like those in finance and decarbonization.

Some may argue that this adds bureaucracy and reduces entrepreneurial freedom – a common criticism that holds some truth, given the breadth and depth of social KPIs to be reported. Nevertheless, these formal obligations are unavoidable, as they have the same level of gravity within an integrated reporting environment as the IFRS 16 standard. 

Focusing solely on this aspect overlooks the important link between increased entrepreneurial resilience and social sustainability. The simple truth is that engaged, motivated, and satisfied employees create an intangible competitive advantage by delivering better service quality, higher productivity, and greater innovation, which leads to higher customer satisfaction, more business, and higher profits.

However, with the upcoming obligations of the Corporate Sustainability Due Diligence Directive (CSDDD) and its existing national equivalents in many European and non-European countries, there is another tangible competitive advantage to running a socially sustainable business: retaining existing clients and attracting new ones.

By expanding accountability for adherence to certain social standards beyond the boundaries of the directly employed workforce, companies covered by the CSDDD risk fines of up to 5 percent of global revenue for severe breaches, surpassing the maximum 4 percent penalty for GDPR violations.

Consequently, companies are increasingly required to assess their suppliers’ approaches to social sustainability – just as they do for environmental sustainability – making social sustainability a crucial factor in supplier selection, particularly in emerging markets and industries with an inherently higher risk profile.

Tenders and RFQs among large multinational companies incorporate often include sections requiring disclosure of policies, governance structures, practices, and track records related to social sustainability. While this is rarely the reason for winning a contract, it can certainly be a decisive factor in losing one.

So, if, as Friedman asserted, “the business of business is business,” then the business of a business is also social sustainability.  

Thomas Ogilvie
Global Chief Human Resources Officer, Management Board
DHL Group

This article was originally published in ESMT Update Winter 2024 (PDF).