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What does ESG mean and how is it related to Private Social Investment?

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In 2005, during the ‘Who care wins’ conference organized by the International Finance Corporation (IFC) in collaboration with the United Nations (UN), world leaders examined the role of environmental, social and governance values in asset management and financial research. On that occasion, there was a consensus that these three factors play a key role in long-term investments. 

Hence, the creation of the ESG (environmental, social, and governance) agenda was officially established, along with the expectation that companies would report their actions consistently and proactively. The agenda ultimately brought the financial market closer to the sustainability debate. At the same time, this same sector began to consider in its decisions the risks that these issues might present to the value and longevity of private organizations.

In this article, you will be able to better understand what ESG is and how it influences – and is influenced by –  other topics such as Private Social Investment.

 

What does ESG mean?

Although it was created almost twenty years ago, it was only in 2020, during the pandemic, that this agenda gained popularity, gaining strength especially from the stance of major economic stakeholders in favor of corporate sustainability.

First and foremost, it is important to clarify that when it comes to ESG, we are mainly talking about the relationship between the private sector and the financial market. In other words, when considering investing in a company, investors begin to incorporate environmental, social and governance issues into their decision-making process. These elements are considered important to evaluate the investment quality and non-financial risks. 

Thus, it is understood that companies start to give more serious consideration to how they mitigate or more proactively address aspects that affect all stakeholders involved and interested in their operations, from collaborators to the surrounding society. This incorporates the ESG agenda into the company so that it is possible to achieve a more sustainable world and society.

“It’s not just about seeing, measuring and managing risks from a broader perspective, but also the active search for the generation of positive results in all of the aspects that surround companies activities” 

ESG Practical Guide for Investors, Mattos Filho law firm

 

Environmental agenda

The ‘E’, meaning environmental, focuses on actions that aim to reduce and mitigate the environmental impact caused by companies through efficient management of natural resources, climate change mitigation, reduction of carbon emissions, waste management, adoption of more sustainable production practices and so on.

 

Social agenda

The ‘S’ on the ESG agenda addresses matters related to the well-being of people both inside (collaborators) and outside the company, in the communities where it operates. This axis aims to take a careful look at issues that vary from health and occupational safety, diversity and inclusion policies, relationship with the community, and even corporate social responsibility, volunteering and private social investment, among other matters.

 

Governance agenda

Last but not least, the ‘G’ addresses corporate governance practices. The principles of corporate governance map out practices related to integrity, equity, transparency, ability and sustainability of its governance. Going from an organization’s boards and committees to its financial and ability policies.

 

How does Private Social Investment relate to the ESG agenda?

Private Social Investment, or Strategic Philanthropy, is the voluntary and strategic allocation of private resources for the public good, these being financial, in cash, human, technical or istrative. In order to promote social transformation, this donation needs to be strategically planned, anchored to data, with predefined indicators, careful execution, monitoring of results and evaluation of its impact. 

In this regard, when an organization defines the focus and strategy of their donations, it is understood that these practices will be necessarily aligned to the purpose and values of the institution, as well as approach all of the stakeholders impacted by or who impact the company’s actions.  

But how does ESG fit in all of this? Well, through strategic philanthropy, companies can direct resources to projects, civil society organizations( CSOs) and initiatives that collaborate for the socioenvironmental development of the community. As we understand that strategic private social investment acts in line with the business, the ESG agenda acts as an ally in the development of these practices, measuring and mitigating financial risks.

It is a two-way street. As the ESG agenda contributes to a more strategic decision-making process in regards to private social investment, private social investment acts as a key tool for achieving ESG goals and pledges. 

 

IDIS actions on the ESG agenda

With the impotence growth of the ESG Agenda, IDIS has been investing on the strengthening of its team with specialists and in the production of knowledge of this topic, including the development of methodologies which aid social investors in their decision-making process. 

 

Access more content on the topic here!

In 2023, an ESG advisory team became official, offering technical to companies and social organizations who wish to improve their ESG strategies, as well as connect them to their strategic philanthropy practices. Among the services offered are ESG strategy connected to Private Social Investment; risk and opportunity mapping; (re)structuring of socio-environmental projects; establishment of thematic committees; and alignment of indicators and metrics for consistent reporting.

Study indicates a correlation between good practices of Private Social Investment and the ESG agenda

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Since aspects related to socioenvironmental impact and risk assessment started to integrate into the business strategy of an increasing number of companies, we have seen the market turn upside down and the subject gain strength and scale. It’s evident that the idea of sustainability and corporate social responsibility is not new, but the market logic has certainly changed since it was suggested that resources allocated to socioenvironmental projects of public interest should no longer be seen as expenses, but rather as investments that bring short, medium, and long-term returns. This is what we call private social investment – or strategic philanthropy, integrated into an ESG agenda.

We understand that private social investment practices have high penetration and can substantially enhance a company’s socioenvironmental actions. In other words, when done well, social investment can help unlock various other aspects of a corporate sustainability agenda. Empirically, the Third Sector has been working for years to demonstrate the impact that private social investment can have on an organization’s ESG metrics, especially in the social field.

To prove this hypothesis, IDIS – Institute for the Development of Social Investment undertook to analyze the correlation between private social investment and the scores of the brazilian stock exchange’s Corporate Sustainability Index (in portuguese, abbreviated as ISE B3). Established in 2005, it is currently the largest sustainability index in the country and was the fourth to be created globally, undergoing periodic revisions and analyses according to societal and market demands.

The companies included in the Index are chosen annually based on a ‘best-in-class’ process — a term used to describe practices or processes considered the best compared to market standards. The Index questionnaire is based on SASB Standards and maintains consistency with the Global Reporting Initiative (GRI), one of the world’s leading ESG measurement standards.

The survey analyzed the 2022-2024 triennium of companies included in the index, and during the evaluation period, it was very rewarding to identify that the practice of private social investment consistently ranked among the top ten topics most correlated with the ISE B3 score. In other words, companies that perform well in strategic philanthropy tend to excel in overall corporate sustainability.

It is also interesting to note that private social investment practices are aligned with aspects such as ‘foundations of corporate sustainability management’, ‘business ethics’, and ‘trends and purpose’. The alignment with topics that naturally have greater cross-sectional relevance indicates the tactical nature of private social investment in formulating and implementing integrated corporate sustainability strategies.

A private social investment strategy aligned with an ESG strategy helps to materialize the organization’s purpose for its stakeholders, generating tangible results for both the company and society. A company’s investment in socioenvironmental projects can be a good way to engage different stakeholders and initiate collective agendas with the government and organized civil society, promoting benefits for both society and businesses. Furthermore, it helps companies clearly and robustly demonstrate their socioenvironmental commitments, signaling to the market and consumers a real commitment to different causes.

Despite seeming logical, this alignment is not an easy task. In addition to connecting actions with business challenges and brand purpose, strategic action must consider material business aspects and a thorough mapping of stakeholders and different ways to engage them. Moreover, socioenvironmental actions should complement efforts undertaken by the Third Sector, promoting exchanges that enrich the performance of all actors. Study data shows that this is a relevant task that should be given importance by the private sector, as it is highly correlated with comprehensive corporate sustainability management.

 

Other findings

Regarding the scope of this study and the adoption of private social investment practices, some results stand out. For example, the most adopted actions in 2024, representing 93% of the 85 companies that responded throughout the triennium, were:

–  Considering collective agendas, such as SDGs, as a general reference for defining social investments;

–  Working in partnership with the community and other stakeholders in the formulation or execution;

–  Valuing the leadership of local actors and strengthening civil society;

–  Contributing to the participatory construction of public policies and/or collective sustainable development agendas.

Additionally, it was identified that the performance in private social investment topics is slightly better, both in average and median, in companies that operate, where applicable, through philanthropic vehicles, such as a foundation or corporate institute with its own structure. There was no statistically significant difference in total ISE B3 score performance between companies operating via philanthropic vehicles and those that do not. We can establish that scoring well in corporate sustainability is possible even in the absence of specific philanthropic vehicles. However, these vehicles remain important structures (alongside endowments, another modality capable of fostering co-investment) that mark firm corporate commitments in the face of numerous social dilemmas and issues. They will be even more effective if they can connect their areas of focus to the business, constituting important elements to boost the growth of a broader and deeper ESG agenda linked to purpose that permeates the entire organization.

In topics involving consultation with stakeholders to define investment priorities and maintaining open channels with the community, the difference between companies that claimed not to adopt such practices and those that do was more than 10 points. Companies that emphasize the leadership of local civil society actors in their private social investment actions demonstrate considerably superior performance compared to those that do not consider this aspect. Local dialogues, consistent positive social impact aligned with the company, open channels, and transparency in private social investment move the needle and demand new perspectives from companies. However, companies need to further advance this agenda, seeking ways to engage with local actors, working in partnership with the Third Sector in a complementary manner. Private social investment plays an important role: by building relationships focused on the community and surroundings, in line with internal company guidelines and demands, socio-environmental investment strategies are more assertive, targeted, and promote improvements in territories.

Another discovery is related to the practice of impact assessment by companies. Companies that assess the results of initiatives ed through private social investment have a higher performance in the ISE B3 and also showed a relatively high increase in performance between 2022 and 2024. In practical , systematic collection of impact indicators allows for reflective and strategic examination of the efficiency of a given social intervention, thereby enabling periodic review and improvement aimed at maximizing the desired and generated social benefits. Often, social projects end up generating unintended positive impacts that would go unnoticed without an evaluation that takes into , for example, the beneficiaries’ perception of the changes in their lives.

In summary, we empirically know that by connecting the concept and practices of private social investment with the organization’s purpose and institutional values, considering the economic bias of the business and the perspective of key stakeholders regarding the socio-environmental value to be created by the company, it is possible to enhance the organization’s capacity to generate positive impact for society and real value for the business. This relationship is now quantitatively proven, considering an extremely relevant sample of Brazilian companies.

IDIS maintains the view that to catalyze lasting social transformation, Private Social Investment must be accompanied by a robust strategic planning, grounded in specific data and indicators, implemented with precision, and accompanied by monitoring and evaluation of its results and impact.

Access the full study, available only in portuguese here.

IDIS is named the best Brazilian philanthropy organization

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Efficiency and excellence in management are key factors for social organizations to achieve greater impacts on the causes they defend. The “Best NGO Award” recognizes good practices in governance, transparency, communication and financing and, for the fourth time, IDIS was among the top 100 in Brazil. And this year, a surprise: IDIS was also named the best organization on the brand new category Promotion of Philanthropy, Volunteering, and CSO , taking two trophies home.

“Receiving these awards makes me very emotional and fulfilled! We made many investments in people, processes and tools to strengthen our projects, and ending the year with this recognition reinforces that we are on the right path”, says Paula Fabiani, CEO of IDIS. “This is the result of the dedication of our team and council, in addition to the trust placed by our partners”, she adds.

Among IDIS´s highlights are the monitoring strategic planning and indicators, investment in financial management and CRM platforms, the creation of a diversity and inclusion committee, and the growing investment in team training and development. The result was the expansion of advisory projects with new clients and the strengthening of relationships with those who were already in the house; strengthening of own projects such as endowment´s advocacy and Transforming Territories, a program to develop community philanthropy at Brazil. Equaly important was the productions in the field of knowledge, such as the 2021 Volunteer Survey, the Brazilian Endowments Outlook, the Seminar on ESG and Strategic Philanthropy; and the Brazilian Philanthropy Forum.

The selection of the prize is based on a rigorous evaluation carried out by O Mundo que Queremos Institute, the Doar Institute and “Ambev VOA”, with the of researchers from Getúlio Vargas Foundation (FGV), Humanize Institute and of the Toyota Foundation.

We congratulate all the organizations that work every day for socioeconomic development in the most different causes and regions of Brazil and who were also recognized on this year´s edition.

 

The ‘S’ of the Brazilian ESG will not evolve without dialogue with CSOs

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The B3 (Stock Exchange in Brazil) revealed last year that it would have new rules for its Corporate Sustainability Index. The changes in the ranking stemmed from pressure from investors so that the companies evaluated became increasingly attentive to ‘ESG’ actions (Environmental, Social and Governance).

Following the announcement, B3 started to openly publish the scores of the 73 organizations participating in the index. Dimensions such as human capital; corporate governance and senior management; business model and innovation; social capital and environment were all disclaimed.

Among the top 10 companies, the dimension with the lowest average rating was human capital, which includes issues such as diversity and labour rights – followed by the social capital index, which covers the topics of private social investment and community relations. Both represent, not only, but essentially, the ‘S’ within ‘ESG’.

The findings reveal a weakness in materializing actions, measuring achievements, and an unclear commitment to social transformation. A study by BNP Paribas (ESG Global 2021) revealed that 51 per cent of investors surveyed considered the ‘S’ the most difficult to analyse and incorporate into investment strategies. Another analysis, carried out by the Global Reporting Initiative (GRI) in partnership with Deutsche Bank, shows that only 14 per cent of the ‘social’ ratings compiled by the GRI are aimed at investors. In contrast, 97 per cent of environmental ratings and 80 per cent of governance ratings have investors as their primary audience.

The next step for Brazilian companies

Facing this scenario, what should Brazilian companies do to evolve on the social agenda in their ESG practices? The answer is not simple, nor is it unique. Among the options, there is a great opportunity for companies to rethink the way they dialogue with communities, and the role of grantmaking and strategic philanthropy, promoting social transformations aligned to the business.

As a trend, we see a raising involvement of CSOs in companies’ initiatives and, more than that, a transfer of knowledge from the social organizations to their investors, instead of the other way around. Projects are developed in collaboration, and direct investment is made on CSOs, which can increase their influence and capacity for execution and transformation alongside beneficiaries.

The pandemic showed that in the most difficult moments, problems are concentrated in the most vulnerable populations, whether due to the precariousness of the system or to the lack of work and income. At the same time, the experience made it clear that they were the ones most capable of finding the best solutions. Proofing points are the gigantic mobilizations conducted by community leaders during the emergency, such as those carried out by CUFA (Central Única de Favelas), which provided basic needs such as food and PPEs and promoted entrepreneurship in favelas across the country.

The connection between the ESG Agenda and philanthropy can no longer be invisible or ignored. A Census conducted by Gife in 2020 ed an increase of 11 percentage points in the number of social investors focused on ‘strengthening civil society’ in relation to the 2018 survey. Instead of creating new and promoting their own projects, companies should choose to strengthen grassroots organizations, which are more likely to act faster, more precisely and promote the changes we long to see.

Renato Rebelo was the Project Director at IDIS.