Beyond Compliance 2024

Beyond Compliance: Embedding Impact through Innovative Finance15Social progress credits (SPC) are an initiative by SK Group, launched in 2015 under an OBF framework, supported by the Centre for Social Value Enhancement Studies (CSES). It aims to incentivize social enterprises by monetizing their social impact. Proposed by SK Group Chairman Chey Tae- won at the 2013 World Economic Forum Annual Meeting, the aim was to improve the company’s philanthropic practice by incentivizing deeper impact and sustainability in market- based organizations. The company also recognized that its core business value and future growth depended on the resilience and well-being of the society in which it operates. The ultimate goal of SPCs is to enable the market to identify, measure and trade social impact as a recognized asset, in a similar way to that in which environmental credit markets have developed. The valuation methodology used supports the standardization, systematization and quantification of impact that would be required to achieve this across diverse sectors. The approach is rooted in SROI converting the value of service performance, employment inclusivity, environmental protection and ecosystem effects into monetary value.33 The pricing mechanism compensates enterprises for 25% of the social value that has yet to be incorporated into the market price of goods and services, which tends to bring profitability in line with similarly sized SMEs. SK Group had intended for the initiative to be adopted by fellow companies, which has yet to happen; but six local governments are using this methodology to advance the regulatory context for social enterprises in South Korea.34 The SK Group have paid out $52 million in cash incentives, with each participating social enterprise receiving an average of $50,000 annually. Since its inception, SPC has engaged 448 social enterprises, generating $363 million in social performance value.35 The multiple analyses undertaken on SPC data have shown that incentive payments improve the enterprise’s financial and impact performance over and above the incentive payment itself,36 and there is considerable evidence that participating enterprises are much more successful in securing additional funding, mostly from government and impact investors. Moreover, the initiative has advanced the impact ecosystem within the country by entrenching impact measurement, which has led to better impact management, communication and transparency. It has also shown that social enterprises are best placed to allocate unrestricted funding to drive results. Currently, SPCs reward enterprises that are external to the supply chains of SK Group’s 175 operating companies. Steps are being taken, however, towards integration as supply chain companies are obliged to demonstrate social performance across their core business, according to the article of association. Furthermore, SK Group has incorporated the expertise accumulated from the social performance measurement of SPCs into the social performance measurement of the company and its supply chains. This was intended to proactively manage risks by utilizing SPCs to learn impact measurement methodologies in preparation for a future market where demonstrating social impact will be required, much like the current environmental credit market. The company is using this double-bottom-line accounting to align internal operations with the commitment to social outcomes, with the intention of demonstrating the link to overall corporate value.CASE STUDY 2 SK Group – social progress credits 2.2 Product and service opportunities Social and environmental business models offer significant growth potential, with research indicating that addressing SDGs could unlock new market value and create jobs. By developing new products, reaching underserved markets and enhancing operational efficiencies, companies can increase profits while generating positive social and environmental outcomes. OBF can shift the incentives structures and measurement systems that drive current corporate behaviour. Investment time horizons for profitability, profitability thresholds and mission drift at break-even can be addressed through supplementation of revenue streams with impact-linked incentives and country-level impact bonuses, which align profit with social value. For instance, OBF can support the development and manufacture of goods and services that have yet to reach a sustainable market size. For example, pharmaceutical companies have participated as product developers and manufacturers in partnership with Gavi, The Vaccine Alliance using advanced market commitments (AMCs) for vaccines. AMCs are mechanisms designed to incentivize the development and production of products or services by guaranteeing a future market at a set price, typically in sectors where market failures, like high costs or uncertain demand, discourage innovation. Gavi is raising $12 billion over the next five years to expand coverage and introduce new vaccines. Corporate foundations also make direct contributions, most notably to the COVAX Facility. Companies have also used sustainability-linked loans to broaden access to medication in low- and middle-income countries.37