Nestlé

Nestlé's approach to Valuing Social Impacts

About the Company

Nestlé is a leading nutrition, health, and wellness company with headquarters in Switzerland. The company’s 328,000 employees work to enhance lives with science-based nutrition and health solutions for all stages of life, helping consumers in 191 countries to care for themselves and their families.

The company’s business strategy is built on the concept of Creating Shared Value – which is that value creation for the business must also contribute to society and the environment. Being able to measure social and environmental value creation is essential for operationalizing this strategy.

About the Approach

Nestlé has embarked on an effort to better understand approaches to measuring and monetizing social impacts. The company conducted two pilot projects to measure and value non-financial capital: one in France with a natural capital focus, and one in Spain investigating the company’s impact on both natural and social capital. These assessments were all performed at the business unit level.

As part of the social capital pilot, Nestlé sought to go beyond measuring employment and job creation in terms of added economic activity, valued in economic terms. This purely economic approach counts all employment as a positive but does not reflect wages, working conditions, and many other aspects that are essential to quality life. The approach applied monetized DALYs (Disability Adjusted Life Years), a well-established metric for measuring human health, to value the social impact of employment. The study results are described in a publicly available white paper.

As well as continuing to develop and pilot the approach internally, Nestlé is engaged in discussions with businesses and organizations working in this area, including the WBCSD, in the belief that collaboration is essential to strengthening the credibility and rigor of this new field.

Stage 1: Frame

Understand social capital and its relevance to the business

Nestlé did not specifically use national or international frameworks such as the Sustainable Development Goals (SDGs) as an organizing principle for work on social impact valuations; instead company priority focus areas (salient issues) were used as a starting point. By responding to these salient issues, the company addresses a broad swathe of SDG targets related to living longer and healthier lives.

Identify the business case and potential business decisions

The key driver for conducting the pilot social capital assessment at Nestlé was to understand the use of the “social capital” concept to drive the sustainability agenda within the business. It is hoped that this will then enable better reporting to stakeholders including investors, civil society and governments.

There is also growing interest from analysts and insurance companies in understanding risks associated with owning shares or insuring the companies. More and more insurers and government agencies are assigning monetary values to social issues and so, Nestlé wanted to start exploring different approaches inside the company.

Nestlé also believed that having better data and insights into their value to society could initiate discussions with partners in the value chain on how to improve the company’s contribution. It could also support more informed policy discourse concerning sustainability issues, and further understand and define the role of governments vis-a-vis companies.

Prioritize social capital issues 

The company started with Nestlé’s 11 salient human rights issues, (those human rights at risk of the most severe negative impact on stakeholders through the company’s activities and business relationships, and therefore the material issues in most need of addressing). The company mapped these issues to human health to understand how they directly or indirectly impact health. (see "Define Impact Pathway" step below).

Nestlé decided to focus on living wages, and more broadly the topic of employment because it is one of the key activities of the business and has a clear impact on health. Although the company has the ambition of including all relevant social issues and human rights in Nestlé’s social capital impact assessment, it also had to be pragmatic and consider where knowledge and methodologies existed for carrying out this work.

Stage 2: Scope

Determine target audience and objectives

Nestlé has identified 11 salient human rights issues in its sustainability strategy. Each of these human rights issues has or will see the development of specific commitments. In order to support those developments; valuing the societal impact of Nestlé related to those human rights is key. The initial model developed focuses on employment and skills (living wage) and health & safety, covering the value chain of one of Nestlé’s brand. The results are intended to be used alongside natural and financial impact assessment to inform resource allocation decisions by senior leadership, as well as at brand level to support decision making in order to create shared value. The results of the study are initially focused on internal audience in order to build awareness and knowledge. It has been additionally shared with selected external stakeholders to support the methodology developments.

Set boundaries 

The scope of the Nestlé pilot assessment was set at the food business unit operating in Spain, as there was particular internal demand for generating this data. This scope enabled the Nestlé food business to test whether non-financial impact valuation could indeed provide different insights and understanding on the business’s portfolio of companies and products. Most importantly at the corporate level, this pilot assessment offered an opportunity to trial the proposed methodology and to generate preliminary results.

The social impact model looked at the value chain from vegetable growing (farmers), intermediate processing (supplier 1) and finally the Nestlé factory (Nestlé). The study timeframe was one year of production. 


Define the impact pathway 

Nestlé mapped impact pathways for both direct and indirect impacts. Direct pathways imply that the specific human rights topic has a direct impact on the health of people (e.g., safety and health, access to water and sanitation, etc.). The indirect pathways indicate that there is a more complex cause effect chain (e.g. forced labour, child labour, working time, living wage, etc.). Some human rights issues might influence the health of people through both pathways.

The process of mapping direct and indirect impacts helped the company determine what human rights issues should be included in the assessment and how other factors influence these issues, and therefore should be considered within the broader model.

The Nestlé Impact Pathway

 

Stage 3: Measure and Value

Select appropriate valuation technique  

Nestlé assessed the relationship between the health (life quality and expectancy) of groups of employees and their work environment and conditions (in particular, their income), which are elements of the social determinants of health according to the World Health Organization. Based on existing statistics linking inequalities of income to inequities of health (Eurostat 2010 and 2013), Nestlé developed a set of characterization factors to value social impact related to employment. Working conditions include income, benefits and work environment are linked to psychological and material conditions. Although income inequalities can be used as a general proxy to employment conditions, the study recognized that factors beyond income including nonfinancial rewards and general conditions are key determinants of social impact. The characterization factors are defined for deciles of income inequality. These are expressed in DALY’s per year or per income unit (e.g. USD), with all data being eventually being converted into a monetary value.

Choose indicators and metrics 

Nestlé’s impact pathways were mapped in the early stages of the project, including potential impacts mediated through wages, skills and health & safety. These issues are usually measured using disparate units that are hard to compare and/or do not match with the definition of impacts as defined in the impact pathways (step 6 of the SCP), but rather stop at measuring only outputs. A unit of measurement was required that could represent impact over a broad range of issues and hence Disability Adjusted Life Years (DALYs) were chosen. This unit sums two sub-issues which are years of life lost and spent disabled, allowing the accounting of not only early deaths but also reduced quality of life.

DALYs and its counterpart Quality-Adjusted Life Years (QALYs) are well-understood units used by governments and UN organizations to guide policy decisions around public health. The World Health Organization (WHO) has, for example, published an extensive study - “Global Burden of Diseases” - of all sources of DALY per country linked to causes as well as extensive research on the social determinants of health, including working conditions and environment. In corporate impact valuation, there is an emerging consensus that DALYs are the most appropriate measure for health and safety, i.e. the impact of accidents and injuries in work-related environment. The use of such metrics is much less common for assessing other societal issues such as child labor or living wages. However, DALYs can provide very relevant insights to those issues if measurements and models can be established.

Using quality of life (expressed in DALYs or QALYs) to evaluate social performance issues other than health and safety provides a more relevant approach than traditional measures of economic contribution such as job creation and related output/outcome indicators. Studies that use a purely economic approach view all employment created as a positive, while neglecting potential human rights issues related to the quality of the job in terms of wages and working conditions, among other factors.

Undertake or commission measurement and valuation  

Based on existing statistics linking inequalities of income to inequities of health (WHO, Eurostat), Nestlé developed a methodology to value social impact related to employment and skills (health and safety was addressed in a more direct impact pathway and is not discussed further here). The working conditions considered include income, control and reward which are linked to psychological and material conditions. The model showed that for selected European countries, one year of equivalent wage for the 1st decile (the 10% the poorest) would be equivalent to 0.1 to 0.2 DALYs, while it drops well below 0.05 DALYs for the 5th decile (median income) and to 0 above the 8th decile. These results show the link between income and health impact of employees, which is totally new in the private sector and in social capital impact valuation. The underlying assumption is that income inequality is a key health determinant, on which the private sector has an important influence.

The baseline definition is critically important in this methodology and leads to the translation of the same results into either positive or negative societal impacts. If it is assumed that people should live to their full potential, this leads to only negative impacts. Nestlé believes that this is an unrealistic baseline - there is no societal expectation that all employees will earn a top-level salary.

There is also an issue with assuming that any wage provided is positive, which would be the case if a minimum income baseline were used. States mandate a minimum wage; though for companies to employ people at this rate still places a burden upon society in terms of income support or increased health care costs, which should be valued as a negative impact at the company level. This has led to the emergence of living wages which may set a more realistic baseline from which to measure impact. To summarize, two alternative baselines that can be defined are:

  • The living wage baseline: this baseline assumes that there is a threshold (the living wage) below which a negative impact occurs and above which a positive one occurs. This baseline seems the most aligned with current trends in public and businesses social policies.
  • The minimum income baseline: this baseline assumes that all income provided above the minimum income in a country brings a positive impact. It is close to the current vision of economic impact assessment studies. However, Nestlé are not in favor of this baseline, for the reasons mentioned above.

Nestlé social impact results expressed using the three different baselines

The figure above highlights the difference in results using three different baselines (full potential, living wage, and minimum wage). A positive value here equates to a negative social impact.

This model therefore highlights the need to measure impact metrics rather than output or outcome, but also raises the question of the choice of the correct baseline against which impacts should be measured and valued. Not all employment is entirely positive for the employees and society. Nestlé proposes that the concept of living wage could be the baseline against which to judge whether a company is generating a positive or negative impact upon society.

Stage 4: Apply and Integrate

Integrate social capital into business processes 

The primary objective of the Nestlé pilot was to test whether an approach for applying widely accepted measures of health could be applied to employment, and strengthen company’s understanding of positive and negative impacts on social capital. The results of the pilot will be used for internal awareness raising activities and to engage with a selected number of external stakeholders.

The company additionally sees an opportunity to apply the methodology to other employment conditions and labor standards. The approach revealed that a full picture of a company’s impact should not be presented using just an “absolute” baseline, but instead in comparison to business as usual (e.g. using current sectors averages) and over time. If data is available on company remuneration policy versus that from alternative employment in a region, the model may be used to compare the impact of the company versus others within the same region. This could help inform both company and government policy decisions.

Contribute to mainstreaming 

Nestlé believes that advancing social impact measurement and valuation requires collaboration to further define and validate methodologies and establish best practices. As such the company has summarized its experience and lessons from the pilot in a publicly available white paper and is working with the WBCSD and others to strengthen the Social & Human Capital Protocol.

A key lesson from the study is on determining the appropriate baselines for the calculation of social impacts. The Nestlé model highlights the question of “which is the correct baseline against which impacts should be measured and valued?”. Not all employment is entirely positive for the individual and society. Nestlé proposes that the living wage could be the baseline against which to judge whether a company is generating a positive or negative impact upon society. This impact will vary depending on the country and the respective social context. The social impact model created by Nestlé leads to higher negative impacts for countries with higher social inequalities, in particular linked to working conditions. The statistics used account partly for contributing factors such as social security and the education system.

Nestlé also compared the results of this work with the results that would have been produced if a more traditional economic valuation methodology was used. Essentially the Nestlé methodology indicates that there is a right to a certain income level and corresponding quality of life. This presumes that the “full” quality of life is achievable at the upper income levels within society, but not the lower income levels, and that this can be modelled. This is the basis on which the calculations were made. By having an income below this certain threshold, it reduces a person’s quality of life, which can be valued in monetary terms.