Which social numbers really matter to investors?

Blue-chip companies spend big bucks on social programs. Apple, for example, recently increased the budget for its diversity program alone from $100 mn to $200 mn, while Mercedes Group spent €97 mn ($104 mn) on training in 2023, up from €93 mn the year before.

The areas normally included under the S pillar of ESG are quite broad and people-oriented but can be divided into company internal and external projects.

Internal

• Cyber-security
• Diversity
• Ethics
• Health & safety
• Human rights
• Innovation
• Recruiting
• Supply chains
• Training: sales, technical

External

• Communities
• Customers
• Marketing, communications
• Products
• R&D

But while all of these areas have some type of financial impact, which ones are likely to have the biggest financial impact on companies?

Innovation impacts revenues & margins

In a fast-moving world, ideas for new products or to streamline company processes can significantly impact future revenues, such as in the pharmaceutical and technology industries. Well-established metrics, such as the Innovation Rate and Innovation Ratio, confirm the strong connection between innovation and revenues.

But don’t confuse innovation processes with research and development: innovation means extracting ideas and suggestions, typically from employees, while R&D involves transforming these ideas into sellable products. And neither is cheap: some companies spend up to 5 percent of their total costs on innovation. A broader study reveals that companies typically spend 3 percent to 4 percent on innovation. Yet a lot of this probably covers some R&D as well.

Cyber is about employee behavior

Global losses due to cyber-crime are estimated to have topped $1 tn in 2022, which equates to 1 percent of global GDP, according to data compiled by McAfee. More than a third of these losses were linked to careless or maleficent employee behavior, which could be reduced with improved employee training, awareness campaigns and tighter processes.

Training delivers the highest ROI

Among all social processes, staff training takes the top spot in terms of its impact on revenues and operating expenses. It can easily change the way people think and act, which can substantially move the needle on revenues and margins. The basic rule is that the higher the value of products and processes an employee is handling, the greater the positive impact of training.

For example, training maintenance engineers can reduce the downtime of aircraft because it means they can solve problems quicker and more effectively. An hour of operating a Boeing 777 can cost $28,500, according to trade group Airlines for America. If you factor in financing costs and rebooking passengers due to major delays, costs per hour could be higher.

Maintenance training typically costs $10,000 or less so the return on investment of maintenance training can easily reach thousands of percent within months. Training alone can potentially save a single airline millions per year.

Marketing to communities

Community programs can range from sponsoring Christmas parties to funding childcare centers. Large Brazilian banks, such as Bradesco, spend millions annually on training customers on the responsible use of micro-credits. As a result, Bradesco has seen annual growth rates of 50 percent or more in credit volumes in underbanked regions of Brazil.

Oil and gas companies invest millions in communities to create goodwill when they are up for being granted licenses to drill or build refineries in respective regions, thus impacting their revenues, margins and company value.

In conclusion, the breadth of investments in social areas is substantial, and only a few are touched upon here. But investors that do their homework in translating social projects into financial impacts can unearth real value and resilience.