CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY

1
CORPORATE SOCIAL RESPONSIBILITY AND
SUSTAINABILITY
CHAPTER 8
The New Business Imperatives? An International
Comparison
2
Outline

• The overwhelming movement presently driving
  towards corporate social responsibility
• Why bridging the great divide between corporate
  governance and corporate social and environmental
  responsibility (CSR) is the next great challenge
  for business
• The responsibilities of business corporations to
  shareholders, stakeholders and government
• The legitimacy of corporate social responsibility
  
• The increasing sophistication of corporate
  reporting of social and environmental matters

3
The Economics of Climate Change
Source Stern Review The Economics of Climate
Change (20068)
4
Defining Social and Environmental Sustainability

• Definitions of CSR and sustainability range from
  the basic to the most demanding
• from a specific reference to a number of
  necessary activities to demonstrate
  responsibility
• to a general call for a comprehensive, integrated
  and committed pursuit of social and environmental
  sustainability

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The Significance and Impact of CSR

• The narrow focus of corporate governance
  exclusively upon the internal control of the firm
  and simply complying with regulation is no longer
  tenable
• Corporate objectives described as wealth
  generating too frequently have resulted in the
  loss of well being to communities and the ecology
• Trend towards monitoring not just the financial
  health of the company, but the social and
  environmental impact of the company
• CSR is becoming established in many corporations
  as a critical element of strategic direction, one
  of the main drivers of business development, as
  well as an essential component of risk
  management.

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CSR Responses Investors

• Capital Report 2006, a guide to the investment
  community on how to incorporate environmental,
  social and governance issues into their
  investment decision-making and ownership
  processes
• The third Carbon Disclosure Project meeting,
  (investors representing 21 trillion dollars in
  assets) collectively requesting the worlds
  largest corporations to disclose information on
  greenhouse gas emissions and their approach to
  the management of carbon risks (UNEP FI 2005).
• Banks representing more than 80 of the global
  project finance market, have adopted the Equator
  Principles, a set of voluntary principles
  outlining environmental, social and human rights
  disciplines associated with project finance above
  50 million (Freshfields Bruckhaus Deringer
  2005a).

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CSR Responses International Organizations by
encouraging CSR

• The International Finance Corporation (IFC), the
  private sector investment arm of the World Bank
  originally developed the CSR principles
• The OECD Guidelines for the operations of
  multinational corporations (OECD 2000)
• The European Union Guidelines for the business
  contribution to sustainable development (European
  Commission 20032004)
• Global Reporting Initiative (GRI) 2002
  Sustainability Reporting Guidelines

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CSR Responses Corporations by incorporating CSR
in their business

• The World Business Council for Sustainable
  Development, and the World Economic Forum Global
  Corporate Citizenship Initiative has projected
  corporate responsibility in the minds of the
  international business elite (WBCSD 20022004
  WEF 2005)
• Leading corporations signed up for the Global
  Reporting Initiative and more than 2,000
  international corporations now publish reports on
  their CSR performance
• Business Leaders Initiative on Human Rights
• The Conference Board
• Business in the Community
• Business for Social Responsibility
• The new indices including the Dow Jones
  Sustainability Index and FTSE4Good, are seeking
  to reinforce the commitment to CSR

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The Integrity of CSR

• Questions are often addressed to the sincerity of
  corporate social and environmental initiatives
  the legality of company directors engaging in
  these concerns equally, the legality of the
  trustees of investment institutions attending to
  these interests and the verifiability of CSR
  activities and outcomes
• There is a place in the market economy for
  responsible firms. But there is also a large
  place for their less responsible competitors.
  ..Precisely because CSR is voluntary and
  market-driven, companies will engage in CSR only
  to the extent that it makes business sense for
  them to do
• Civil regulation has proven capable of forcing
  some companies to internalize some of the
  negative externalities associated with some of
  their economic activities.

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Tomorrows Markets

• People
• Innovation
• Natural Capital
• Connection
• Roles and Responsibilities ( Democracy,
  accountability, privatisation)

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The Range of Environmental Costs
Tier Description
1 Conventional Costs 1 Conventional Costs
Includes the costs of direct raw materials, utilities, labour, supplies, capital equipment and related depreciation
2 Hidden Costs 2 Hidden Costs
Includes the up front environmental costs, such as search costs relating to environmentally conscious suppliers, initial design costs of environmentally preferable products, regulatory costs which are often obscured in overhead costs, future decommissioning or remediation costs
3 Contingent 3 Contingent
Defined in probabilistic terms and includes fines for breaching environmental requirements, clean up costs, law suits relating to unsound products
4 Relationship and Image Costs 4 Relationship and Image Costs
These costs are difficult to determine and would seldom be separately identified within an accounting system. However they could be expected to have some influence on the value of some intangible assets, such as goodwill, brand-names and so forth. The sum of the costs in Tiers 1 to 4 can be referred to as private costs and they can directly impact on an organizations reported profit
5 Societal Costs 5 Societal Costs
These costs are often referred to as externalities and represent costs that an organization imposes upon others as a result of their operations but which are typically ignored by the organization. They could include environmental damage caused by the organization for which they are not held accountable or adverse health effects caused by organization-generated emissions for which the organization is not held responsible. It is difficult and sometimes controversial to put a cost on these Effects and with the exception of a few organizations worldwide, most entities ignore these costs when calculating profits. However, physical measures can be developed, and related KPIs can be used to assess performance.
Source Van Berkel R. (2003)
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KPMG CSR Surveys 1993-2005 (KPMG)
Source KPMG CSR Surveys 1993-2005. KPMG
International Surveys of Corporate Responsibility
Reporting 2005, KPMG International
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Drivers for Corporate Social Responsibility (KPMG)
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Key Stakeholders According to Corporate
Executives
Source Adapted EIU (2001)
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CSR Stakeholder Model Driving Enlightened
Shareholder Value
Source Mays S. (2003). Corporate Sustainability
_ An Investor Perspective. The Mays Report.
Department of Environment and Heritage
Commonwealth of Australia. p11-16.
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CSR Stakeholder Model Driving Enlightened
Shareholder Value
Source Mays S. (2003). Corporate Sustainability
_ An Investor Perspective. The Mays Report.
Department of Environment and Heritage
Commonwealth of Australia. p 11-16.
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Legal and Moral Liability are Converging
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The Legitimacy of CSR from a Governance
Perspective

• Corporations enlightened shareholder value?
• The duty to promote success of the company
• Investment Institutions Effective Portfolio
  management The duty to address ESG issues?

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Fund Trustees Fiduciary Duties
Source Freshfields Bruckhaus Deringer (200515)
Duties Diagram 1-Pensions Geneva UNEPFI.
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Institutional Investor Voting 2000-2003
Full Source Monks, R. Miller, A. and Cook,
J.(2004).
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The Impact of Socially Responsible Investment
Upon CSR

• UK
• Socially responsible investment (SRI) according
  to the UK Social Investment Forum (2001)
  combines investors financial objectives with
  their commitment to social concerns such as
  social justice, economic development, peace or a
  healthy environment.
• France
• AFG-ASFFI the association of professional fund
  managers, requests that corporate boards consider
  the concept of sustainable development, social
  responsibility and the environment. Also, French
  corporate law was amended to require listed
  companies to disclose in their annual reports how
  they take the social and environmental
  consequences of their activities into account in
  May 2001.
• Australia
• The Ethical Investment Associations (EIA 2002)
  figures SRI in Australia has grown dramatically
  rising to A13.9 billion in 2002, an increase of
  31 over the previous year while managed funds as
  a whole declined by 0.1

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Proportion of UK Funds Taking SRI Concerns Into
Account to Differing Degrees
Source Mathieu, E. (2000),UKSIF .
23
Growth of SRI Investment Assets in Australia
2000- 2006
Source Ethical Investment Association (EIA) 2006
SRI Benchmarking Survey
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The Impact of Socially Responsible Investment
Upon CSR

• US
• US Socially Responsible Investing (SRI),
  according to the biennial report of The Social
  Investment Forum, of the overall investment
  through professional managers amounting to
  US19.9 trillion in December 2000, over 11 or
  2.3 trillion dollars is invested in a socially
  responsible manner.
• The Social Investment Forum (SIF) breaks down
  these figures into 1.4 trillion employing
  screening only on social or environmental
  criteria 601 billion in screening and
  shareholder advocacy funds 305 billion in
  shareholder advocacy only funds and 8 billion
  in community investment funds

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Growth of SRI Investments in the United States
1995-2005
Source SIF (2006) 2005 Report on Socially
Responsible Investing Trends in United States,10
year Review. Washington DC Social Investment
Forum. Fig 1.2 p. 2.
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Screens most commonly used in Screened Portfolios
in the US (2005)
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US Shareholder Actions Planned for 2003-2004
Including Key Resolutions
Proposed Proposed Withdrawn Withdrawn Voted On Voted On Average Vote Average Vote
Type of Proposal 2003 2004 2003 2004 2003 2004 2003 2004
Independent board chair 42 59 9 8 30 36 26.10 28.30
Limit consulting by auditors 29 35 7 16 19 12 16.10 14.20
Increase board independence 8 14 1 0 5 13 27.50 26.10
Majority vote to elect directors - 14 - 2 12 - 11.80
Cumulative voting 21 24 1 1 20 21 34.10 34.90
Restrict executive compensation 64 158 2 28 36 79 15.40 11.50
Expense option value at time of grant 115 50 27 11 69 34 47.40 53.30
Vote on golden parachutes 21 36 2 8 18 26 57.00 51.80
Cap executive pay - 15 - 3 - 7 - 7.70
Award performance-based stock options 92 8 24 1 59 5 16.10 40.20
Poison pill 107 100 1 3 84 51 60.00 61.10
Declassify board 63 59 9 11 48 39 63.40 71.60
Eliminate supermajority vote 10 11 1 1 9 7 60.50 75.80
Sell the company/maximise value 4 13 0 1 2 4 3.20 25.10
Other 215 251 38 84 75 99 - -
TOTAL 791 847 122 178 474 445
Source SIF (2006). 2005 Report on Socially
Responsible Investing Trends in the United
States- 10 Year Review, Washington DC SIF.
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Social and Environmental Investment Indices

• The Calvert Social Index
• The KLD Broad Market Social Index (BMS Index)
• The Domino 400 Social Index (DSI)
• The Nasdaq Social Index
• The Large Cap Social Index (LCSI)
• FTSE4Good
• Dow Jones Sustainability Indexes (DJSI)
• The Ethibel Sustainability Index (ESI)
• ECP Ethical Global Return

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Corporate Reporting of CSR

• The Global Reporting Initiative (GRI) Principles
  aim to
• Provide a balanced and reasonable representation
  of an organization's sustainability performance
• Facilitate comparability
• Address issues of concern to stakeholders
• The GRI reporting principles
• Transparency
• Inclusiveness
• Auditability
• Completeness
• Relevance
• Sustainability Context
• Accuracy
• Neutrality
• Comparability
• Clarity

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Future Developments The Redesign of the
Corporation

• The effective integration of corporate social and
  environmental responsibilities could potentially
  release greater value for both shareholders and
  wider stakeholders

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Corporate Strategies to Deliver Value to Society
Source Nelson J. (2004).
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Conclusions

• Only a fundamental redesign of corporate forms,
  objectives and value measures can fully meet the
  realities of responsibility.