corporate social responsibility and sustainability chapter 8 the new business imperatives? an...

CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY

CHAPTER 8

The New Business Imperatives? An International Comparison

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

The Economics of Climate Change

Rising AtmosphericGreenhouses

GASCONCENTRATION

( Measured in CO2 equivalent)

•Rising Global Mean Surface Temperatures

(GMT)

Rising Sea Levels

Changes in rainfall variabilityand seasonality

Changing Patterns of NaturalClimate variability

Melting of Ice Sheets, Sea-Iceand Land Glaciers

PHYSICAL CHANGES IN CLIIMATE

RADIACTIVE FORCING

(Change in energy balance)

Land use change

Emissions

Feedbacks including a possible reduction in The efficiency of the land and oceans to absorb Carbon dioxide emissions and increased naturalReleases of methane

Local and global feedbacks i.e.:Changes in the clouds, the water contentOf the atmosphere and the amount ofSunlight reflected by sea ice (albedo)

RisingAtmosphericTemperatures

Rising OceanTemperatures(Lagged)

Impacts onPhysical,

Biological and

Human systems

Source: Stern Review: The Economics of Climate Change (2006:8)

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

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.

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 world’s 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).

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 2003;2004)

Global Reporting Initiative (GRI) 2002 Sustainability Reporting Guidelines

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 2002;2004 ; 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

CSR Responses: Corporations by incorporating CSR in their business

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.

Tomorrow’s Markets

People Innovation Natural Capital Connection Roles and Responsibilities ( Democracy,

accountability, privatisation)

The Range of Environmental Costs

Tier Description

1 Conventional Costs

Includes the costs of direct raw materials, utilities, labour, supplies, capital equipment and relateddepreciation

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 oftenobscured in overhead costs, future decommissioning or remediation costs

3 Contingent

Defined in probabilistic terms and includes fines for breaching environmental requirements, clean upcosts, law suits relating to unsound products

4 Relationship and Image Costs

These costs are difficult to determine and would seldom be separately identified within an accountingsystem. However they could be expected to have some influence on the value of some intangibleassets, such as goodwill, brand-names and so forth. The sum of the costs in Tiers 1 to 4 can be referredto as private costs and they can directly impact on an organization’s reported profit

5 Societal Costs

These costs are often referred to as externalities and represent costs that an organization imposesupon others as a result of their operations but which are typically ignored by the organization. Theycould include environmental damage caused by the organization for which they are not heldaccountable or adverse health effects caused by organization-generated emissions for which theorganization is not held responsible. It is difficult and sometimes controversial to put a cost on theseEffects and with the exception of a few organizations worldwide, most entities ignore these costswhen calculating profits. However, physical measures can be developed, and related KPIs can beused to assess performance.

Source: Van Berkel R. (2003)

KPMG CSR Surveys 1993-2005 (KPMG)

52% (64% including CR information in annual reports

45%35%----

G250: Percent of companies with CR reports

33% (41% including CR information in annual reports)

23%

(28% for 11countries in 1999)

24%17%13%

N100: Percent of companies with CR reports

98%96%98%69%85%Response rate

1, 600+1, 900+1, 100+1, 300810

Total number of companies included

Top 100 in 16¹countries &

Global 250

Top 100 in 19 countries &

Global 250


Global 250

Top 100 in 13 countries


Research

Set (s)

20052002199919961993Survey year


45%35%----



23%

(28% for 11 countries in 1999)

24%17%13%



1, 600+1, 900+1, 100+1, 300810



Global 250


Global 250


Global 250



Research

Set (s)

20052002199919961993Survey year

Notes:(4) Refers to 15 of the OECD countries (Australia, Belgium, Canada, Denmark, Finland, France, Germany,Italy, Japan, Netherlands, Norway, South Africa, Spain, Sweden, UK, US) and also South Africa.


45%35%----



23%

(28% for 11countries in 1999)

24%17%13%



1, 600+1, 900+1, 100+1, 300810



Global 250


Global 250


Global 250



Research

Set (s)

20052002199919961993Survey year


45%35%----



23%

(28% for 11 countries in 1999)

24%17%13%



1, 600+1, 900+1, 100+1, 300810



Global 250


Global 250


Global 250



Research

Set (s)

20052002199919961993Survey year

Notes:(4) Refers to 15 of the OECD countries (Australia, Belgium, Canada, Denmark, Finland, France, Germany,Italy, Japan, Netherlands, Norway, South Africa, Spain, Sweden, UK, US) and also South Africa.

Source: KPMG CSR Surveys 1993-2005. KPMG International Surveys of Corporate Responsibility Reporting 2005, KPMG International

Drivers for Corporate Social Responsibility (KPMG)

11Other

9Improved relationships with governmental authorities

9Cost saving

13Strengthened supplier relations

21Market position (market share improvement)

27Reputation or brand

39Access to capital or increased shareholder value

47Risk management or risk reduction

47Employee motivation

53Innovation and learning

53Ethical considerations

74Economic considerations

%Driver

11Other

9Improved relationships with governmental authorities

9Cost saving

13Strengthened supplier relations

21Market position (market share improvement)

27Reputation or brand

39Access to capital or increased shareholder value

47Risk management or risk reduction

47Employee motivation

53Innovation and learning

53Ethical considerations

74Economic considerations

%Driver

Source: KPMG (2005) International Survey of Corporate Responsibi lity Reporting. KPMG international.

Key Stakeholders According to Corporate Executives

0

10

20

30

40

50

60

70custo

me

rs

Em

plo

ye

es

Oth

er

Inve

sto

rs a

nd

Sh

are

ho

lders

Bo

ard

of

Dir

ecto

rs

Insti

tutio

nal In

vesto

rs

Go

vern

me

nt

and

Re

gula

tors

Ve

ndors

Local com

mun

itie

s

No

n G

overn

men

tal

org

aniz

ation

s

Oth

er

Source: Adapted EIU (2001)

CSR Stakeholder Model Driving Enlightened Shareholder Value

Human Rights

Value chain management

Commitment to sustainability

Codes of conduct

Corporate Governance

SHAREHOLDERS/ VALUE CHAIN

ECONOMIC PARTNERS

Human Rights



Codes of conduct

Corporate governance


ECONOMIC PARTNERS

Employee development

Employee conditions

Health and Safety

Employee rights

EMPLOYEES


Employee conditions

Health and Safety

Employee rights

EMPLOYEES

Community investment

Community involvement

COMMUNITY

SOCIAL RESPONSIBIL ITY

Public Reporting

Cultural considerations



COMMUNITY

Waste

Resource use

Energy

Biodiversity

Product life cycle and design

PHYSICAL ENVIRONMENT

Waste

Resource use

Energy

Biodiversity

Product life cycle and designPHYSICAL ENVIRONMENT

ECONOMIC PARTNERS

ENVIRONMENTALRESPONSIBILITY

SOCIALRESPONSIBILITY

WORKPLACE

Human Rights



Codes of conduct



ECONOMIC PARTNERS

Human Rights



Codes of conduct



ECONOMIC PARTNERS


Employee conditions

Health and Safety

Employee rights

EMPLOYEES


Employee conditions

Health and Safety

Employee rights

EMPLOYEES



COMMUNITY

SOCIAL RESPONSIBIL ITY

Public Reporting




COMMUNITY

Waste

Resource use

Energy

Biodiversity



Waste

Resource use

Energy

Biodiversity


ECONOMIC PARTNERS



WORKPLACE

Source: Mays S. (2003). Corporate Sustainability _ An Investor Perspective.The Mays Report. Department of Environment and Heritage Commonwealth of Australia. p11-16.

CSR Stakeholder Model Driving Enlightened Shareholder Value

EnlightenedShareholder Value

Reducedregulatory intervention

Enhanced reputation andstronger brand

Allianceswith business

partners

Betterstakeholders

relations

Minimize risksoperations and

M&ACost savings

New businessopportunities

Customer satisfaction

loyalty and highersales

Access to andlower cost of capital

Attractive employer

Source: Mays ( 2003: 11 )

Human Rights



Codes of conduct



ECONOMIC PARTNERS

Human Rights



Codes of conduct



ECONOMIC PARTNERS


Employee conditions

Health and Safety

Employee rights

EMPLOYEES


Employee conditions

Health and Safety

Employee rights

EMPLOYEES



COMMUNITY

SOCIAL RESPONSIBILITY

Public Reporting




COMMUNITY

Waste

Resource use

Energy

Biodiversity



Waste

Resource use

Energy

Biodiversity


ECONOMIC PARTNERS



WORKPLACE

EnlightenedShareholder Value

Reducedregulatory intervention

Enhanced reputation andstronger brand

Allianceswith business

partners

Betterstakeholders

relations

Minimize risksoperations and

M&ACost savings

New businessopportunities

Customer satisfaction

loyalty and highersales

Access to andlower cost of capital

Attractive employer

Source: Mays ( 2003: 11 )

Human Rights



Codes of conduct



ECONOMIC PARTNERS

Human Rights



Codes of conduct



ECONOMIC PARTNERS


Employee conditions

Health and Safety

Employee rights

EMPLOYEES


Employee conditions

Health and Safety

Employee rights

EMPLOYEES



COMMUNITY

SOCIAL RESPONSIBILITY

Public Reporting




COMMUNITY

Waste

Resource use

Energy

Biodiversity



Waste

Resource use

Energy

Biodiversity


ECONOMIC PARTNERS



WORKPLACE

Source: Mays S. (2003). Corporate Sustainability _ An Investor Perspective.The Mays Report. Department of Environment and Heritage Commonwealth of Australia. p 11-16.

Legal and Moral Liability are Converging

Legal Liability Moral

Compliance Driven

Accountability Driven

Source: SustainAbility 2004

Goodwill/ badwillMoney

AssociationOwnership

Compliance to spiritCompliance to letter

Time- unlimitedTime- limited

Court of public opinionCourt of law

Emerging (Moral)Existing (Legal)







Source: SustainAbility 2004.

Source: SustainAbility 2004:4


Compliance Driven

















Compliance Driven
















Source: SustainAbility 2004:4

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?

Fund Trustees Fiduciary Duties

DUTY TO ACT FORA PROPER CAUSE

DUTY TO ACTPRUDENTLY

Carry out the items Of the trust

Act in the best interestsof the beneficiaries as

a whole

KEY FIDUCIARY DUTIES

Act reasonablyApply special

Knowledge and skill

Act with care, skill andDiligence regarding

Someone else’s investment

Consider the suitability Of investments

Consider relevantconsiderations

Australia (FiduciaryDuties set out in case

Law and statute)

DiversityTake proper advice

Canada and UK(fiduciary duties setOut in case law andstatute

US (fiduciary duties case law and federalAnd state statute

MODERN PRUDENTINVESTOR RULE

SOLE PURPOSE LAST

Source: Freshfields Bruckhaus Deringer (2005:15); “Duties Diagram 1-Pensions” Geneva: UNEPFI.

Institutional Investor Voting 2000-2003

0 10 20 30 40 50

2000 2001 2002 2003

Public health –AIDS, workplace coverage

Banking/ insurance

Treatment of animals

Public health – product safety

Nuclear power

CSR/ CERES reporting

Humanitarian – debt relief to poor countries

Human rights

Arctic drilling

Social community impact

Charitable giving

Public health – tobacco cigarettes

Militarism and violence

Genetically modified organisms

Climate change/ renewable energy

Public health- affordable medicines

Pollution/ Recycling

Political influence

Equal employment

Global labour standards

Public health –AIDS, workplace coverage

Banking/ insurance

Treatment of animals

Public health – product safety

Nuclear power

CSR/ CERES reporting

Humanitarian – debt relief to poor countries

Human rights

Arctic drilling

Social community impact

Charitable giving

Public health – tobacco cigarettes

Militarism and violence

Genetically modified organisms

Climate change/ renewable energy

Public health- affordable medicines

Pollution/ Recycling

Political influence

Equal employment

Global labour standards

Source: Monks, Miller and Cook (2004:322).

Full Source: Monks, R.; Miller, A. and Cook, J.(2004).

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 Association’s (EIA 2002) figures SRI in Australia has grown dramatically rising to A$13.9 billion in 2002, an increase of 31% over the previous year while managed funds as a whole declined by 0.1%

Proportion of UK Funds Taking SRI Concerns Into Account to Differing Degrees

There is no statement saying environmental, social and ethical considerations will be taken into account.

0

The Fund delegates the decision to the discretion of the fund manager, with no guidance.

1

The Fund will pursue a policy of engagement, but not primarily or necessary through the fund manager.

2

The Fund manager is requested to take account of financial implications of environmental, social and ethical considerations.

3

The Fund manager is requested to take account of financial implications and trustees associate good environmental, social and ethical performance with positive financial implications.

4

The Fund manager is empowered/ required to take account of environmental, social and ethical considerations as long as there are no negative financial consequences.

5

There is no statement saying environmental, social and ethical considerations will be taken into account.

0

The Fund delegates the decision to the discretion of the fund manager, with no guidance.

1

The Fund will pursue a policy of engagement, but not primarily or necessary through the fund manager.

2

The Fund manager is requested to take account of financial implications of environmental, social and ethical considerations.

3

The Fund manager is requested to take account of financial implications and trustees associate good environmental, social and ethical performance with positive financial implications.

4

The Fund manager is empowered/ required to take account of environmental, social and ethical considerations as long as there are no negative financial consequences.

5

40%

22%

12%

9%

30%

33%

10%

28%

8% 8%

0%

25%

50%

75%

100%

Number Capital value

Per

cen

t40%

22%

12%

9%

30%

33%

10%

28%

8% 8%

0%

25%

50%

75%

100%

Number Capital value

Per

cen

t

Source: Mathieu, E. (2000),UKSIF .

Growth of SRI Investment Assets in Australia 2000- 2006

325

18182175 2355

4500

7670

11 985

0

2000

4000

6000

8000

10000

12000

2000 2001 2002 2003 2004 2005 2006

A$

m

Source: EIA (2006) Sustainable Responsible Investment in Australia, Sydney: Ethical Investment AssociationSource: Ethical Investment Association (EIA) 2006 SRI Benchmarking Survey

The Impact of Socially Responsible Investment Upon CSR

USUS Socially Responsible Investing (SRI), according to the biennial report of The Social Investment Forum, of the overall investment through professional managers amounting to US$19.9 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

Growth of SRI Investments in the United States 1995-2005

$0

$500

$1,000

$1,500

$2,000

$2,500

SocialScreening only

ShareholderAdvocacy only

Screening andShareholderAdvocacy

CommunityInvesting

Total

1995 1997 1999 2001 2003 2005

Billions

Source: 2005 Report on Socially Responsible Investing Trends in the US.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.

Screens most commonly used in Screened Portfolios in the US (2005)

0 25 50 75 100 125 150 175

Other

Animal Testing

Human Rights

Pornography

Faith-Based

Equal Employment

Product/Services

Labour Relations

Environment

Community Relations

Defense/Weapons

Gambling

Alcohol

Tobacco

Total Net Assets ($ Billions)

Source: Social Investment Forum Foundation 2006

US Shareholder Actions Planned for 2003-2004 Including Key Resolutions

Proposed Withdrawn Voted On 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.

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

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

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

Corporate Strategies to Deliver Value to Society

Comply

Obey the law

Control

Communityinvestment

Create newvalue

Collaborate

Costs, risks,liabilities,Negative impacts

StrategicPhilanthropy,Social venturecapital,Employee volunteering

New :Products & services,Processes,Alliances,Markets, andBusinessModels that Meet societal needs

To solveComplex

social&

environmentalissues

Shareholder added value

So

ciet

al

ad

ded

va

lue

Sustai

nable

added

val

ue

Long term

gro

wth

Source: Nelson, 2004.Source: Nelson J. (2004).

Conclusions

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

corporate social responsibility and sustainability chapter 8 the new business imperatives? an...

Documents

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impact of csr

sincerity of corporate

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