The growing importance of CSR and SRI

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AK Roy
Corporate social responsibility (CSR) is an emerging, yet poorly defined, process used by some as a fashion statement through glossy reports and websites, and by others as a potential framework for demonstrating a more responsible approach to doing business.
Over the past two decades, the pressure upon business to become accountable and perform a social and environmental role has increased dramatically. Incidents such as the Union Carbide accident in Bhopal, India, in 1984 and the Chernobyl nuclear power station disaster in Ukraine in 1986 helped put corporate responsibility for environmental hazards on the international agenda. Western industrialised governments responded to such incidents and established legal and regulatory frameworks for corporate accountability.
Globalisation has had an extraordinary impact on its emergence. Throughout the late 1980s and 1990s, the new knowledge-based economy generated millions of new jobs and a rash of innovative products and services for Western consumers. It has exposed a wide range of labour, human rights and environmental abuses and created a dysfunction between meeting the people's needs, protecting planetary resources and enhancing corporate profits - the perfect trigger for the anti-globalisation demonstrations of 1999, 2000 and 2001. The result has been that even companies in sectors with high levels of environmental risk have introduced ways to reform their business by looking and listening.
Globalisation has gone hand-in-hand with business short-termism and a total focus on maximising shareholder value - a strong emphasis on immediate results and a loss of faith in long-term strategic management.
CSR (or sustainable development, which is a closely allied concept) is generally regarded as the opposite of short-termism. It is argued that sustainable development looks at the need of future generations rather than a focus on short-term delivery with scant regard for the consequences. It appears to run contrary to established market forces and modern business practices. However, there is a growing business imperative to embrace social responsibility, and it is emerging through consequences to the bottom line.
Whether or not organisations are enthusiastic about embracing greater social and environmental accountability, there seems to be a growing business imperative to do so. This can be defined in four categories of commercial penalties and incentives:
Socially responsible investment (SRI) and shareholder targeting are developments that are beginning to receive serious attention from financial analysts and institutional investors. Banks, term assurers and asset managers are screening their shareholdings in favour of companies that demonstrate commitment to social and environmental programmes, and against those that engage in activities deemed detrimental to society and the environment. With institutional investors potentially deterred by the `hassle factor' in picking non-SRI stocks, a company's ability to conform to sustainable development models will potentially have share price implications. The growth of ratings agencies is likely to mean that companies will find their financial position rated on CSR issues as well as conventional criteria, whether they like it or not. It is likely that in the future regulators will make companies hold capital against such risks.
SRI is an investment strategy that takes into account a company's ethical, social and environmental performance as well as its financial performance. SRI has supplanted `ethical investment' as the criterion for judging responsible business, and has widened to include environmental and social issues. A range of vetted products, including unit trusts and pensions, are now on offer from most large banks and other companies.
Today, SRI is a dynamic and rapidly expanding sector of financial services in North America, parts of Europe and Australia. It is estimated to be worth more than $2 trillion in the United States and around £25 billion in the UK, the largest market in Europe. The Dow Jones Sustainability Group Index has outperformed the Dow Jones Index by 36 per cent over the past five years. In the UK, changes to the Pensions Act now require pension funds to declare how far they take social, environmental and ethical considerations into account when choosing stocks for investment, and other European countries are considering introducing similar legislation.
The initial emphasis of SRI funds was on negative screening - specifically excluding companies engaged in particular types of activity. However, negative screening has partly given the way to screening on the basis of companies' positive activities and looking for best practice in what were once seen as controversial industries. Many fund managers now look to invest in companies that make a positive contribution to the economy and to the society. A survey of the 23 top European ethical and green unit trusts' adoption criteria has revealed that screening under positive measures is rapidly becoming as significant as negative screening.
Strict screening can exclude whole sectors, such as chemicals, from investment, but some new funds are adopting a `best of sector' or `light green' approach, and investing in (mostly larger) companies shunned by traditional ethical funds. This has enabled companies in the energy, automotive and agrochemical sectors to warrant inclusion of some funds. For example, the car manufacturer Volkswagen, the chemicals company BASF and the mining company Rio Tinto are included as sector leaders in the Dow Jones Sustainability Index.
Harnessing the importance of SRI through shareholder activism is now considered by some environmental groups as a much more significant tool than consumer boycotts. In 1999 concerned investors in the United States introduced more than 200 resolutions on a wide range of issues relating to environmental health and corporate governance matters. In one case, Home Depot, a large lumber and hardware store, announced it would stop selling forest products from environmentally sensitive areas and would give preference to timber certified as sustainably produced, just three months after 12 per cent of its shareholders asked the company to stop selling wood from old-growth forests.
Organisations like Friends of the Earth and the Amnesty International are now consulted by fund managers, partly to clarify screening for ethical funds, and also to ensure that future pressure on companies' behaviour is adequately appreciated in financial-led investment decisions. This has developed particularly since the response in Europe to genetically modified (GM) products, which led to the near collapse of Monsanto and its subsequent acquisition by Pharmacia Upjohn. Monsanto had previously been strongly commended on Wall Street because of its rapid expansion in the United States. However, NGO (non-government organisation) pressure in Europe became so intense that it began to affect the US share price. Campaigners targeted all stakeholders. This led the Deutsche Asset Management to recommend that institutional investors should sell Monsanto shares quickly. The resulting drop in share price made the company an easy prey to takeover at the end of 1999. In spite of being one of the most innovative companies in the agrochemical and biotechnology sectors, the Monsanto brand never recovered from the legacy of this attack.
As demands for environmental and social responsibility in business have grown, they have also become more mature. Concerned consumers look at the corporate face behind the brand, and this influences purchasing decisions. At the same time, there is public acceptance that not every company can be the perfect eco-friendly business. Society needs products like oil and chemicals -but there is a demand for companies in these sectors to reduce their negative environmental and social `footprint'. Consequently, there is an emerging emphasis on CSR best practice and leadership within sectors of industry, paving the way for individual companies to gain competitive advantages.
The costs of damage to reputation-loss of existing investment and innovation in marketing, difficulty with recruitment and staff retention, advertising that is undercut by public perception - merit serious consideration. The need to safeguard reputation is implied in the substantial budgets dedicated to marketing, compliance, recruitment, public affairs and communications. As society becomes less tolerant of companies that do not conform to social and environmental standards, the risks to reputation are much greater. Even more importantly, however, `doing the right thing' by adopting and integrating a values system into an organisation actually does generate financial value. People want to bring their own values to work, as employees, and to have relationships with companies - as customers, suppliers or investors - that relate to their own behaviour, expectations and methods of working.
CSR is concerned with many aspects of a company's impact, from sourcing to service delivery or product disposal, and can affect a host of cost-based as well as reputation aspects of a business. Human capital has become more important than physical capital, and so the threat to important relationships has become critical. Concerned investors will apply pressure to those that are not managing such risks and reward those that are.
The proliferation of financial and regulatory instruments in support of sustainable development is starting to engineer market forces in some countries to the extent that companies need to take a serious look at adoption. Failure to do so risks criticism and a detrimental impact on reputation. A perception of moving slowly in response to new societal and consumer trends and demands can now be damaging in the financial markets.
The author is a district and sessions judge.
chairman_mwbdhaka@yahoo.com