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 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 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).

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.

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

The Range of Environmental Costs TierDescription 1 Conventional Costs Includes the costs of direct raw materials, utilities, labour, supplies, capital equipment and related depreciation 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 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 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 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)

KPMG CSR Surveys (KPMG) Source: KPMG CSR Surveys KPMG International Surveys of Corporate Responsibility Reporting 2005, KPMG International

Drivers for Corporate Social Responsibility (KPMG)

Key Stakeholders According to Corporate Executives Source: Adapted EIU (2001)

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.

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

Legal and Moral Liability are Converging

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

Institutional Investor Voting 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 Australia The Ethical Investment Associations (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 Source: Mathieu, E. (2000),UKSIF.

Growth of SRI Investment Assets in Australia Source: Ethical Investment Association (EIA) 2006 SRI Benchmarking Survey

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 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 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)

US Shareholder Actions Planned for Including Key Resolutions ProposedWithdrawnVoted OnAverage Vote % Type of Proposal Independent board chair Limit consulting by auditors Increase board independence Majority vote to elect directors Cumulative voting Restrict executive compensation Expense option value at time of grant Vote on golden parachutes Cap executive pay Award performance-based stock options Poison pill Declassify board Eliminate supermajority vote Sell the company/maximise value Other TOTAL Source: SIF (2006) 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 Source: Nelson J. (2004).

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