July 30, 2012
The business case for CSR is complex, yet, in a more sophisticated, inter-connected, post global-recession world, the business case is stronger than ever before.
Moreover, climate change, poverty, social disenfranchisement and inequality must be addressed in a meaningful manner that is both qualitative and quantitative. With economic uncertainty and weakness, governments are reluctant to put greater burdens on business, as economic growth is essential if we are to create a fairer, more idealized world. And, as expressed frequently by CEOs and CFOs, creating new revenue streams, cost efficiency, corporate value and the mitigation of risk are seen as main priorities for business. And yet, here lies the business case for CSR.
Firstly, businesses who do not manage their impact on the environment and the impact on the societies within which they operate will begin to hand their business over to competitors who are taking a lead in understanding what CSR can bring to their business. This view is supported by the Carbon Disclosure Project – Supply Chain Report 2012, which states: “Suppliers that do not measure, quantify, and manage their greenhouse-gas emissions will soon see their business move to competitors that can provide better information and clearer evidence of change.” Indeed, the evidence supporting this statement, from the CDP 2012 report, states of respondents to their survey that 39 percent will soon begin deselecting suppliers that do not adopt such measures (compared to 17 percent in 2009 and 23 percent in 2010).
Understanding CSR and the wider workings of sustainability delivers competitive advantage. Yet, to reap the rewards, there has to be a change in attitudes and behavior. And, whilst being simply the application of common sense, it needs leadership. Essentially, business leadership sets the tone for the company, being based on what the CEO stands for, what their ethics and values are; to inspire, engage and motivate every employee, and all stakeholders in that business: to create balance, and bridge the duality of making money whilst addressing environmental and social concerns.
However, leadership takes many forms. The CEO sets the tone, but leadership can also include individual employees who, for example, represent the company’s values and build the advocacy for the company to exist, as well as inspire other employees, while assisting the company towards its overall leadership ambitions.
Responsible leadership ensures CSR issues are factored into the core business model, taking action on key issues: people or planet and empowering future leaders, as well as leading the public discussion on responsible business issues.
Building Cost Efficiency
Additionally, responsible leadership imbued in the precepts of CSR protects the business against the vulnerability of employee instability. For example: unequal and disengaged employees are more vulnerable to concerns related to job loss or age concerns so fostering discontent among those who are excluded from the benefits of the social and economic progress enjoyed by some. Thus, gauging the impact of income inequality in the business could be expanded to measuring how excessive inequality could be expected to have a negative affect on productivity. Therefore, CSR bridges the gaps, creating cohesion, and supports sustainable competitiveness and productivity because it requires focus on economic performance, employee development and cohesion.
This further underpins the case for embedded sustainability, ensuring that goods, services, labor and financial capital are allocated in the most productive manner, which delivers technological readiness, business sophistication, and innovation, to represent both short and long-term drivers for competitiveness. Furthermore, with evidence suggesting CSR attracts best talent, there is a natural progression toward evolving products and services reducing customer impact since well educated workers are able to adapt rapidly to their changing environment and the evolving needs of the production system.
A Positive Halo for the Brand
Therefore, CSR creates a positive halo for the brand amongst staff, developing the right experience, chemistry and attitudes for the staff to be proud, while creating the right spirit with which customers are engaged and attracting the new customers for both the new range of eco-efficient products and services, as well as attracting new customers away from competitors who still run on the corrosive out-of-date operations of yesterday.
In addition, the interdependencies of innovation, engagement and learning are considered a major aspect to retaining employees (saving money) and improving their productivity (generating money). And the increase in contribution and satisfaction elicits improvement to both the bottom line as well as the top line. Indeed, this outcome, shown to have occurred during the “Great Recession,” suggests companies are becoming more sophisticated in their approach to being a responsible business, with more value realized from, and for, employees.
Create New Income Streams
For example, innovation is driven by highly motivated and engaged organizations in the search for the creation of new revenue streams and the attraction of new customers for the shifting markets towards more sustainability orientated products and services. This has been borne out by GE, who first launched its Ecomagination drive back in 2005. Ecomagination very quickly generated 6.5 percent of company sales, and by 2010 was generating approximately 10 percent of GE revenue – representing $18 billion.
But CSR goes further towards creating company value, through traversing risk management and the understanding of corporate vulnerability. For example: goodwill and enhanced reputations can reduce risk of boycotts and minimize negative press. And, as the internet has improved access to information, it also has created many more corporate touch points with negative “events” being communicated to millions of people in a matter of hours, and consequently facilitated public pressures on organizations such as exposure to previous unknown supply chain vulnerabilities such as corruption, child labour or conflict minerals. First by identifying risk better and by then reducing exposure to risk, companies protect against financial shock and create awareness of cost savings. Basically, positive community relations help to decrease exposure to risk and conflict and protect a company’s social contract, i.e. its license to operate.
Measuring the Risk
Ultimately, CSR traversing Risk Management is an opportunity to understand the vulnerabilities in the company’s value chain better, protect its brand and organization in a wide ranging, over-arching long-term manner, forcing the organization to understand and deal with the multiple environmental and social stressors such as climate change, deforestation, pollution, ocean health, bio-diversity protection and the rise of climate change refugees and urbanization. These issues are being driven by the market, by the rising stakeholder expectation that businesses have a role in addressing these issues and that they have a duty of care to be a good corporate citizen.
CSR as an Agent of Change – Driving Value
The combination of these agents of change has a positive financial impact that is felt throughout the organization and its value chain. As such, not only does the company create the attraction of new revenue streams, but also, for example, attracts the investor community, who are becoming more sensitive to the ethical nature of their investment portfolios. As such, Socially Responsible Investment (SRI) is benefiting organizations through improving access to capital. Indeed, as of April 2012, over 1000 investment institutions have become signatories of the United Nations Principles for Responsible Investment (UNPRI), with assets under management in excess of $30 Trillion. Moreover, as discussed by the International Integrated Reporting Committee: “The need for a broader information set is clearly demonstrated by the small percentage market value now explained by physical and financial assets – down to only 19 percent in 2009 from 85 percent in 1975. The remainder represents intangible factors, some of which are explained within financial statements, but many of which are not.”
The information investors are seeking is in line with a strategic sustainability policy and its reported schedule of actions and achievements. This is particularly pertinent for listed companies, who are more used to including sustainability in their annual report and accounts. Reporting is a commitment, and a company’s statement to stakeholders throughout the value chain. Notwithstanding non-listed, smaller companies, in the supply chain, are just as affected, as investors need to understand the vulnerabilities that lie in that supply chain.
Thus, sustainability reporting is pivotal to the health of any company across the globe. Indeed, if there is a poor level of reporting it would be deemed the business must have climate-related risks. Silence presumes guilt. Because such reporting is becoming commonplace, any due diligence is going to demand reporting as part of the process.
Common sense will ultimately prevail, and reporting will become regulated and obligatory. It is better to get used to it now, and make the preparations for the behavioral change to start saving money whilst creating new opportunities.
Financial reporting laws already require companies to disclose any information that may have a material effect on a company’s health, now, or in the foreseeable future. With the adoption of SRI there have had to be an increase in the tools available to make this more inclusive.
For these reasons, disclosure is becoming contractual and insistent as climate change and social inequality is being pursued through the market and inter governmental drivers.
CSR and the wider sustainability agenda assist in creating new revenue streams, cost efficiency, corporate value and the mitigation of risk, which are seen as main priorities for business.
Author : Christopher Gleadle