CHAPTER 8

CORPORATE SOCIAL
RESPONSIBILITY AND
SUSTAINABILITY
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
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

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
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
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 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 organization’s 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 1993-2005 (KPMG)

Source: KPMG CSR Surveys 1993-2005. 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 11-16.
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 2000-2003

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

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

Growth of SRI Investment Assets in Australia
2000- 2006

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

Source: Nelson J. (2004).

Conclusions

 Only a fundamental redesign of corporate forms,

objectives and value measures can fully meet the realities
of responsibility.