Cover Story : Corporate Social Responsibility
A QUESTION OF PRINCIPLES

As corporate responsibility becomes a staple corporate tool, it is easier than ever for corporations to live by principles they can be proud of. The cost of failing to act responsibly is rising, too.

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Pity the poor corporation with global ambitions but a murky plan for corporate social responsibility (CSR) and how it will interact with society, shareholders and the environment over the rest of the decade. It’s no longer just activists marching outside a corporate skyscraper in downtown Chicago or environmentalists protesting a hydroelectric plant being carved out of an Indonesian rainforest who are demanding that multinationals act responsibly.

Institutional investors and Wall Street analysts who can influence a company’s stock price or its ability to issue debt are increasingly demanding that corporations consider the impact of such issues as climate change, workplace conditions and violations of human rights on their bottom lines.

“If corporate social responsibility comes out of social concerns, that is good. But if not, market logic dictates that corporate executives recognize the need because it will play out financially,” says Georg Kell, executive director of Global Compact, an initiative launched by the United Nations to encourage corporate responsibility. “There’s a change in perception among investors. They recognize that environmental and social concerns are material to financial responsibility,” he notes.

After challenging business leaders gathered at the 1999 World Economic Forum in Davos to join his global initiative, the then United Nations secretary-general Kofi Annan launched Global Compact in July 2000. Since that time, nearly 4,000 companies have signed on in hopes of advancing 10 universal principles in the areas of human rights, labor, the environment and anti-corruption.

Executives at Petróleo Brasileiro, the Brazilian oil company also known as Petrobras, which joined Global Compact in 2003, say a growing awareness of environmental and social concerns have meshed with pressure from investors over the past three to four years to strengthen the company’s social responsibility initiatives. “We realized that investing in the environment and safety and security results in a much better performance and lowered our risks,” says Ana Paula Grether de Mello Carvalho, coordinator of social and environmental reports in the department of corporate responsibility at Petrobras. “It also brings advantages in the capital markets.”

The company was hit by a wave of negative publicity at the beginning of the decade when an oil leak in Guanabara Bay off the city of Rio de Janeiro was followed by the sinking of its Petrobras 36 oil platform, one of the world’s largest, in 2001 in Campos Basin. “That made the company wake up on environmental issues and invest higher levels in security and safety,” says Grether, adding that Petrobras invested $4.3 billion in such measures in 2005. She could not provide data for previous years. While 60% of the company’s shares are held by private investors and traded on the São Paulo stock exchange Bovespa, nearly 60% of the firm’s commun shares, which retain voting rights, are still held by the Brazilian government, she says.

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Carone: The future is sustainable products

Many analysts agree that socially responsible behavior is no longer a niche agenda created solely to appease local environmentalists or irate global shareholders and will increasingly push—or even drag—the corporate board into the social responsibility arena over the next decade. Andrea Moffat, director of corporate programs at Boston-based Ceres—a coalition of investors and environmental groups working with companies to address sustainability issues—says shareholders are increasingly interested in how sustainability issues affect a corporation’s pocketbook. Institutional investors and their money managers want to know, for example, how climate change will affect an energy company’s profits, whether mounting health concerns surrounding obesity will spark regulations that could drag down a food company’s stock price, or how the human rights violations of an indigenous group in Latin America might affect a multinational mining corporation.
Pity the poor corporation with global ambitions but a murky plan for corporate social responsibility (CSR) and how it will interact with society, shareholders and the environment over the rest of the decade. It’s no longer just activists marching outside a corporate skyscraper in downtown Chicago or environmentalists protesting a hydroelectric plant being carved out of an Indonesian rainforest who are demanding that multinationals act responsibly.

Institutional investors and Wall Street analysts who can influence a company’s stock price or its ability to issue debt are increasingly demanding that corporations consider the impact of such issues as climate change, workplace conditions and violations of human rights on their bottom lines.

“If corporate social responsibility comes out of social concerns, that is good. But if not, market logic dictates that corporate executives recognize the need because it will play out financially,” says Georg Kell, executive director of Global Compact, an initiative launched by the United Nations to encourage corporate responsibility. “There’s a change in perception among investors. They recognize that environmental and social concerns are material to financial responsibility,” he notes.

After challenging business leaders gathered at the 1999 World Economic Forum in Davos to join his global initiative, the then United Nations secretary-general Kofi Annan launched Global Compact in July 2000. Since that time, nearly 4,000 companies have signed on in hopes of advancing 10 universal principles in the areas of human rights, labor, the environment and anti-corruption.

Executives at Petróleo Brasileiro, the Brazilian oil company also known as Petrobras, which joined Global Compact in 2003, say a growing awareness of environmental and social concerns have meshed with pressure from investors over the past three to four years to strengthen the company’s social responsibility initiatives. “We realized that investing in the environment and safety and security results in a much better performance and lowered our risks,” says Ana Paula Grether de Mello Carvalho, coordinator of social and environmental reports in the department of corporate responsibility at Petrobras. “It also brings advantages in the capital markets.”

“More institutional investors are asking for better disclosure, and more Wall Street analysts are responding,” says Moffat, referring to the trend among research departments at Wall Street investment banks to turn out reports based on how various sustainability issues, such as climate change, will affect corporations operating in various industries. “As Wall Street uses this information, it can encourage companies to add to their CSR programs,” she says.
Ceres has been actively pushing federal regulators to recognize the financial fallout of environmental issues on corporate bottom lines. Last summer Ceres’ Investor Network on Climate Risk asked the chairman of the Securities and Exchange Commission (SEC) to require publicly traded companies to disclose the financial risks of climate change in their public documents. No action emerged from a subsequent meeting that SEC officials held with Ceres executives last year, although the more switched-on corporations are already beginning to take note of such requests. Whether or not the SEC makes a move on the issue, companies are recognizing that it might be wise to assess their exposure to climate change risk.

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Moffat: Get CSR into the DNA of business

The United Nations is also playing a role in pushing socially responsible investing strategies around the globe with its Principles for Responsible Investment. Launched in May of 2006, the set of voluntary guidelines gives institutional investors and asset managers a framework to follow and helps them avoid investing in companies with poor records on such issues as human rights, pollution or corporate governance. The principles have nearly 170 signatories from around the world, including some huge government pension funds.

“Our view is that the mainstream financial markets will advance the corporate social responsibility movement,” says Gavin Power, head of financial markets for Global Compact. “Up to now [mainstream financial markets] really haven’t paid a lot of attention to CSR activities. But that is changing as they see how these activities can affect a company’s reputation, brand name, employee productivity and other aspects of its operation,” he explains.

The bottom line for activists and stakeholders is to persuade multinationals to focus more on how their daily business decisions play out on the environment, society at large and their shareholders. “The question is, how do you get CSR into the DNA of a business strategy?” says Moffat. “There’s been a lot of progress around [CSR] over the last 15 years, but there is certainly much more to be done.”

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Chan-Fishel: Banks can raise the bar

Premium Benefits

In a joint effort with Yale University and global insurance broker Marsh, Ceres is reaching into the corporate boardroom to educate hundreds of independent board members about the potential liabilities—as well as business opportunities—surrounding climate change. “The message that we’re trying to get across is that [climate change] goes to the heart of your company and will affect the long-term value of your firm,” says Anne Kelley, chief of governance programs at Ceres. “All corporate social responsibility issues belong at the board level.” Active and effective management of climate risks or other CSR-related risks can also help firms trim their insurance premiums.

Analysts agree that solid corporate sustainability principles are more important than ever as multinationals expand their reach around the planet with everything from brick-and-mortar factories to intricate supply chains to off-shore back-office functions. Yet the impact of globalization on corporate sustainability practices remains uneven. “It’s all over the map. Globalization exposes countries and people to forces of both good and evil,” says Julie Gorte, a vice president at Calvert Funds and the firm’s chief social investment strategist.

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Flaherty: CSR has been an evolution

An investment company created three decades ago, with more than $12 billion in assets under its management today, Calvert Funds set up the Calvert Social Investment Fund in 1982 as a way for investors to sink their dollars into socially responsible investment vehicles. The holdings of these mutual funds are screened across seven key areas: governance and ethics, workplace, environment, product safety and impact, international operations and human rights, indigenous peoples’ rights, and community relations.

Gorte points out that, on the one hand, globalization means corporations will engage with governments holding extremely poor human rights records, such as Chinese companies operating in the Sudan. That can help fill the coffers of a regime exploiting the human rights of some of its citizens. Or a multinational from an industrial nation will head to a country with weak labor standards to hire people to work in unsafe conditions for paltry wages.

But globalization and the accompanying scrutiny of corporate operations by global activists have also focused attention on these same Chinese companies operating in the Sudan, Gorte says. Activists have also successfully pressured China to raise the bar on environmental practices within its own borders, she adds.

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Kell: There is a change in perception

And globalization has had a beneficial impact on working conditions in the garment industry, analysts agree. The negative media attention surrounding working conditions in Asian garment factories in the mid-1990s forced many US apparel and sports manufacturers to more closely scrutinize the working conditions of employees at their overseas suppliers. Codes of conducts for overseas vendors and the use of outside auditors to verify these new workplace standards have flourished over the past decade.

Graham Sinclair, a Boston-based investment consultant involved with socially responsible investing for many years, adds that it is not only multinationals from developed nations that can help elevate sustainability practices among corporations. Indian energy companies, for example, have recently purchased wind farms in Germany, and South African companies have taken the lead on social issues such as HIV/AIDS education in the workplace when they head into a less-developed nation in sub-Saharan Africa, says the South African native.

A Global View

“It’s not only the north-south influence. It’s the south-north and south-south influence,” says Sinclair, who runs a consulting firm that advises companies on integrating environmental, social and governance principles into their investment strategies. “Companies from the south can show more sensitivity to poverty and the social welfare of citizens than companies from the north.”

Grether of Petrobras views globalization as having a positive impact on the environment and social issues as it helps raise the bar on a multinational’s activities around the planet. “We need to care, not just about our offices at home, but our operations far away,” she adds.

Globalization has pushed Xerox as it signed on to the Electronic Industry Code of Conduct last year to ensure its suppliers and manufacturers around the world are meeting appropriate labor standards. The Stamford, Connecticut-based manufacturer of copiers and other office machines has embraced corporate responsibility principles since the early 1970s, when it began measuring diversity in the workplace, says Christa Carone, a vice president of communications who produced the company’s first global citizenship report last year. She sees the sustainable business of the future as a company devoted to developing sustainable products.

“There’s been a shift in thinking and a focus on sustainable innovation and technology,” says Carone, adding that Xerox is now developing a self-erasable paper that could be reused in 16 to 20 hours after the ink evaporates.

Banks Play a Key Role
In the international banking arena corporate social responsibility has moved beyond energy reduction and community programs to scrutinizing the construction projects that banks finance, whether close to home or in a jungle halfway around the globe.

“Ten to 12 years ago, banks were going for the lower-hanging fruit, such as turning out the lights and not wasting paper,” says Michelle Chan-Fishel, program manager of the Green Investments Project at Friends of the Earth-US in San Francisco, California. Now banks are more frequently looking at the social and environmental ramifications of their lending policies, she adds.

“The most significant contribution that the financial sector can make [to CSR] is to incorporate these principles into their lending policies,” says Chan-Fishel. She points out that it is more difficult to analyze the social consequences of a corporate financing project than the environmental impact. But banks can most effectively raise the bar on environmental and social standards by placing at least one person from their CSR sections in the credit risk department. “That’s a good thing because it places a set of eyes in the deal cycle,” she adds. “If CSR is only in the public relations sector, it won’t have as much impact.”

Chan-Fishel points to the Equator Principles, the voluntary guidelines that banks can use to help reduce the harmful social and environmental risks that surround the multi-billion dollar project finance industry, as an example of how banks are successfully using the transaction process to protect the environment.

Pamela Flaherty, director of corporate citizenship at Citi in New York City, says banks have been concerned with corporate citizenship for many years, pointing to the decades-old policies surrounding lending into minority and low-income areas. “[CSR] has been an evolution, and it hasn’t just arrived at one time,” she says, adding that the focus shifts over time.

Flaherty agrees that the Equator Principles are a strong vehicle that banks can use to “make an impact on the ground” and set a standard for the industry. Citi was one of the 10 original signatories.

Flaherty, who is also the president and chief executive officer of the Citigroup Foundation, believes that globalization has generally had a positive impact and helped spread social and environmental concerns around the world—in all directions. “There’s been learning across the globe,” she says, referring to companies such as Tata Group of India, which takes the corporate ethics embedded in its business values and operations into both industrial and developing nations.

And Flaherty thinks the CSR movement is heading for another phase, where principles are no longer simply embedded in corporate practices. “We’re moving to the creation of businesses and product lines that are sustainable,” she says. “It’s very exciting.”

DOING THE RIGHTS THING
Whether it’s a blueprint for investing retirement dollars or a framework that global banks can use to reduce the harmful environmental impact of a mega-dam, the foundations underpinning the swelling sets of guidelines for sustainable business practices remain universal human rights and greater transparency, analysts agree.

“These principles require transparency and give all people access to the same information,” says Diane Osgood, vice president of CSR strategy at Business for Social Responsibility in San Francisco. “From the smallest investor to the largest pension fund, you’re able to get more information if a company adheres to these types of guidelines. And 90% of CSR is about human rights, labor standards and the environment.”

Matthias Stausberg, a spokesperson for the United Nations Global Compact Office, says the Global Compact and UN Principles for Responsible Investment integrate the universal values that go back to the UN Charter of Human Rights in 1948. Other global treaties and conventions, such as the 1992 Rio Declaration on Environment and Development or the International Labour Organization’s 1998 Declaration on Fundamental Principles and Rights at Work, have helped weave human rights into business practices and encouraged governments to integrate these principles into their national laws.

“Our goal was to have the broadest possible appeal and widest acceptance among businesses,” says Stausberg of both the Global Compact and the Investment Principles, which are coordinated by the UN Environment Programme Finance Initiative (UNEP FI) and the Compact offices, “and to not have them rejected as instruments of the north being imposed on the south.”


Paula L. Green
 

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