Madlen King looks at the evolution of corporate sustainability
Corporate social responsibility has changed. Society today is far more vocal and savvy about what it expects from organisations. Consequently, the market at large is coming to realise the benefits of addressing environmental and social issues alongside economic ones. Long-term business viability is no longer guaranteed by profit alone. Organisations that embed sustainability into core strategy and governance processes are the ones that are best placed for survival.
The 20th century saw the birth of the environmental report, as organisations wanted to build their reputation. Terms such as environmentally friendly were dominant as companies sought to advertise their green credentials through propaganda. These first reports were mainly afterthoughts – an annual activity completed at the end of the year as a PR function, pulling together details of what were largely a summary of legal compliance obligations and status, pet projects and charitable donations, limited to environmental concerns.
At this time, companies were free to choose if they were going to report; they decided what would be included – and more importantly what they would exclude. They determined the report coverage (geographically as well as by function), the appropriate criteria, and the vehicle to relay their message.
This ad hoc approach led to a lack of clarity and an obvious deficiency in any ability to compare and contrast companies. Unsurprisingly therefore, these reports have been subject to scepticism of the ‘greenwash’ that they contained.
Shift to accountability
However, by the dawn of the 21st century a discernible shift within this arena had begun. It was started initially by the various stakeholders groups who had found their voice and who drove change by expressing their dissatisfaction at the way of operating.
Fast forward to the present day, and organisations are now having to respond to these increasing demands to be accountable for their environmental, social and governance performance, together with greater assurance of the completeness and accuracy of the data and information.
The largest drivers are still considered to be consumers and employees. The first demands, however, came from government through regulators and stock exchange requirements mandating increased environmental reporting and extending this into newer areas such as greenhouse gas reporting.
After the regulators came the investors. Through organisations like CDP, investors which represent US$87 trillion in assets are now demanding increased voluntary reporting on corporate strategies and data relating to climate change and natural resource usage, to help identify and manage what these issues represent as potential risks in their portfolios.
Rating for sustainability
Together these demands from stakeholders have resulted in the emergence of a variety of sustainability rating agencies which survey corporations and utilise publicly available information to rate them on their sustainability performance. These organisations include the Dow Jones Sustainability Indices, FTSE4GOOD, Bloomberg and EIRIS (Ethical Investment Research Services).
These agencies have been successful in increasing the amount of corporate information publicly available and giving it some legitimacy, merely through their independence. In a recent survey 61 per cent of companies cited demands from sustainability rating agencies as a factor prompting them to address sustainability, second only to demands from consumers.*
And business sees the benefits of being awarded a good rating. In the same survey 97 per cent of companies expected a good sustainability rating to have a positive effect on their reputation and it is often used as a key differentiator against the competition.
But the success of these rating agencies has generated its own problems. To name but a few: inconsistent approaches; potential conflicts of interest between the rater and the rated; companies suffering ‘survey fatigue’; and the ability of companies to cherry-pick the ratings that they respond to in order to gain a favourable result.
Of greatest concern however is the reliance that companies place on the agencies to identify new potentially material issues to their business. As many as 96 per cent of companies use enquiries from sustainability rating agencies to help them detect new social and environmental issues. While such sources can be a good calibrator, to gain the full business benefits of corporate responsibility what is material to the business must be identified and managed strategically and through central governance processes – not just by the corporate responsibility department, but by the CEO.
It has for some time been largely accepted that sustainability activities that go beyond regulatory requirements or industry norms can result in benefits ranging from premium pricing, increased sales and market share, to improved public support and talent retention.**
But when sustainability is addressed in the long term and central to corporate strategies it can create value in many other ways. An increased ability to innovate enables organisations to see and realise opportunities in new markets, with new products for new customers, together with operational and workforce efficiencies. In parallel, taking a long-term strategic view delivers greater anticipation of risks, for example from regulation or supply chains, thereby enabling adaptability to the challenges presented.
Today, leading organisations in the field are placing sustainability at the heart of corporate strategy and governance, enabling them to address major strategic challenges, strengthen their business and contribute to society at the same time.
While reporting remains an important element of an organisation‘s corporate responsibility strategy, it is now only one small element. Internationally recognised standards such as ISO 26000 and the OECD Guidelines for Multinational Enterprises – both recommended by the European Commission for large companies – now include the incorporation of corporate responsibility into central governance processes and management systems. And it is from this strategic position that reporting must flow.
Other reporting standards also support this position. The latest Global Reporting Initiative (GRI) Sustainability Reporting Guidelines (G4) enable organisations to disclose their economic, environmental, social and governance performance, and aim to streamline sustainability reporting.
Along with reporting methodologies driving transparency, business approaches to sustainability have evolved and continue to do so, and for corporate survival they need to. “For sustainability reporting to help develop sustainable businesses and markets, it needs to offer information that is relevant, reliable and transparent, and readily available,” GRI Chief Executive, Ernst Ligteringen recently said.
Natural resource shortages, water scarcity, food security and climate change are affecting core business objectives and societal expectations of business are changing with it. Stakeholders expect businesses today to be aware of their impact on the environment and be able to effectively demonstrate what they are doing to mitigate that impact.
In the words of Darwin – it is not the strongest that survive nor the most intelligent, but the ones most responsive to change.
* The impact of SRI: An empirical analysis of the impact of socially responsible investments on companies. Oekom Research, 2013
** Valuing corporate social responsibility. McKinsey Global Survey results, mckinseyquarterley.com, 2009