Put a number on it: The pros and cons of Corporate Social Responsibility

Businesses rarely do anything that has no obvious payback, unless they are obliged to by law or by weight of external opinion. Corporate Social Responsibility (CSR) appears to have become one such “buzzword” to which top companies feel obligated to nod. But is there a more positive, quantifiable economic reason for them to do so? I believe the evidence suggests there is.  According to the British Standards Institute CSR “is a mechanism for organisations to voluntarily integrate social and environmental concerns into their operations and their interaction with their stakeholders, which are over and above the organisation’s legal responsibilities.” But “voluntary integration” brings with it an associated cost — management time, advisers, internal systems and monitoring costs are just the start. For the fully committed organisation, CSR will also involve identifying and engaging with stakeholders (more management time used up there), responding to stakeholder concerns, gathering data for public reporting and, in an increasing number of cases, having that data assured by an independent third party.

For any commercial organisation to embark on the CSR journey there must also be a set of benefits which must be presumed to at least equal the costs. While most discussion of benefits centres on the largely intangible benefits of reputation and risk management, some organisations claim to have identified these benefits through more scientific means. Here are some examples. Take the Co-operative Bank for example. Paul Monaghan, Sustainable Development Manager at the Co-op Bank says “We have calculated ethical and ecological benefits of sustainability reporting to be in excess of ?20 million profit contribution to products and services. Producing a sustainability report has enabled us to manage a whole host of ethically and environmentally motivated risks much more robustly.” ?20 million is not small change even to a bank. Baxter International, the US Healthcare company, analyses its basic environmental compliance costs and other response programmes and compares them with the savings it derives from environmental initiatives. In 2003 Baxter reported savings of $69 million as compared with total environmental costs of $22 million. Again, not chicken feed.

British Telecom, in their 2003 sustainability report, point out that “our environmental programme, which includes energy efficiency and fuel savings, has saved BT more than ?600 million over ten years.”  BT also point out that their strong focus on social and environmental issues has been a crucial factor when it comes to bidding for new contracts — ?900 million in their 2004 financial year. The ability to produce such direct evidence of CSR benefits may be of interest to some investors, but most are more likely to be more interested in receiving evidence that companies have integrated CSR activities into their strategies and operations across the piece. PwC and Schroders conducted an experiment based on the accounts of the Danish company Coloplast, to find out how non-financial information can influence the future earnings potential of any given company — and thus the stock value. Two versions of the Coloplast annual reports were prepared — one version complete with non-financial (CSR type) information and one version stripped of it. The results? The average revenue and earnings forecast by those with the full set of accounts were lower than those who had referred only to the financially based document. 

But, despite the lower forecast, those with the complete information set were overwhelmingly in favour of buying the stock.  This was in contrast to the other group of investors with the less complete information set — nearly 80 percent of whom recommended selling the stock. Of course, one swallow does not make a summer and the number of FTSE stocks disclosing meaningful environmental data in their annual report and accounts package remains worryingly low. Only 24 percent of the FTSE All Share index make any quantitative environmental disclosures of any kind and only 11 percent link environmental issues to financial performance. But absence of CSR disclosure in the annual report and accounts does not always imply absence of CSR action. It may simply indicate that reporters do not see such disclosures as being directly relevant to the primary stakeholders, the investors. A recent survey of corporate reputation showed that in answer to the question “what social responsibility initiatives has your company undertaken in the past two years?

* 46 percent of respondents claimed to have strengthened employee hiring policies to promote fairness and diversity;
* 41 percent gave more money and time to community and charities;
* 37 percent improved environmental practices  and;
* 23 percent imposed socially responsible criteria of codes of ethics on key suppliers.

However, since only 22 percent indicated that they had published a CSR or “triple bottom line” report, it seems fair to assume that many of these positive CSR initiatives remain unreported to, and therefore unrecognised by, the investment community. (The second part of this column will be completed next week)  

ACCA (The Association of Certified Accountants) is the largest and fastest growing international accountancy body in the world. We currently have almost 320, 000 students and members in more than 160 countries. The organisation has over 70 offices worldwide, including a Caribbean office based in Trinidad and Tobago

Comments can be sent to: info@wi.accaglobalcom.