The corporate world is still searching for definitive proof that corporate responsibility paysand now the evidence is piling up.
For a little more than a decade, companies have tried to meet increasing consumer and investor demand for them to do the right thing through corporate citizenship efforts.However, with executives closely watching the bottom line, many now want to know if their efforts are paying off.
Whether its corporate citizenship, corporate social responsibility (CSR), sustainability or any number of other names by which these efforts have come to be known, studies indicate companies may already be reaping some rewards. One such study by Germanys Oekom Research independent sustainability rating agency correlates sustainability with financial performance. The study, conducted in conjunction with Morgan Stanley Dean Witter, indicates shares of companies with good sustainability records perform better than those of their less socially responsible competitors. It examined 602 companies included in the Morgan Stanley Capital International (MSCI) World Index and also rated by Oekom on social and environmental performance.
Morgan Stanley calculated the share performance from December 31, 1999, to October 27, 2003, of companies receiving Oekoms highest ratings and that of companies receiving lower grades. It found that the best-in-class portfolio outperformed sustainability laggards by 23.4%. Through early December 2003, year-to-date performance of the best-in-class portfolio outperformed the MSCI World Index as a whole by 3.8%.
While good sustainability performance can lead to better financial results, good financial results can allow a company more room to invest in better sustainability efforts. Good corporate management, the Oekom study says, also tends to produce better financial and sustainability performance.
Earlier in 2003, Oekomwhich predicts sustainability ratings will be an integral part of common stock and bond analysis by 2010also conducted a similar analysis of carmaker share prices. It found that those with top ratings, including Germanys BMW and Frances Renault, saw their share prices rise by an average 8.8% between September 2000 and September 2003. Corporates on the lower end of the rating spectrum, which included mainly Asian companies, saw share prices drop by 9%.
Both studies indicate market players who contend sustainable investments do not provide worthwhile returns may be mistaken. On the contrary, it is becoming more and more widely recognized that sustainability is a value-added factor, says Markus Krisel, director of Morgan Stanley Private Wealth Management. The positive correlation between sustainability and financial perfor- mance will provide an enormous boost to the sustainable investment sector.
As the business world rushes to find ways to quantify the benefits of corporate responsibility, determining which companies are the most socially responsible is still a relatively subjective process. In order to identify the worlds most socially responsible companies, Global Finance assembled a panel of experts from the top corporate social responsibility consultancies and analysts. They include GoodCorporation, CSR Global and The Institute of Business Ethics in the UK; KLD Research and Analytics in the US; and ABN AMRO in Brazil.
We asked those experts to identify companies worldwide that exemplified the principles of corporate responsibility. The list includes companies large and small, local and global. Some loudlyand justifiablytrumpet their corporate citizenship efforts, while others quietly go about their business, happy simply to know they are minimizing their negative impact on the world.
Even among these companies there are a handful that stand out. Those companies, highlighted in red below and profiled on the next page, receive special commendation.
Companhia Siderrgica de Tubaro
The Co-operative Bank
Green Mountain Coffee Roasters
Johnson & Johnson
Marks & Spencer
Northern Trust Corporation
Proctor & Gamble
Rohm & Haas
The Rouse Company
The St. Paul Companies
Votorantim Celulose e Papel
Whole Foods Market
Executives are catching on to this new reality. More than 80% of respondents to a survey of CEOs in the US last year said good corporate citizenship helps the bottom line. The survey, conducted by The Center for Corporate Citizenship at Boston College and the US Chamber of Commerce, also found that CEOs want these efforts to be voluntary and not regulated, with 80% saying corporate citizenship should not be governed by law.Admitting a dilemma over which efforts to report, 85% said many companies are already doing more for their communities than is talked about.
The reality is also that CSR efforts require some degree of investment by companies, whether in implementing a program, changing a policy or even in taking the extra step to publish a report making their CSR strategies known. Lack of resources was identified by 46% of respondents to the CEO survey as the primary obstacle to corporate citizenship, despite the fact that investment in this area has increased or remained constant among most companies polled. The survey concluded that most US businesses, regardless of size, provide cash, volunteer time or goods and services to their local communities.
No matter the level of involvement, few companies can escape growing pressure to show some degree of commitment to social responsibility. For the World Eco- nomic Forum (WEF), corporate citizenship is equally as important these days as competitiveness and governance, forming a triad of pressures that the organization feels will shape business leaders agendas. Compliance and philanthropy, which had gained companies goodwill in the past, are no longer enough.
In the face of the high levels of international insecurity and poverty, the backlash against globalization and the mistrust of big business, there is growing pressure on business leaders and their companies to deliver wider societal value, notes a CEO survey on corporate citizenship conducted by the WEF and The Prince of Wales International Business Leaders Forum, adding that the situation calls for effective management of wider corporate impacts and contributions to society to make appropriate use of stakeholder engagement.
Once again it requires new types of public-private partnerships to address challenges that are beyond the capacity or responsib i l i t y o f a n i n d i v i d u a l company or the private sector, says the survey.These include issues such as access to training and education, healthcare, water, energy, credit and markets, as well as tackling problems such as corruption, money laundering, crime and terrorism. In 2002 WEF members not only signed a joint statement on global corporate citizenship but went a step further by designing a framework for action by CEOs and management.
In order to reap CSRs bottom-line benefits, companies must present convincing evidence of their commitment, actions and motives lest they appear to be committed in name only. When asked to submit her nominations for Global Finances list of most socially responsible companies, Heidi von Weltzien Hivik, president of the European Business Ethics Network and associate professor at the Norwegian School of Management, said she could not make any recommendation.
Many are just at the very beginning of understanding the issue and thus far from being recommendable in my opinion, she said. There is too much PR and too little substance so far.
CEO: JOHN BROWNE
UK-based BP is one of the worlds largest petroleum and petrochemicals groups, with operations in 100 countries in Europe, North and South America,Australasia and Africa. Its CSR initiatives include conducting social and environmental impact assessments to understand the impact of its operations on the communities where it operates. In addition to a commitment to introducing cleaner fuels and renewable energy, the company also supports urban renewal programs, art sponsorships, literacy drives, conservation programs and health campaigns. Among other programs, BP sponsors medical treatment in Bolivia and assists in the installation of solar power in desert communities in Algeria.
Britains BT is one of Europes leading telecom providers, serving more than 20 million residential and business customers in the UK. One of the companys key CSR strategic targets is to contribute at least 1% of its UK pre-tax profits to community programs. As one of the countrys largest energy consumers, it has also set a target of capping 2010 carbon dioxide emissions at 25% below 1996 levels, having already reduced its energy use by nearly 21% since 1991. Staffing plans call for increasing the percentage of women on the BT payroll to 25% and of disabled workers to 2.5% by March 2004.
The worlds largest chipmaker, and a leading manufacturer of computer, networking and communications products, Intel focuses much of its CSR efforts on education and training. Its Teach the Future program helps teachers in 30 countries to bring technology into their classrooms, with more than 1 million teachers trained since the program was launched in 2000. Intel also supports a communi- ty education model developed by MIT to form a global network of computer clubhouses that help underserved youth acquire technology and problem-solving skills. The company also aims to recycle 45% of chemical waste and 60% of solid waste generated at its worldwide facilities.
P&G; is the United States largest manufacturer of household products, selling to more than 5 billion consumers in 140 countries. P&G; identifies water and health and hygiene as areas in which it has the greatest potential to make a positive impact. In 2003 it introduced a new low-cost product to purify polluted drinking water to reduce waterborne diseases in developing countries. Its consumer research efforts include the Living It! program in Brazil, which had P&G; staff living with low-income consumers for two weeks to better adapt new products and distribution systems to their needs. P&G; is also a leading advocate of alternatives to animal testing.
The UK-based international retailer has nearly 2,300 stores and some 300,000 employees in the UK, Europe and Asia. Its Tesco.com unit is the worlds largest grocery e-tailer. In 2003 CSR initiatives included launching trial sales of biodiesel fuel in the UK, recycling 40 million Christmas cards through a partnership with the Woodland Trust, and donating more than 17 million worth of computer equipment to community schools.The company has a cross-functional CSR committee of senior managers that meets at least four times each year.Tesco published its first CSR Review in 2002 and is listed in the FTSE4good and Ethibel indexes for ethical and socially responsible investment.
Sunny Misser, global leader of sustainability services for PricewaterhouseCoopers, feels results must be tangible and cohesive. Most companies often knee-jerk to pressures defensively, as opposed to having their own affirmative CSR strategies, he says. This can risk becoming a PR spin-management game, where the primary objective is to respond to stakeholder pressures through media messaging. Companies need to proactively integrate their CSR strategy into their business operations. The premise of CSR has to be based on content and performance, as opposed to faade management.
There are plenty of examples of companies paying more than lip service to CSR. The UKs BP oil company backs up claims of its commitment to cleaner fuels and renewable energy by producing ultra- low-sulphur diesel (ULSD) for sale in the UK and Europe, supplying compressed natural gas (CNG) as a motor fuel in Egypt to reduce pollutants by up to 85%, and launching a biodegradable lubricating oil in Australia. Likewise, UK retailer Tesco established a crossfunctional committee that meets at least four times each year to track CSR results according to a list of key performance indicators.
While it is a companys actions, not the PR spin, that are important, firms can benefit more from their efforts if they tell the world about them.The World Economic Forums CEO survey showed 48% of respondents have published some form of public report on their corporate citizenship activities, while 77% are using their Web sites to communicate this information.
According to the latest corporate sustainability survey by UK-based SustainAbility for the UN Environment Program (UNEP), the number of companies reporting CSR activities has risen but is still low, considering there are more than 50,000 multinational corporations and millions of smaller companies worldwide. Only a few thousand are currently issuing reports.
Those reports that are appearing are becoming increasingly comprehensive and weighty. The average number of pages for CSR reports among companies benchmarked by the UNEP study rose by 45%, from an average of 59 pages in 2000 to 86 pages in 2002. Some point to an irony in this statistic: Protecting the environmentand protecting treesis a cornerstone of most CSR programs. In trying to convey their achievements and goals, many companies have resorted to what the study calls carpet bombing, in which corporates inundate investors and consumers with information in the hope that they will find what they need. The search for proof of the business benefits of social responsibility is far from over, and analysts expect that companies will continue to seek ways to quantify the returns on their CSR investments. The Center for Corporate Citizenship at Boston College has partnered with Fortune 100 companies to develop a benchmarking system to measure the impact of corporate citizenship. There is still much work to be done on this front, but it seems significant steps are being taken that will allow CEOs in the future to better quantify how much bang they will be getting for their CSR buck.
Economic performance is not limited to financial information, says Misser. However, several companies experience challenges with t h e n o n – f i n a n c i a l repor t i n g process, as tools and metrics to measure social and environmental performance are still evolving. Nonfinancial reporting, as it currently stands, has its limitations, but it still reflects a broader option for companies to disclose meaningful information that impacts their financial results.