Ethical Performance
inside intelligence for responsible business


CSR: how it has changed and how it will develop

November 2003

To mark this 50th issue, EP considers the forces shaping corporate social responsibility – and looks at how the field is likely to develop in future

When the first issue of Ethical Performance appeared in May 1999, there were no socially responsible investment indices, the European Commission had not begun to address the topic and very few large companies were aware of it. A Fortune 100 company even thinking about producing a CSR report was news. Four-and-a-half years on, the world’s biggest two equity index providers have SRI indices, the EC is working on its second CSR white paper, and 48 of the Fortune 100 publicly report on their social and environmental performance.

CSR has become mainstream. Why? One answer is that companies have realized CSR enables them to manage aspects of their business which conventional tools cannot tackle. A second is that the information revolution has made it easier to shine a spotlight on unsavoury business practices. Third, CSR is relatively cheap. If influential interested parties, such as investors, are saying the company needs to take more account of these issues, and it doesn’t cost too much, why not give them what they want? Fourth, global corporate governance scandals have highlighted the importance of monitoring non-financial performance. Fifth, the appreciation of intangible assets, as seen in the gap between the market value and the book value of companies.

Deeper trends are also at work: beneath the CSR field, a seismic shift in the relationship between companies and the societies in which they operate is taking place. Large companies, more than any other organ of society, realize this, which is why the majority have embraced CSR.

The more interesting question, however, is where CSR goes from here. One article cannot hope to answer this question in full – subsequent EP analyses will consider in more detail CSR’s future direction.

To start with, we will point to two drivers – one internal, one external. One of the biggest changes in the last four-and-a- half years is that CSR now has a life of its own. In the early days, the pressure for change came largely from outside the company. Increasingly, it is from inside: CSR is being professionalized, and new management structures are evolving. Work to date has focused on codes of conduct: these will remain important as a reference point and ‘glue’, but there are signs of different departments taking their own approaches, with internal audit, compliance, legal and facilities teams all increasingly active.

Marketing departments and product developers will find themselves having to put the same energy and creativity into selling sustainable solutions as into unsustainable ones.

This spread of activity into operational areas beyond the ‘CSR department’ will create a need for training, an area which will prove fertile ground for consultancy services. CSR departments themselves will not ‘wither away’ as some predict, because companies will need a management team to co-ordinate the disparate elements, and to provide training for staff.

Overall, the emphasis will shift from data collation and reporting to the substance of CSR. Sophisticated communications strategies will be developed and the communications department will become allies of CSR managers, insisting that CSR policy needs to be aligned with wider business objectives in order to put an effective message to internal and external audiences.

Investor relations will become the new frontline. Indeed, institutional investors represent the most powerful single external source of pressure on listed companies in the forseeable future. The trend for investors in the US and UK to collaborate on social and environmental issues will accelerate because a joint approach carries greater weight with the company or sector concerned and saves research and engagement costs for the investors.

While a new bull market may reduce the current high level of shareholder activism, a ratchet effect will operate in respect of investor initiatives already under way. Shareholder activism will therefore grow as governance concerns widen to include social and environmental issues.

Investors will increasingly sing from the same hymn sheet as pressure groups and governments on key issues such as climate change and extractives payments.

As SRI grows, retail SRI funds will continue to act as an early warning system for companies, alerting them to possible future investor concerns. A market upturn will see niche funds launched with innovative criteria to tap unmet ethical investment concerns.

Investment institutions will not be immune to disclosure pressures: voluntary codes will increasingly oblige them to become more transparent and to develop CSR policies.

Ultimately, the business case for investing in a company that meets social and environmental criteria in preference to one that does not may never be proven conclusively because there are many factors influencing performance. Investors will simply add social, environmental and ethical concerns to the range of issues they consider when making investment decisions.

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