The global financial crisis presents a challenge for CSR practitionersNovember 2008
Not the least important among the many issues raised by the turmoil in financial markets is the performance of the executives working in the CSR and sustainability fields. Within the corporate structure they have been, and remain, largely removed from the core of the financial crisis. Yet one can reasonably ask why a sustainability director has not been scrutinizing, at least, activities of the business that in some cases have caused its outright collapse. For a business to be sustainable it must first be viable; to be responsible, it must first be profitable. A lot of people seem to have missed that. CSR and sustainability directors therefore bear a share of responsibility for what has happened, along with regulators, company boards, senior managers, and investors.
CSR teams are not financial modellers. But they must understand enough of business basics to raise questions before viability is threatened. Otherwise, all the talk of ‘integration’ and ‘embedding’ of the corporate responsibility function is just that – talk. Part of the problem is that they often lack knowledge of other business disciplines. Half of CSR and sustainability managers have never worked in another corporate function, last year’s CSR Salary Survey found. Bringing expertise into the business is no bad thing – but practitioners still need to focus more on what Peter Drucker called the ‘grubby’ areas of business: more on what makes money and less on what may be good PR.
Ironically, they took their cue from investment analysts who assess environmental, social and governance risks. Some ESG analysts indeed identified subprime risks at an early stage. Innovest’s Greg Larkin warned in 2006 of the risks run by banks ‘aggressively’ pursuing mortgage customers with impaired or no credit (EP8, issue 7, p6). But many ESG analysts looked for material risk in the wrong place and over the wrong timescale. Big on climate change risks, they missed huge social risks building in the subprime market. If the financial crisis has one beneficial outcome, it will be to redress the balance between environmental and social risk. The latter is still a poor relation.
ESG analysts should not pack their bags, for their skills are required more than ever. They do, though, need to carry out a thorough review of criteria and procedures, remembering that ethical investors are interested in decent and secure returns like anyone else. In the longer run, ESG analysis will benefit from the financial crisis. Core concerns such as executive remuneration and business ethics will be part of any solution, and the issues driving change – global warming, diversity, increased information flows – may have been temporarily relegated by the crisis. But they have not gone away.
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