Corporate Social Responsibility: A Rapidly Changing Landscape

The landscape of corporate social responsibility (CSR) continues to evolve at a surprisingly fast pace, given the challenging economic conditions.

The size and scope of corporate social responsibility (CSR) is a topic of ongoing and vigorous discussion. Some stakeholders include sustainability concepts in CSR, while others make distinctions between the two terms, with sustainability considered more closely aligned with environmental activities. The social area, rather than environmental, is where explicit references to occupational safety and health generally are found.

CSR still is in the early stages in most businesses, with the U.S. market lagging the EU and some less developed regions just starting to see their first signs of activity. At the other end of the spectrum, some larger companies and early adaptors are taking their best-in-class CSR programs to new heights, providing much needed leadership in this emerging corporate arena.

Still, there are few resources that provide company managers with an overview of developments to monitor and include in their planning for the future. Within the last year, advances in the areas of public performance reporting, rating systems/guidelines, regulation/legislation and corporate programs have increased the profile and activity level of CSR in the business community.

Public Performance Reporting

Global Reporting Initiative – Public performance reporting has become an important tool for disclosing and measuring a company’s level of CSR activity. Since releasing its first official version of public reporting guidelines in 2000, the Global Reporting Initiative (GRI) has become the framework of choice for reporting CSR performance by multinational businesses in the Fortune 250. The GRI was formed in 1997 by two U.S.-based non-profit organizations, Ceres and Tellus Institute, with the intention of making it an instrument of change for corporate governance.

More than 1,800 companies filed GRI reports in 2010, a small but growing number of which are verified by a third-party assessment. This is a 22 percent increase from 2009. In a recent presentation to stakeholder organizations, GRI reported that businesses using its framework comprise 95 percent of the Dow Jones Sustainability Index, 78 percent of the FTSE4Good, 70 percent of the Global 100, and 70 percent of the NASDAQ OMX CRD Global Sustainability Index. There is no other reporting scheme that approaches the popularity of the GRI for companies and stakeholders at this time.

Since the framework’s adoption is greater in Western Europe than anywhere else, GRI is working to expand its coverage in other regions. A Focal Points USA initiative was launched in affiliation with the Conference Board in early 2011. This is an effort to increase the number of U.S.-based companies that use the GRI format when publishing CSR reports. The GRI staff is working with professional, industry and sustainability organizations to engage their members and encourage reporting. An industry sector leaders program is being developed to improve benchmarking opportunities, and a second Focal Points office is opening in China.

The GRI is continuing to revise and expand the information required in its reporting framework. In March, the organization released G-3.1 Guidelines, an update of its G-3 Guidelines. The G-3 build on the G-2 Guidelines (released in 2002), which were a revision of the initial guidelines released in 2000. Each version of the guidelines is developed through a consensus-seeking, multi-stakeholder process with participants from global businesses, NGOs, labor and the academic and professional communities.

The G-3 requires new disclosures related to the social aspects of CSR, which are contained in report sections titled, Human Rights and Labor Practices and Decent Work. Some of the expanded information includes:

➤ The percentage and total number of operations that have been subject to human rights reviews and/or impact assessments.

➤ The total number and rate of new employee hires and employee turnover by age group, gender and region.

➤ Return-to-work and retention rates after parental leave by gender.

➤ The ratio of the basic salary and remuneration of women and men by employee category and by significant locations of operations.

The next update will be the G-4 Guidelines. The development of this more comprehensive set of CSR metrics began in June. It is anticipated a first draft of the guidelines will be available for public comment in 2012, with the planned launch of the final document in May 2013.

One source of concern is the framework’s failure to include a comprehensive set of performance indicators for occupational safety and health (OSH), which is considered part of the social area. The key focus of required disclosure in the current guidelines is employee illness and injury rates. Those rates are lagging indicators and generally are regarded by the OSH community as insufficient measures of the effectiveness of a company’s health and safety performance.

To address this deficit, the American Society of Safety Engineers recently published a draft Safety and Health Sustainability Index of performance measures. The association also is participating in the G-4 Guidelines development process. Now that GRI-formatted reports are gaining more support, the need to develop better performance measures for the social and governance areas will receive increased scrutiny.

Although the GRI has made CSR reporting more uniform and created common terminology, it has yet to produce the detailed, sector-specific information needed by financial investors and others to effectively compare performance among participating companies. Some stakeholders believe that most corporations are using their reports for the limited purposes of assisting the management of their sustainability efforts, protecting their reputations and enhancing their brand values. Recent catastrophic events caused by companies with positive reports have contributed to this perception. Notwithstanding all of the progress the GRI has made to date, the credibility of its reports and their value as instruments of change is still in question.

Mandatory and integrated reporting – A growing chorus of stakeholders is pushing governments to mandate CSR reporting for businesses, and they are seeking the disclosure of an increasing amount of information in a uniform reporting format.

The Initiative for Responsible Investment and the Hauser Center for Nonprofit Organizations at Harvard University in its recent report, From Transparency to Performance, argues that reporting must be made mandatory “in order to assure that comparable sustainability data is available to investors and other stakeholders.” Such reports should include key indicators with different levels of materiality identified for each industry sector.

Some governments are starting to take action. A study of 30 countries by KPMG, Carrots and Sticks, found 142 country standards and/or laws with some form of sustainability-related reporting requirement or guidance. Of those, approximately two-thirds could be classified as mandatory and one-third as voluntary.

Another emerging trend is integrated reporting. An integrated report is the combination of a company’s financial report and its corporate social responsibility report into a single document. The goal is to provide a more holistic view of its true economic value and to reach a much broader audience in the mainstream financial sector.

An international effort aimed at promoting integrated reporting is spearheaded by a newly formed International Integrated Reporting Committee (IIRC). The committee is leading the development of an integrated reporting framework similar in approach to the work being done by the GRI.

Ratings/Rankings/Guidelines

The community of socially responsible investors is expanding and building a higher profile. In early 2011, over 800 investment institutions (asset owners, investment managers and professional service providers) had become signatories to the UN Principles for Responsible Investment. The principles focus on environment, social and governance (ESG) issues. They require signatories to incorporate those issues into investment analyses and decision-making processes, and seek appropriate disclosures.

Socially responsible investors still represent a small percentage of the investment market, but they have been clamoring for information on ESG issues and performance metrics. To address this need, asset management firms such as Sustainable Asset Management (SAM) have developed surveys and indices to inform investment manager decisions on where to place their funds, e.g. Dow Jones Sustainable Index. These efforts have led to a proliferation of ESG metrics and ratings schemes, most of which are voluntary.

The wave of questionnaires produced by these raters has caused a serious case of survey fatigue for companies interested in disclosing their CSR performance, and confusion about the grading of disclosures by analysts who seem to have only a rudimentary understanding of corporate programs and operations. Corporate CSR personnel are finding themselves overwhelmed by the diversity and volume of information demanded, and questions are being raised about the methodologies used, the overall quality and the usefulness. The situation has been exacerbated by the lack of coordination of content or process amongst the raters.

In June 2011, Ceres and Tellus Institute announced the formation of the Global Initiative for Sustainability Ratings. Its purpose is to develop an independent, noncommercial framework that will serve as a benchmark standard for ESG metrics and cause a reduction in the number of ratings offerings. This effort is notable as the first serious attempt by a non-governmental organization to reconcile and influence the diverse sets of data used by the ratings organizations.

Voluntary standards-setting organizations are addressing the demand for clear direction on CSR requirements and management program components. The most prominent document released within the past year is the ISO 26000 Guidance for Social Responsibility. This comprehensive guideline was developed by the International Standards Organization, with rigorous analysis and diverse stakeholder input. It includes more detailed guidance in the social and governance areas, including occupational safety and health. Although not intended for use for third-party certification purposes, there already are efforts by certification providers to incorporate its contents in their auditing activities.

International government organizations also are undertaking efforts to increase the role of businesses in addressing CSR issues. Building on the momentum generated by its Global Compact, the United Nations recently adopted the Guiding Principles on Business and Human Rights. These principles provide the first global standard for preventing and addressing the risk of adverse impacts on human rights linked to business activity. They require human rights due diligence assessments to identify, prevent and mitigate any human rights risks.

The Organization for Economic Co-operations and Development (OECD) recently released the Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. It clarifies how companies can identify and better manage risks throughout the supply chain, from local exporters and mineral processors to the manufacturing and brand-name companies that use these minerals in their products. It complements the updated Guidelines for Multinational Enterprises, which include new recommendations addressing human rights, living wages and Internet freedom.

Legislation

New CSR-related legislation has been passed at both the federal and state levels in the United States. A little known provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires public companies that trade on a major U.S exchange to report the use of conflict minerals in their products and work force diversity metrics. The specific conflict minerals are cassiterite (tin ore), wolframite (tungsten ore), coltan (tantalum ore) and gold or their derivatives. The trade of these minerals has supported armed conflict in the Democratic Republic of the Congo and neighboring countries.

Companies are required to disclose certain supply chain information in a report filed with the SEC, including a description of the measures taken to identify the source and chain of custody of such minerals, as well as the company’s efforts to determine the origins of the minerals. The SEC is developing regulations for these reporting requirements.

The California Legislature passed the precedent-setting Transparency in Supply Chain Act of 2010. The law requires retailers and manufacturers operating in California to post on their Web sites the policies they have in place to ensure their supply chains are free of slavery and trafficking by Jan. 1, 2012. This public disclosure must include the extent to which they use third-party verification, conduct independent, unannounced audits and maintain internal accountability for employees and contractors that fail to meet company standards.

Government traditionally has taken a larger role in regulating the private sector in Western Europe than in the United States and other global regions. Many social and environmental responsibilities that would be considered part of a company’s voluntary CSR activity in the Unites States already are legally defined. As a result, the CSR efforts by larger companies in Western Europe are sometimes further advanced and more structured than those found in Central and Eastern Europe. Some EU countries, such as Denmark, have enacted specific CSR reporting requirements, but most of the pressure to move the agenda forward currently is being generated by stakeholders.

The recently published 2011 edition of the respected United Nations CTAD World Investment Report contains a section on CSR that notes the emergence of CSR standards as an important investment policy development. It reviews the universe of standards, challenges and key issues. It urges governments to play a key role in such mainstreaming by “creating a coherent policy and institutional framework to address the challenges and opportunities presented by the universe of CSR standards.” A number of policy options for governments to adopt are also identified, including:

➤ Supporting CSR standards development;

➤ Applying CSR to public procurement policy;

➤ Building capacity;

➤ Promoting CSR disclosure and responsible investment;

➤ Moving from soft law to hard law;

➤ Strengthening compliance promotion mechanisms among intergovernmental organization standards;

➤ Applying CSR to investment and trade promotion and enterprise development; and

➤ Introducing CSR to the international investment regime.

Corporate Activity Trends

The number of chief CSR/sustainability officers in corporations is rising and their roles and responsibilities are expanding, according to a 2011 report, “Structuring & Staffing Corporate Responsibility,” published by the Corporate Responsibility Officers Association. The information is based on membership surveys. Members most frequently described the position as including the following functions: environment/sustainability, philanthropy, governance/risk, human rights and employee relations. The report also identifies two general models for managing CSR activities: centralized and decentralized.

Some pioneering companies with more comprehensive CSR programs are starting to embed them into their core businesses. This involves integrating them into the operations of key business units and not treating them as additional responsibilities and requirements. In those companies, CSR is embraced by senior leadership and becomes part of the business strategy. Some also are finding this approach can become a competitive advantage that generates revenue growth and market leadership.

The social aspect of CSR has been attracting increased stakeholder scrutiny and generating more corporate activity lately. The areas of social focus include human rights, employee diversity and engagement, community outreach and philanthropy. Businesses are finding the need to enter into partnerships and collaborative efforts with NGOs that have specialized social expertise in order to effectively identify and address social issues. They also are developing robust internal and external stakeholder engagement processes to solicit critical social input. Some companies consider engagement on social issues an important citizenship responsibility that they disclose in a public report that is separate and apart from their sustainability/environmental performance.

Corporate initiatives to drive CSR activities through supply chains have begun to gain substantial traction. Wal-Mart has taken the scrutiny of its supply chain to a new level by asking its 100,000 suppliers to provide environmental information. Companies are finding that supply chain emissions from activities such as processing, packaging and transportation often exceed those arising from an individual company’s own operations. The Carbon Disclosure Project is assisting Wal-Mart with the information gathering process. Wal-Mart’s intention is to develop a green rating for certain categories of products in their stores. Other large companies, such as P&G, have developed supplier scorecards to promote responsible and sustainable sourcing. These market-based efforts are introducing CSR/sustainability concepts to small and medium-sized companies.

Another step forward in the evolution of corporate CSR programs is the movement from aspirational goals, some of which are focused exclusively in the environmental arena, to comprehensive, measurable goals across the spectrum of ESG issues. These next-level goals are multi-year in scope and include external stakeholder input. A company’s performance against its goals is then publically reported, and in some cases can impact executive compensation.

As an example, Johnson & Johnson’s Healthy Future 2015 consists of seven strategic priorities, supported by 15 goals and corresponding targets to measure and drive performance. The company says this exercise “builds on our previous environmental goal setting and performance, while also incorporating social- and transparency-related priorities that our stakeholders expect of us.”

What’s Next?

If the activity level this past year is indicative of a trend, there will be continued growth in all areas of the CSR sphere. Performance measures will become more detailed and mature in the social and governance areas. Businesses, professional associations, academics and others not previously active on CSR issues will begin a new level of engagement and bring important perspectives to the dialogue. This activity will include an increased demand for sharing best practices on topics such as employee and stakeholder engagement, human rights and community outreach. Additionally, there will be further penetration of CSR issues and actions into the small and medium business markets, via expanding and more sophisticated supply chain initiatives.

Advocacy groups will bring more pressure to bear on governments to intervene and set standards. This could result in new laws or regulations that require specific CSR actions by businesses. Mandated public reporting likely is an initial focus, including auditing and verification requirements. The new California supply chain law can be viewed as an example of the kind of government intervention that might be initiated at the state level or in the regulatory arena. Proponents of government involvement argue there will not be real, verifiable progress on CSR issues until governments become fully engaged.

Judi Freyman has been the leader of the Mercer ORC Networks Western Occupational Safety and Health Group since August 2001.

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