Today’s business world is a world of disorder. Global mega crises ranging from security threats, global warming and the depletion of natural resources to food shortage and the growing gap between the rich and the poor, as well as higher personal levels of stress are changing companies’ freedom to operate, their reputations and brand value, the cost of capital and perceived investor risk.
Not only are the current imbalances making it more difficult for companies to sustain business as usual due to resource scarcity, natural disasters or social instability, which raise costs and endanger operations. They are also changing the expectations and demands of a broad range of stakeholders, including regulators, investors, employees, consumers and society at large.
In short, the 21st century business of business is still business. But the rules of how to stay in business are changing.
Today companies are expected to share responsibility with governments for tackling issues such as health or the environment, which, in the old-world economy would have been well under the corporate radar. For example, a 2007 Globe Scan poll on corporate citizenship found that a significant number of citizens in 25 countries held companies completely responsible for improving education and skills in communities, responding to public concerns, increasing global economic stability, reducing human rights abuses and reducing the rich-poor gap.
It is perhaps less surprising but equally important for companies wishing to maintain a good relationship with its stakeholders, that a large majority of the surveyed citizens also held companies completely responsible for the safety of their products, fair treatment of employees, responsible management of their supply chain and for not harming the environment.
In the wake of the economic crisis, the gap between the needs and expectations of society on the one hand and the objectives and practices of many businesses on the other has also widened dramatically: according to the 2009 Edelman Trust Barometer, nearly two-thirds of the public reported less trust in businesses than the year before.
Stakeholder responses ranging from public campaigning to lawsuits underline the demand for trustworthiness and responsible business practices. Consider, for example, the lawsuits filed against car companies for the costs of their alleged diminution of ecosystems, against tobacco companies for their alleged misleading of smokers about the dangers and addictiveness of cigarettes and against fast food companies for the alleged responsibility for their customers’ obesity.
It is for reasons like these that investors of capital are starting to steer away from companies within sectors whose risks and potential liabilities are not well understood. Their calculus is increasingly reflecting the uncertainties of potential costs and liabilities associated with externalities, future regulatory constraints or restricted access to natural resources. And it is for reasons like these that corporations are rising to the challenge of rebuilding stakeholder trust by linking business with sustainability and including the broader interests of society in core strategic efforts.
SRI – a new growth market
Socially responsible investing (SRI) is increasing the attention on corporate social and environmental practices through either positive screens, i.e. identifying companies that in some way benefit society, or through negative screens which weed out poor SRI performers, including those who pollute or maintain poor working conditions.
Large pension funds around the world are already using screening agencies to assess how companies tackle so-called ESG (environmental, social, governance) issues like eco-friendly practices, human rights and corruption. 475 large institutional investors around the world representing more than $55 trillion of funds (2009 figures) investigate the emissions strategy of companies through The Carbon Disclosure Project (CDP). And stock market indexes like the FTSE4Good Index Series and the Dow Jones Sustainability Index are tracking the financial performance of companies that focus on creating long-term shareholder value by embracing opportunities and managing risks derived from economic, environmental and social developments.
The following figures reflect the growth trend within SRI: according to the Washington D.C.-based Social Investment Forum, SRI has soared 5,000% in less than two decades (in 1984 SRI was a $40 billion market, by 2003 it had morphed into a $2.16 trillion industry). In 2005 almost one dollar in ten under management in the US – $2.3 trillion – was invested in SRI funds. From 2005 to 2007 the average level of shareholder support for resolutions on social and environmental issues rose by 57%, from 9.8% to a record high of 15.4%, and in 2007 institutional investors that filed or co-filed resolutions on social or environmental issues controlled $739 billion in assets. That same year global investment banking firm Goldman Sachs anticipated that additional professional managers, although not necessarily adopting a pure SRI mandate, will increasingly incorporate environmental issues into their analyses.
Interestingly, corporate scandals and the recent economic crisis have only proven beneficial to this trend: during 2008, when the crisis seriously started making its mark, the number of signatories to the investor-led and UN-backed initiative Principles for Responsible Investment (PRI) more than doubled to 381 as a response to the crisis, and has since then increased to 560 investors managing a total of $18 trillion in assets, including private equity firms.
Traditional business models are consequently being stretched. And with the reinforcing impact of the economic crisis, some of them are being stretched to a breaking point where short-term shareholder value creation cannot stand alone. As a result, companies are responding with attempts to reconfigure their DNA as pure profit seekers through responsible and sustainable business actions.
‘We believe that the leading global companies of 2020 will be those that provide goods and services and reach new customers in ways that address the world’s major challenges – including poverty, climate change, resource depletion, globalization, and demographic shifts.’ This is the manifesto for tomorrow’s global business by World Business Council for Sustainable Development (WBCSD), a CEO-led global association of some 200 companies from more than 30 countries and 20 major industrial sectors, dealing exclusively with objectives for bridging business and sustainable development. Not because they should feel morally obliged to do so, but simply because it makes good business sense.
Business practitioners that have succeeded in doing so report of benefits like improvement of the corporate brand, differentiation from competitors, increased operational efficiency, attraction and retention of employees, innovation of products and services and access to new or under-served markets and customer segments.
In short, by applying a business strategic approach to CSR the in-built weaknesses of old-world CSR – where, for example, donations, sponsorhips and volunteering are unrelated to the company’s business and therefore suffer cutbacks in times of crisis – are overcome. And thereby more sustainable value is added to both society and the company.
From CSR to CSI: A case study
… a diverse range of companies are revitalizing their business models by putting innovation and sustainability at the core of their business thinking. They transform corporate social responsibility into corporate social innovation (CSI).
General Electric (GE), for example, – maker of jet engines, plastics and lighting and builder of power plants that churn large amounts of carbon dioxide into the atmosphere – is marking itself out as a leader within the field of eco-business.
GE’s Ecomagination business strategy is a pledge to improve its environmental practices by focusing technologies, production capacity and infrastructure on developing solutions such as solar energy, hybrid locomotives, fuel cells, lower-emission aircraft engines, efficient lighting and water purification technology.
The industrial giant invests $6 billion each year in research and development, of which $4 billion is allocated to solving the problems of clean energy and affordable healthcare. In 2008, GE’s energy-efficient technology reaped $17 billion in revenue, up 21% from the year before.
Operating in emerging markets can also provide fertile ground for new ideas and products that may eventually also sell to consumers all over the world by serving as beta sites for what has been dubbed ‘trickle-up innovation’.
General Electric, for instance, is now selling small-size, low-price handheld electrocardiogram devices and portable PC-based ultrasound machines in the USA, although these machines were originally developed for rural India and rural China.
The author, Tania Ellis, is a Danish-British prize-winning writer, speaker and business innovator, who specialises in social business trends.
This article has been reprinted with permission from a longer format. Read the full article from The European Financial Review or on Tania Ellis’ website.
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