An Assessment of Achieving Sustainability through the New Corporate Social Responsibility Agenda
16th June 2017
An Assessment of Achieving Sustainability through the New Corporate Social Responsibility Agenda
Author: Tanja Nowak
Queen’s University, Belfast
The Malthusian principle of ‘moral restraint’ for population sustainability, can transition effectively into the modern day strive for Sustainable Development (SD). There needs to be restraint present both; in terms of financial institutions gambling with risk and in corporate short-termism, to ensure the viability of companies and the community. This is necessary as societal expectations have transformed with the increasing adverse impacts that corporations can have on the community; consequently, more is demanded of firms. As companies are the main drivers of the economy they are the ‘engines of the future’ which should bear responsibility for achieving the objectives of SD; this logic being exacerbated by the Crisis of 2007/8 which exemplified the ‘collateral damage’ of unsustainable practices. Nevertheless, businesses are not social institutions, and so it is useful to explore how, and if, they could achieve the goals of SD.
In this essay I aim to critically analyse the concept of Corporate Social Responsibility (CSR) and SD from an alternative perspective, mainly focusing on the interrelated concept of Socially Responsible Investing (SRI) and green bond issuance; as modern kinds of CSR strategies which have the potential to place businesses closer to the objective of SD. The issue here is that the present market system encourages short-termism, which has restricted the ambitions of ordinary Corporate Social Responsibility, as a system for achieving SD; and so, it is debatable whether this is still a possibility or whether a new approach is needed. A solution to this may lie in the, increasingly important, new CSR initiatives. These practices do not require a severe rethinking of the corporate purpose; but rather, are a progressive aspect of CSR, which focuses on long-term growth in order to achieve both; social and corporate sustainability. However, it may be questioned whether these are enough.
This article will be divided in the following way; Firstly, I will briefly discuss legislative reform and outline the emergence of Sustainable Development within CSR discourse. Secondly, I will consider the importance of the business case for CSR and sustainability. Thirdly, the promise of Socially Responsible Investing, in tandem with green bonds, will be examined. Fourthly, I will contemplate reforms.Overall, concluding that while achievement of Sustainable Development is complex, this does not require drastic corporate changes, but rather; innovative CSR approaches and ‘enabling legal frameworks’ will be successful.
The ‘systemic breakdown’ caused by the Global Financial Crisis has resulted in growing calls for businesses to behave in a socially responsible manner; thus furthering the need for a unified approach to governance and sustainability, and allowing Sustainable Development to permeate into the company agenda. Regarding this, it has been argued that post-2008, stakeholder theory has become dominant; via UK statute; however, scepticism has been expressed. Critics have questioned the authenticity of its transition from the shareholder primacy modeland conflicting responses resulted in diminished optimism. Therefore, it appears that legislative reforms have not succeeded in sustaining transparency concerning social responsibility.
Significantly, the failure of the ‘Chicago position’; of contributing to society through wealth-maximization, has enabled CSR to emerge as a powerful tool for indirect company regulation. Importantly, due to its lack of a conclusive definition, CSR can respond to ‘new pressures placed by each generation’, and; consequently, it is able to account for the increased focus on sustainability, along with ‘new’ CSR; such as sustainable bonds which encourage SD. Sustainable Development is a particularly important concept, as it is a way of development which can be maintained for future generations, and not only the present one. Initially, the concept focused on environmental sustainability, formally introduced by the International Union for Conservation of Nature in 1980, and dating back to the Rio Summit, where businesses were encouraged to act upon pressing sustainability challenges. This has subsequently resulted in the focus shifting to balancing financial and social aspects for corporate success. Therefore, Sustainable Development endorses longevity in corporate activities and as a result is highly compatible with the aims of Corporate Social Responsibility; complementing its approach of improving the social as well as corporate climate.
The focus on sustainability has not only been a result of public concerns, but executives have realised that sustainable approaches to CSR can provide substantial benefits to their companies; this reasoning being echoed in the recent Green Paper on corporate governance. Therefore, it is better to engage with sustainability in a proactive way, as environmental degradation poses a threat to business survival, rather than having to respond when issues transpire. However, the business case is not unproblematic, as it is founded upon the corporate market-control perspective; and so, when economic markets do not reward socially responsible activities it can lead to its foundations being ‘shaken’.
Notably, the profit-driven CSR dialogue appears to have turned to one that is based on achieving dual sustainability; of the environment and at the firm level; whereby, enterprises can achieve this through their responsibility ‘mission’. The preceding can be attempted through two types of CSR; tactical and strategic, whereas the former is short-term focused, the latter seeks long-term ‘financial advantage’ from aligning responsibility with wider societal needs. This second approach; also referred to as the ‘sustainability model’, embraces the reasoning that firms need financial returns to ‘survive’, rather than posing it as a conflict of ‘opposing judgments’. Thus, it seems to be a basic approach towards SD. However, such CSR proves to be overly idealistic; as positive financial returns cannot exist in every instance of responsibility, and; moreover, this technique does not address the core problem of corporate irresponsibility; but rather, focuses on capitalisation from ‘fixing’ the adverse outcomes of business actions.
The current economic market presents an obstacle for Sustainable Development; as it rewards short-termism and; thus, implicitly discourages engagement with prevalent long-term societal problems. This issue is manifested in the fact that markets do not consider the ‘intangible benefits’ which a company gains from engaging with SD and; as a result, this has prompted, somewhat unrealistic, suggestions that a new system of capitalism is neededto ensure that firms are valued on their long-term prospects. However, dismantling capitalism is not be a feasible option as it is ‘naïve’ to assume that changes can be made to a system which is so ingrained within the present societal structures. Rather, it is better to focus on sustainability through CSR; by way of, for example, Elkington’s Triple Bottom Line perspective of environmental, social and economic governance from which firms are able to create value in ‘multiple dimensions’.
Following from the discussion above, Sustainable Development may be rarely associated with financial institutions, which are mainly concerned with capital gain, however, the indirect role of these establishments in CSR activity is crucial for ‘sustainable economic development’ as they can transform capital into positive developmental (CSR) schemes. Therefore, I will argue below that financial markets are experiencing an ‘ecological evolution’ through embracing Socially Responsible Investing. Moreover, there is a link between SRI and CSR due to the fact that institutional investors hold the majority of shares in the UK; consequently, this means that they will exercise vital influence over whether a firm becomes sustainable.
Ethical funds represent a merger between social values and financial investments, and this combination is linked directly to the CSR ‘profits debate’ above, as the process of investing is fundamentally about maximising shareholder-value. However, the short-term pursuit of returns can no longer be the dominant strategy in investment practices due to its ‘incompatibility’ with the SD concept. The aim of Socially Responsible Investing is to integrate ‘ethics’ and finance, and involves identifying corporations with a good CSR record, where the firms are evaluated on the basis of environmental, social and governance (ESG) criteria. Accordingly, SRI can reward responsible companies by giving them access to capital, and so providing them with recognition for their positive initiatives.
The rising investor community interest in corporate sustainability performance is evidenced by the various sustainability indexes; such as the Dow Jones Sustainable Index, which provide a good-practice benchmark for investors and may use positive or negative screening to filter out irresponsible firms. However, such screening does not change the behaviour of unsustainable companies. This is due to the fact that it refuses investment in environmentally degrading sectors; but these are the sectors which need these investments most; as to allow them to transform their entrenched industry practices to more sustainable ones. Thus, social investments could have an impact on industries and this could lead to greater SD, than from purely endogenous CSR.
Moreover, investors are becoming active in their voting-powers to influence responsibility in companies. Hedge fund activism on ESG concerns has been found to improve company performance as regards CSR issues; therefore, investors play an important part in encouraging sustainable practices. The investor community is also a ‘guardian’ for SD, in that signatory financial institutions act according to the Equator Principles (EP) to prevent funding of unsustainable projects. Under these voluntary standards, banks adopt policies to ensure that proposed development projects are compatible with environmental requirements. Interestingly, these principles have a disclaimer of not creating liability, which poses the question as to whether they are meaningful in a practical way as they cannot enforce standards. However, voluntary regulations, such as EP are not treated as tools for social change and so; the reality of non-compliance is a barrier to their success.
Nevertheless, SRI of financial institutions may still have the potential to transfuse sustainability into company CSR. I would argue that the issuance of bonds, whether green, social or sustainable, is a type of ‘new’ CSR activity which could contribute to SD; as corporations are aiming at using the raised capital for investments which will reverberate beneficial sustainable effects; either locally (clean transportation) or internationally (renewable energy). Green bonds enable companies to raise finance to fund environmentally sustainable CSR projects and this responsible market seems to be developing rapidly. It has been reported that the UK is the second largest issuer in Europe with its investments focused on renewable energy, which is advantageous for contributing to both; investor relations and also CSR initiatives. Furthermore, green bonds are a tool to achieve business sustainability, as it has been claimed that companies which engage in issuance will have better prospects.
Banks have been the main issuers of green bonds, due to the fact that they can spread the cost of issue, and this may be seen in Barclays committing to investing £1bn into this scheme, which shows that financial companies are becoming more devoted to be seen as taking CSR actions in order to contribute to SD, especially following their role in the Financial Crisis. Regarding this, it may be useful to mention that the green bond market emerged during the 2007/8 era, which does seem to reinforce an assumption that the Crisis may have had a role in bringing to light the importance of corporate responsibilities of financial markets and its key players.
Nevertheless, issues exist within the green market. The extraction company GDF Suez has, following investor demands, previously issued a green bond worth €2.5b. However, this has caused significant controversy as the issuance allowed the financing of a Brazilian dam which had contributed to rainforest flooding and destruction of habitat. Another example concerns the large amount of green bonds issued by Chinese banks, which are not only useful to counter the pollution crisis but rather, this issuance is utilized to fund ‘clean coal’ which contributes to negative social and environmental externalities. Consequently, these instances exemplify the difficulty in controlling the nature of projects these bonds are used to fund, and this problem stems from the fact that there is no official definition of green bonds by which company issuances may be measured.
The examples above indicate that the Green Bond Principles are not particularly effective in their application; in terms of providing transparency and ensuring that the targeted projects are ‘green’. This suggests that investor pressure will not contribute to genuine environmental sustainability and that additional regulation may be the answer. It is argued that such regulation will provide necessary information to the markets so that they will be able to discipline firms upon deviation from standards; however, this proposition may be an overstatement, as market control is limited. SRI also suffers from the same problem as CSR, in that the focus of studies has been on its financial performance, whereby it has been found that SRI funds do not perform better than conventional investments, which detracts from its purpose of encouraging SD. However, their long-term financial performance may be superior, and this poses problems in that; funds apply social perspectives after firms have been screened via financial criteria, resulting in exclusion of responsible firms which do not exhibit performance straightaway. A solution to this ‘top-down’ approach is a model which considers financial decisions as ‘embedded’ in ‘social values’ and where the ‘first screening’ is based on ethical rather than financial factors.
SRI has not transitioned ‘successfully to mainstream’ investing as evidenced by the issues above, and so the solution may lie within the EU Commission’s study to further green market growth; with reform proposals such as the establishment of standardization measures to provide clarity. A benefit of this strategy would be improving the confidence in ethical investing; namely that the investments are for genuine green purposes.
Contrary to my argument, and considering the issues with SRI presented above, perhaps a new corporate form should be considered. Hybrid organizations have social responsibility at their core, as these are a mix of a for-profit and non-profit organization with similar aims to that of CSR. For example, the ‘benefit corporation’ can be understood within the CSR discourse as a company which includes stakeholder interests in its governance; and therefore, it is argued to be a solution to the shareholder-primacy problem due to its explicit stipulation of its social purpose. Additionally, this concept is related to SRI, as these companies are argued to provide a ‘shelter’ for directors who are willing to invest in socially responsible enterprises at the expense of company’s financial margins; however, this reasoning is defective as it assumes the position that such investments cannot be reconciled with ordinary company agendas, which is what this essay has been attempting to endorse. Despite their potential, these companies may become marginalized as a ‘select group’ and; consequently, have the counter-productive impact of diverting attention away from requiring hegemonic companies to adopt CSR.
It has been suggested that legally mandated CSR is a ‘virtual certainty’ in the future for the achievement of SD, this being encapsulated by the EU directive on non-financial disclosure which aims to provide transparency and improve performance measures of companies which made sustainability a part of their agenda. Accordingly, rather than rethinking the corporate purpose, it would be more efficient to increasingly mandate CSR and, as there would be ‘no discretion’, this would end the circular value-maximization debate. However, this comes at a risk, as mandates could have negative repercussions such as for example; enabling the covering up of corrupt corporate activities. Importantly, legislation should not lead to a ‘bi-polar’choice between either government or corporate interference but rather; to identify situations in which CSR is most appropriate.
An alternative conclusion to my analysis would argue that having a drastic change is the only way of achieving SD; as otherwise nothing will improve. Conversely, I think that the participation by firms in CSR, and to an increasing extent in SRI and issuance of green bonds, shows that corporations are taking actions. Controversially, it has also been argued that CSR and SD should not be treated as interlinked, because this can actually hinder corporations from concentrating on their long-term community impacts. I would agree with this to the extent that it is suggesting that too much is being expected of firms but not so far that they should not be linked, as the discussion above presents that they are.
There has been a major shift in our perception of corporations and the responsibilities we envision on them. The ambiguity of the Corporate Social Responsibility definition has allowed concepts such as Sustainable Development to permeate into its discourse, and this has resulted in consensus about the need to achieve sustainability, in terms of both; economic and environmental as to ensure the viability of our ecosystem and the corporation.
Furthermore, SRI and green bond issuances are a new, and modern kind of initiative; which, despite their serious problems, are nevertheless progressive developments which may impel CSR into more complex areas in the future and thus, should not be abandoned. I would suggest that CSR can achieve SD if it is utilised in the right way and that a radical rethinking of the corporate purpose or the capitalist system may not be feasible; consequently, it is better to look internally and consider what is within the reach of company directors and the law. This can be achieved through smaller; though no less significant, changes by way of ‘embedding’ social and environmental values into the financial markets. Consequently, corporations not only need Malthusian restraint in terms of irresponsibility, but, more importantly, a drive for increasingly innovative CSR in order to achieve future sustainability.
 Council Directive 2014/95/EU of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups OJ L330/1.