What is corporate social responsibility?
Corporate social responsibility (CSR) considerations have entered the mainstream and are becoming part of integrated reporting, investment analysis and corporate governance. Markets all over the world are grappling with the rise of environmental social governance (ESG) criteria in investment decision making.
Where did CSR originate?
Corporate social responsibility stretches back to an emerging view among academics in the 1960s that companies that were socially responsible, and managed the effects of the business operations in line with public expectations, would perform better. However, the majority of business held to the doctrine of economist Milton Friedman, that the sole responsibility of business is to increase its profits to benefit shareholders.
That ethical business practices and profitability are not mutually exclusive is a concept that has persisted for decades. The unconscionable corporate behaviour that led to the global financial crisis (GFC) brought these issues to the fore of public discourse.
A company’s responsibilities are now seen to encompass a duty for its surroundings. Where companies’ reporting requirements were confined to sales, profits, margins, assets, liabilities, there is now a powerful trend for companies to consider data on the social and environmental impacts of its operations. While it is a voluntary practice, inclusion of CSR (or similar initiatives such as ESG) in company policies and strategy has become commonplace, driven largely by institutional shareholders.
Corporate social responsibility and listed companies
Australian listed companies have been required to report on their handling of ESG issues on an ‘if not, why not’ basis since the financial year 2015-16. Under Recommendation 7.4 of the ASX Corporate Governance Principles and Recommendations (Principles), ASX-listed companies should report on sustainability issues in their business. The recommendation states that, “A listed entity should disclose whether it has any material exposure to environmental or social risks and, if it does, how it manages or intends to manage those risks.”
This inclusion in the Principles in 2014 had a marked effect on reporting in listed companies. In Sustainability Reporting Practices of S&P/ASX200 Companies: 2016, the Australian Council of Superannuation Investors (ACSI) reported that of the 174 ASX 200 companies surveyed in 2015 and 2016, 48 had improved their ESG reporting level. In total, 90 per cent of companies in the ASX 200 provided some level of ESG reporting in their 2015 disclosures. The same paper also found that the number of companies in the “no reporting” category fell from 26 in 2015 to nine in 2016. For the first time, there were not any “no reporting companies” in the ASX 100.
Subsequent annual reports from ACSI on ESG reporting by ASX 200 companies have shown that reporting standards have continued to improve significantly. Inclusion of the UN Sustainable Development Goals (SDGs) and the Task Force on Climate-related Financial Disclosures (TCFD) framework in company reporting have sharply increased.
In 2019, the ASX released the fourth edition of its list of Principles. These Principles reinforce the need for listed companies to act in lawful, ethical, and socially responsible ways.
What are some corporate social responsibility examples?
Some current CSR topics that are a focus of discussion are:
Boards need to understand these important CSR issues and how their organisation is addressing them. Equally, boards should consider how emerging issues will play into these trends and whether their organisation is adequately prepared for them and to respond to them.
What’s next for corporate social responsibility?
There is a growing trend in ventures that achieve strong commercial performance through social outcomes. Larger institutions are recognising the benefits of partnerships with charities and community organisations that can help achieve its corporate social responsibility goals. By giving back, companies can improve their standing in the community, and individuals and communities are eager to support altruistic businesses.
In the years following the GFC we have seen the rise of the social enterprise: a business that intentionally runs operations so as to address social or environmental problems. There is also a league of social enterprises that have gone a step further and achieved B Corp Certification. Enterprises with B Corp Certification have equally a strong commercial imperative and social mission. They meet the highest standards of performance in CSR considerations, including their transparency and legal accountability.
The issue of climate change is now centre stage in global governance discussions. Larry Fink, CEO of the world’s largest asset manager BlackRock, wrote of the link between purpose and profit in his annual letter to CEOs, highlighting the demand for social purpose by millennial consumers and investors. He also announced that Blackrock would begin to exit investments that carry a high-sustainability risk.
In Australia, the fallout from the financial services Royal Commission, which issued its final report in February 2019, continues to be felt in boardrooms around the country. More than ever, boards should consider their social responsibility in making governance decisions.