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Market News

 July 11, 2007
The Evolution of Corporate Responsibility

 Geneva, Switzerland -- The gathering of corporate leaders at the United Nations Global Compact Summit last week provided a wealth of research and declarations reinforcing a private sector commitment to environmental and social issues. Executives spoke strongly on issues relating to climate change, clean water and poverty reduction, and cited studies showing positive links between sustainability and profitability. Despite such progress, enormous challenges remain as the business community strives to address these issues, and there are questions on whether bold words will be supported by actions. Yet it is clear that corporate responsibility has moved into the mainstream to become a matter of strategic importance for leading firms, an evolution that should not be discounted.

Founded in 2000 by then-UN Secretary General Kofi Annan, the Global Compact was envisioned as part a new wave of corporate responsibility, based on voluntary commitment by the world's leading businesses to ten universal principles in the areas of human rights, labour, the environment and anti-corruption. Seven years later, its membership boasts nearly 4000 companies and stakeholders in 116 countries.

The initiative is voluntary, with organizations required to communicate progress in implementing the 10 principles. The Compact relies on public accountability, transparency, and the "enlightened self-interest of companies" to ensure compliance. Sometimes criticized for its lack of power and the potential hypocrisy of members that adhered to the principles only in public declaration, the Compact has in fact delisted more than 500 members over the past year for repeated failures to communicate on progress in sustainability areas, lending more weight to membership.

Last week, an international audience of more than 1000 chief executive officers, government ministers, and the heads of civil society and labour organizations gathered in Geneva to discuss the group's progress. Accompanying bold declarations of new actions to promote environmental and social sustainability were reports that nearly all participants had improved action in these areas, and that those firms which had done so were rewarded with higher shareholder value.

Increasing engagement, outperforming the market

The Compact released its first Annual Review (PDF), a survey monitoring the extent to which companies have implemented the ten principles, revealing that most companies involved in the program have taken action related to human rights, labour conditions, the environment and anti-corruption.

Three-quarters of respondents have engaged in cross-sector partnerships with one or more of the following sectors: non-governmental organizations, business, academia, the UN, and other multi-lateral organizations. Almost two-thirds (63 percent) of respondents said they participate in the Global Compact to increase trust in the company.

Another survey prepared by McKinsey&Company (PDF) showed that despite such actions, there are important "performance gaps" in implementation. While 72 per cent of CEOs surveyed said that corporate responsibility should be embedded fully into strategy and operations, only 50 per cent think their firms actually do so; 59 per cent of CEOs said corporate responsibility should be embedded into global supply chains, but only 27 per cent think they are doing so.

Progress is being made however, as more than 90 per cent of CEOs are doing more than they did 5 years ago to incorporate environmental, social and governance (ESG) issues into strategy and operations.

Another report revealed some potential motivation for increased consideration of ESG issues, along with reputation enhancement: increased profitability. Presented by investment industry leader Goldman Sachs, the study (PDF) showed that among six sectors covered -- energy, mining, steel, food, beverages, and media -- companies that are considered leaders in implementing environmental, social and governance policies have outperformed the general stock market by 25 per cent since August 2005.

In addition, 72 per cent of these companies have outperformed their peers over the same period. The report analysed companies in three areas: ESG performance; how well they are positioned in relation to long-term industry trends; and the strength of their underlying financial returns.

Calls for action

The Global Compact Summit was also highlighted by a number of calls for action and declarations on ESG issues. Two notable statements focused on two of the most pressing environmental and business concerns today: climate change and clean water. The chief executives of 153 companies worldwide endorsed a statement entitled "Caring for Climate: The Business Leadership Platform", which calls for increased government and corporate action to establish market-based mechanisms to reduce greenhouse gas emissions, including a "stable price for carbon".

Signatories to the statement, including 30 from the Fortune Global 500, committed their companies to "taking practical actions to increase the efficiency of energy usage and to reduce the carbon burden of products, services and processes, to set voluntary targets for doing so, and to report publicly on the achievement of those targets annually". The leaders also pledged to deal with the climate issue strategically and build relevant capacity; to work with other enterprises and on a sector basis and along their global supply chains; and to promote recognized standards and joint initiatives to reduce climate risks.

Also at the Summit, the CEOs of six corporations -- The Coca-Cola Company, Levi Strauss & Co., Läckeby Water Group, Nestlé S.A., SABMiller, and Suez -- launched the "The CEO Water Mandate", a project designed to help companies better manage water use in their direct operations and throughout their supply chains.

The project asks companies to make progress in six areas: direct operations, supply chain and watershed management, collective action, public policy, community engagement, and transparency. Specifically, endorsers of mandate pledge to set water-use targets, assist suppliers with water-efficiency practices and partner with governments, policy makers and community groups to address water shortages and sanitation.

Other Summit activities included: a call for business schools and academic associations to do their part to advance corporate responsibility worldwide; a new tool to help companies improve implementation of the Compact's principles, particularly in emerging markets; and a discussion of the urgency to address the challenges brought by climate change as a main development priority for China.

The Business role in society

At the close of the Geneva Summit, participants endorsed the 21-point Geneva Declaration (PDF), pledging to adhere to the Compact's principles and underlining the positive role of business in society.

"Business, as a key agent of globalization, can be an enormous force for good", the declaration says, adding that companies can create and deliver value in the widest possible terms by committing themselves to corporate citizenship. Poverty, income inequality, lack of work opportunities, as well as protectionism, are identified as serious threats to world peace and markets.

Summit participants noted that responsible business practices contribute to social and economic inclusion, and encouraged the development of partnerships with governments, civil society and labour. In countries afflicted by conflict or weak governance, investors and companies can play a more helpful role by engaging rather than divesting, the statement adds.

The statement also acknowledges the increasing consideration of ESG issues by the worldwide private sector, asserting that "it is unprecedented in history to have the objectives of the international community and the global business community so aligned". While the corporate executives and leaders of non-governmental organizations present acknowledged that there is a tremendous amount of progress yet to be made, it would appear that participants were right to consider the current wave of corporate responsibility initiatives as groundbreaking.

Business objectives still centre on profitability and shareholder value, and necessarily always will, but the key to recent transformations is that environmental and social performance have been demonstrated to be intrinsically tied to the bottom line. As the world's most progressive companies recognized years ago, improved ESG performance can make a business more successful, and that thinking has spread to many giants of the global business community.

The result is that many in the Fortune 500, as well as small businesses, have made public commitments to reduce greenhouse gas emissions, conserve fresh water, address human rights concerns, and improve overall social and environmental performance - and have followed through in many cases. In the past, mere lip service was paid to issues that are now attracting billions of investment and catching the eye of the executive suite.

There is now a business imperative to integrate ESG considerations into strategy, and firms that ignore these aspects do so at their peril: the global public and the financial community are unwilling to ignore any such abuses, and laggards are at risk of eroding market share, government pressures, and a lack of access to capital.

Leading firms are currently demonstrating the positive impact business can have on society, as they create wealth and encourage prosperity while preserving natural resources and promoting social inclusion. Accordingly, many firms, some of which were previously targeted by protests, are shedding their adversarial relationship with local communities and NGOs to create partnerships with multiple benefits. The business 'community' is now more than ever deserving of the name, contributing positively in many ways beyond the boundaries of the firm.

The UN Global Compact is just another indicator of these changes, as a global expression of the evolution of corporate responsibility. No doubt some members will excel in implementing its principles while others will struggle, but their collective efforts, whether successful or not, will continue to push in the right direction. Bolstering these efforts with support from government and society will help to provide a 21st century that is peaceful, inclusive, environmentally sustainable, and increasingly stable for all.



For More Information: United Nations