Why create a CSR report?

Why create a CSR report?

Why should a company create a CSR (Corporate Social Responsibility), sometimes known as a Sustainability report, or even a “Triple Bottom Line” report? What are the drivers? Is CSR a fad, a real reporting opportunity, or a requirement? The answer to that question depends on who you are, your markets and clients, your competitors, and those you report to external to the company.

It is easy to suggest that it is a fad, and we've all seen fads come and go. But it is also easy to see that if it is a fad, it is a fad that is being driven as much by consumers as by companies themselves. Companies across industries are touting their corporate responsibility on their websites. Why? Why would they spend the money and time to create reports, unless they actually believe there is a return for such reporting?

The very fast response is that they believe there is going to be a return, a real ROI, either through reduced costs or increased revenue, or both.

Drivers

So what are the key drivers? The can be summed up as including:
•    Investors
•    Market expectations
•    Competitors
•    Regulators
•    Employees
•    Communities

And each of these drivers has at its core either increasing revenues, or reducing costs. After all, if a program does not accomplish one or the other, then why should a company incur the associated costs?

In CSR circles, these drives are called "stakeholders", and frequently direct outreach to stakeholders is an important element of creating a successful CSR report. Strangely, for most companies that "stakeholder engagement" has already take place, in one way or another, and the information needed to create the CSR report already exists.

So lets look quickly at each of these drivers.

Investors

Why should a company produce any report? Fundamentally reporting should serve the purpose of improving internal decision-making, influencing external parties, or responding to regulator mandates. As CSR reports are external facing in nature, the question then is "who do we want to influence". At the front of the pact should be the investors or potential investors. And this means that the CSR report should provide the information needed for that group - information to demonstrate to investors (and analysts whose results are of interest to investors) that the company understands and is proactive in meeting is "responsibility" imperatives.

Investors want both short- and long-term rewards, and management's program must balance the two. The CSR report should, coupled with or even integrated with the annual and financial report, provide the data that delivers comfort to investors that the company understands and is focused on achieving short-term rewards in a manner that ensures achievement of long-term rewards and goals. Almost sounds like the classic definition of Sustainability - enough for today without stealing from tomorrow (my paraphrase).
 
Market Expectations

Markets, both B2B and B2C (and every other x2x) are becoming much more aware of the relationship between a supplier's corporate responsibility and the quality of product, acceptance of the product, and reduction of long term costs.

Equally, companies have come to understand that, as Warren Buffet said best "it takes 20 years to build a reputation and 5 minutes to ruin one". Corporate responsibility is not about always doing good, but about being able to prove to yourself and communicate to your customers that always try, honestly, to do good (within a business context of needing to make a profit).

Many companies are now including a requriement for suppliers to specifically address their CSR credential in proposals. One bank in Vancouver includes responses in it ranking of potential service providers. Other companies around the world are now looking for this information in bids.

You should be asking for a copy of any potential suppliers CSR reports before entering into any major contract. Companies that provide such reports are significantly more likely to understand the issues and to work to ensure that they are “responsible” businesses. Companies that cannot demonstrate their CSR credentials may cost you, and cost you big. Too often a failure to report is not because the company is not aware of the issues, but because addressing potential issues (child labor, carbon-intensive production or energy, pollution) can add costs that will eat into the suppliers’ profits. Competing against “responsible” businesses without carrying associated costs can be profitable business. But today, any tourist or activist with a cellphone could destroy your reputation, linking you to irresponsible companies in your supply chain.

Competitors

Companies should take a very good look at their competitors’ websites and the messages that they are sending.

Working with clients, I make a habit of looking at their competitors’ websites. It comes as a little surprise that many tout their sustainability or responsibility credentials. Sometimes in vapid and empty phrases, or with pictures of windmills, daisies, and little girls smiling in the sunshine (these I almost immediately discount). Others back up their statements with reports, online or in PDF format, sometimes with a GRI Content Index to help find various bits of information.

Then there are the majority - the companies that do not have CSR or Sustainability reports of position statements. I also like to point these out to my clients, asking if demonstrating the company’s credentials might actually provide a competitive advantage. Equally, if the company is already competing of a "level playing field", how level will the field be when their competitors do start showing their credentials?

Regulators

Ahhh, regulators, the gorilla in the room. Why are they a driver for creating a CSR or Sustainability report? The first reason is to show them that you are already a "responsible" business and therefore, as they say on the police shows - "Move along, nothing to see here". The second reason is to prove that there is no need for all that nasty regulation that they are considering, because you are already "responsible", as demonstrated in you report.

Of course, the first reason the more effective, because for the second to matter, your peers will need to be demonstrating that they are responsible businesses also.

So, the CSR or Sustainability report should be taking informaiton that your company already produces, and complies it into a quality report that all can see, not just the regulators who are already receiving those detailed reports.

A great example is the commercial property and construction industries. Many companies in these industries produce very nice CSR reports. A careful read of the reports, especially their health and safety sections (frequently described as "Caring for our People and our Communities" or words to that effect) can be boring, and sound like boilerplate. At there core is a simple message - "We comply with all health and safety laws". But that is not nearly as interesting as reporting a reduced accident rate, increased training, onsite safety briefings for all visitors (“because we care”), etc.

Employees

Employees like to have pride in their company. It is part of them. And a company’s image reflects on the employees. Ask any employee of a "Top 100 Places to Work" (in the US) or virtually any employee of a company like the Co-Op in the UK, and you will see their pride.

And pride in your employer translates directly into reduced unplanned turnover, reduced hiring costs and payroll, and increased productivity. We know that people work for money - but we also know that people chose where they work for many reasons beyond money.

Some companies are intentionally structuring the "responsibility" message with a view to attracting and retaining employees (even in this economy). Some look at their employees as long term assets that require investment. Others understand that the recovery, as it unfolds, will change the employment picture, and companies with a poor reputation will get their pick of the second-level candidates.

Communities

Finally, and possibly most importantly, all companies have a "license to operate" that is in no small part predicated on how the local and wider community views that company. Good employers, innovative products and services, and a respect for the environment and society all factor into that "license to operate". Abuse that license and society will turn against the company.

Therefore reports are being written specifically to highlight the value and respect that companies have for their communities. For the multinationals, they report to demonstrate their respect for and support for the varied cultures and communities in which the work and deliver products and services.

The support of companies for their communities is not something that happens because it is in a glossy CSR report. The CSR report highlights the support that the company provides to its communities.

Where does the content come from?

So, I've highlighted the drivers for CSR reporting. But where does all the information contained in such a report come from? The range of information, the number of people that maintain and hold that information within a company can be quite difficult to map. And mapping the sources of that information is important.

The good news is that there are ways to improve access to and collating all that information, filtering out the important from the merely interesting.

This is a subject for a different article, but clearly tools exist or are coming onto the market that will make the collection, collation and selection of already existing information and content much easier. This will facilitate the rapid creation and updating of CSR / Sustainability reports, regardless of the reporting standard used.

What reporting standards should be followed?

Today there are a few reporting standards, and the standard selected should be based on the primary audiences. If you are looking to create a pool of data for analysts, I would recommend you take a good hard look at the KPIs for ESP produced by the DVFA (German Investment Analysts Association) and endorsed by EFFAS. If your primary audience is marketing, consumers, and employees, then the GRI's G3 standard provides a range of reporting levels (they call them "Application Level") that allows you to produce a tailored report, and to grow the range of reported information over time.


The UN Global Compact probably has the "easiest" and "fastest" standard to comply with, and is a good "starter" report. But if a company is going to be serious about meeting the information needs of the widest range of audiences, the UNCG will not be adequate.


The work of the newly formed (August 2010) IIRC (International Integrated Reporting Committee) will be worth following, as the primary objective there is to create reporting standards that integrate sustainability reporting into tranal business reporting (annual reports, etc) and providing a sound accounting base for the reported information.

HBR Case Study; Should Sustainability Have a Seat in the C-Suite?

Harvard Business Review has the best case studies, but then I guess we should expect that. I know that I read their case studies, and say "Well, of course" in answer to their question. But like most really good questions, the answers are never "yes" or "no". There is a real pleasure in thinking through the problem.

This month it was no different.  Their question was: Should Sustainability Have a Seat in the C-Suite? My gut reaction is "Well, yeah, how else are they going to be, and be seen to be serious about this?" But a close reading of the case, a mythical computer and electronics company called Narinex, made me rethink my automatic response. They are losing bids, not all the time, and not all the big ones, but enough to make them look closer. And one of the key differentiators is their competitor's (in the situation highlighted) sustainability record. At least, it seems to be their record.

Closer reading shows that it is not the sustainability record, but in part the presentation of that record through the appointed CSO (Chief Sustainability Officer) at one of their competitors.

I won't rehash the case here, you can read it at the link above. But I do want to mention two of the comments submitted by readers.

Elaine Cohen, as usual, is clear in her argument - "I believe the question at this point is not whether to hire a CSO but what is the sustainability reality for the Narinex company. The focus on sustainability is not going away, and is now a minimum expectation of businesses." She then goes on to recommend a Sustainability Mapping Study, with result provided to leadership for decision making.

She ends by saying "Sooner or later, in my experience, if a company is serious about sustainability, a CSO is a necessary asset. However, in the first stages, moving forward step by step may require broader expertise that one CSO can deliver and it might be better to establish some initial good practice through engaging the management team in their own functional areas, but only if there is someone in the business who is prepared to champion this as a short-medium term assignment."

The other comment that I really liked was from Erik Thomsen, who approached the problem from a slightly different point of view. Erik focuses on the availability of information for clear future decision making. He says "This is because the financial metrics traditionally used in the C-Suite are inherently backward looking and fail to capture critical environmental and social factors that are the drivers of medium to long-term financial performance. "

He's right. The information provided, and modeling performed remains based on well worn paradigms, one of which is that a zero price input today will remain a zero price input in the future. The pricing of externalities, if not in fact then certainly in projections, is critical to corporate success.

While I favour hiring a CSO, Erik has a different view: "What’s more, hiring a Chief Sustainability Officer implies that the rest of the C-Suite is too busy to be concerned with sustainability. This would implicitly de-position sustainability, putting it into a box other members of the C-Suite don’t have to think about."

He finished by saying "Finally, addressing the VP of Sales’ concerns -- who is going to generate more buzz, a Chief Sustainability Officer talking about issues that could be handled by someone in marketing and communications? Or the CFO, COO and CEO talking about the strategic business decisions that will ensure the company’s future profitability in an environmentally and socially sustainable way?"

Both Erik and Elaine are right, even through their suggestions in the end are different, I think they are both right. I think they should hire a CSO. Yet Erik makes the point well, who better than the entire leadership team to make the point that sustainability has become part of the DNA of the company?

It will be interesting to see how this evolves.

Real Pink Falmingos - near Alres, France

Is CO2 material?

Let me set the context for this question - CO2 released into the atmosphere is the primary cause of global Climate Change, which is real, and is primarily being caused by human activity.  The question - "is CO2 material?" asks about the materiality of CO2, if priced, to the average corporation. Here of course I'm taking the view of "materiality" frequently used by the auditing community to mean of an amount or value that will materially impact the companies performance or reported results. Frequently this level is, somewhat arbitrarily, set at 5% of revenue.

So in this context, is CO2 "material" to the average business, and what are the implications of any answer? Very probably not. In fact, considering the range of inputs (and outputs) for virtually all services based companies, CO2 (as a product of energy use) will be negligible from a financial materiality perspective.

First, for something to be "material" it must have a price. So an associated question is, at what price per ton of CO2 does it become material to a business?

Clearly for some businesses, primarily energy companies, extractive industries, transportation industries, and primary producers such as steel factories, the raw energy inputs (and consequent CO2 content) increase the probability that CO2 is material to their business, if a price is placed on the CO2.

Also, any suggestion that CO2 is "not material" is not the same as saying that there does not, desperately, need to be limits (be they market driven or regulator imposed) on the production and dumping of CO2 into the atmosphere. After all, I cannot imaging cyanide ever being "material" to a person when measured by the 5% definition, when something very far less than 0.1% would kill that person.

The question becomes important when auditors look at a company's financial statements, and when the company (if publicly listed on a US exchange) has to produce their MD&A (Management Discussion and Analysis) as part of their filing with the SEC. In these cases, the "materiality" threshold becomes important, that where CO2 falls below that threshold, there is no reporting requirement.

So there are two key barriers today to mandated reporting of CO2 by companies.

1. There is no price for CO2. Until there is a price, it cannot be "material". So, CO2 must have a price, through a Carbon Tax or through a Cap & Trade. Of course, the benefit fo a Cap & Trade system would be to allow the markets to create a price. The alternative benefit of a Carbon Tax (a sort of Tobin Tax) would be to create a revenue stream for governments that could be used to support "green" technology and infrastructrue investment - but I dream.
2. The concept of "material" in relation to CO2 must be modified to be closer to what would be a "material" level of cyanide in a person, than the 5% level used to determine that something "material" financially.

Certainly the SEC released additional guidance earlier this year on reporting of CSR (Corporate Social Responsibility) and Climate Change related information. Unfortunately the nature of that guidance was simply a reminder filers that they must report "known trends" and "uncertainties". Sadly I expect that guidance will be inadequate.

Friedman - yes, he was right

Milton Friedman said it best, and is often quoted - "The business of business is business". He also said "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud".

It is these quotes and others from Friedman, that are frequently used to justify a position that CSR and Sustainability are not the responsibility of business, and that business has no role to play in the sustainability argument. A derivative is that the only issue of sustainability that should be of interest to a company is the sustainability of the company.

In a way both of these positions are accurate, and both arguments support the active engagement of business in CSR and Sustainability as more widely defined.

Certainly business can and should look to government for regulation, and should seek to influence government to avoid the introduction or support the repeal of harmful regulation.

Likewise businesses should recognize and accept the prerogative of governments, as representatives of the people, to develop regulation. In carrying out this role, government is simply fulfilling its responsibility, and business then as the obligation to implementation and comply with such regulation. In one very real example - Climate Change is real. the arguments are done. Now governments are setting objectives and agendas. It is time for business to stop pretending and get on with preparing, and indeed leading to achieve the changes that will be required.

At the same time there is no reason that a business should not, in the interests of fulfilling the spirit of Milton Friedman's quote, implement CSR and Sustainability programs, especially where such programs will enable the accomplishment of the business plan and objectives. For example, very specifically "social programs" such as assisting local communities with the establishment of basic education or clean water resources can be a manifestation of a company's desire to keep a local workforce supportive of the company, and in so doing ensure a long term source of appropriate labor, and reduction in the risk of local of national government intervention in company activities. In such a way a "social program" can serve as a cost effective method of supporting the core business of the company.

Taking the same example a step further, it is probably significantly harder to suggest that programs in areas either not serviced by the company, or outside the company's labor or raw material catchments, are justifiable as anything other than public relations exercises (which, it should be noted, are equally valid and appropriate business activities).

Another legitimate reason to implement a CSR program might be to thwart a government's desire to create a specific law. If there is the danger of the introduction of a law that the company (or industry group) perceives as being too restrictive, and the company believes that their actions could forestall the introduction of that law, a company may decide to introduce its own very visible program, therefore undercutting the 'need' for the law. This in no small part explains the tobacco industry’s involvement with the corporate responsibility movements, and it’s participation in CSR events (although sometimes in a side room).

For all that has been said in support of CSR and Sustainability activities above, no business should be initiating such activities, projects or reporting simply to create a "warm and fuzzy" feeling. That is not good business, and does not represent the interests of shareholders, and is a failure of management to uphold their fiduciary responsibility.

So in a funny way, Milton Frieidman was right - AND Corporate Social Responsibility and Sustainability ARE issues for business. The business that ignores CSR and Sustainability risks endangering its license to operate, risks increased costs, risks customer defection, and faces a grim future of watching its competition move steadily forward while it whithers away while proudly upholds a principle ("the business of business is business").

CSR/Sustainability reporting: the coming explosion

The next three years will see CSR/Sustainability reporting transition from a "nice to have" to a "Cost of Entry". Companies will find themselves less able to win contracts, upstream supply chain participants will expect reports, and banks will demand to see the CSR report just as they require a set of (audited) financial statements (I'll talk about "audited" in another post).

Today the creation and maintenance of a CSR report can be expensive and time-consuming, and there doesn't seem to be the demand.

Cast your mind back to the darkest reaches of history - say - 1995. The Internet was reasonably well established, and you could search for sites, sort of. If you knew the website of a company (or someone's e-mail address, not everyone had one) you could type in the www then the e-mail address after the @ but before the ".com", and if you were lucky, or the company was really really big, you could find a website.

Companies around the world knew that being on the web mattered, and certainly the leaders had some pretty fantastic sites.

A century or two later, sometime around 1998, I don't remember when exactly, I did the little dance of the cut-and-paste to search for a company website... and for this search, there was no site. I rang my contact at the company and asked "I'm surprised your company doesn't have a website. Why not?"

The answer I got was "Creating and maintaining a website is expensive and time-consuming, and there doesn't seem to be the demand." Sound familiar?

So what changed to make websites truly ubiquitous?

The cost of creation plummeted, tools became available to help build sites, large numbers of people played with HTML and other web technologies. But most important, people; me, and you, began to expect to find a website. Companies without websites dropped in our estimation as "serious" companies. 

Did the websites need to be sexy, smart, absolutely current as of this morning? No. But there had better be a site.

The coming explosion

CSR/Sustainability reporting is at that cusp. the big companies, regardless of industry, have CSR reports. Thousands of companies provide reports to the CDP (Carbon Disclosure Project), over a thousand are producing GRI (Global Reporting Initiative) compliant reports and/or GRI Content Indexes. Today I go to websites and wonder if I do not see Corporate Responsibility, or CSR, or Sustainability. I'm reaching the point where I wonder what they are hiding.

And I ask "I'm surprised you don't have a sustainability policy or a CSR report. Why not?" Well, you know the answer that I'm getting.

But that is about to change, and change pretty radically. Demand creates innovation. Innovation drives adoption. Adoption feeds innovation and demand.

I am confident that there will soon be tools and processes that will make the creation of CSR reports "easy", inexpensive, and ubiquitous. And when that happens, centuries will have passed in an instant, and we will be living in a world in which CSR/Sustainability reporting is simply assumed. That regardless of the size of the company, if it is a "serious" company, wanting to attract and retain clients, staff, and frankly needing to demonstrate that it understands the importance of the societal/corporate "contract", CSR/Sustainability reporting will be a core element of communications and corporate reporting. Just like a website for (audited) financial statements are today.

Earthquake in Christchurch, NZ

Christchurch, New Zealand suffered a 7.1 earthquake yesterday. It appears, remarkably, there there have been injuries but no fatalities. Christchurch is a lovely city on the Canterbury Plains next to the Pacific Ocean. I have found memories of many visits to the city, and have close friends living there. We have been in contact and other than bad damage to their house and the neighbours, all are safe and uninjured.

GNS Science, a New Zealand government-owned research organisation released the following Media Release.

As background, the Hawke's Bay earthquake of 1931 killed hundreds, and raise the port of Napier far enough that the port was too shallow for ships and it silted over. There is now an airfield over what was a port. In addition, the rebuilding that took place in Napier after that quake followed the style of the day, making Napier a center of Art Deco buildings.

Christchurch will recover (quickly), and will continue to be a beautiful city on the plains of the South Island.

At the same time, this is a reminder to all New Zealanders of the importance of earthquake preparedness. Especially in Wellington!


===========================

MEDIA RELEASE

4 SEPTEMBER 2010

CANTERBURY QUAKE THE MOST DAMAGING SINCE 1931

The magnitude 7.1 earthquake that hit Canterbury early today is expected  to be the most damaging since the 1931 magnitude 7.8 Hawke's Bay  earthquake.

The earthquake, which jolted Cantabrians awake at 4.35am on Saturday, was  located 30km west of Christchurch near Darfield at a depth of 10km. It was  felt throughout the South Island and as far north as New Plymouth. Damage  to buildings and infrastructure in Christchurch and surrounding areas is  considerable.

Dozens of aftershocks occurred in the first few hours after the quake and  it is likely they will continue for weeks.   GNS Science duty seismologist, John Ristau, said typically the largest  aftershocks occurred within the first 48 hours of a large earthquake. They  generally declined in frequency and size over time.

"A rule of thumb for a large earthquake at a shallow depth such as this is  that the largest aftershock will be about one unit of magnitude lower than  the main shock," Dr Ristau said.   Seismologists say a foreshock of about magnitude 5.4 occurred a few  seconds before the main shock. Both shocks occurred in slightly different  locations. Seismic energy from the two shocks became entangled making it  difficult to pinpoint the size, location, and depth of the main shock.   There are several known active faults under the Canterbury Plains and in  the Canterbury foothills, but at this stage it appears the earthquake has  not occurred on a known fault.   Scientists from GNS Science, Victoria University of Wellington and  Stanford University in the US have joined colleagues from Canterbury  University to deploy about 40 portable earthquake instruments to record  aftershocks over the next few weeks.

The GNS Science contingent hopes to have most of their portable  instruments deployed around Canterbury by Sunday night. This will mean  approaching landowners and seeking permission, as they hope to place some  of the instruments on private land.   They will concentrate their deployment on the areas where most of the  aftershocks have already occurred.

 The battery-powered instruments will be left unattended for about three  weeks to record aftershocks. Seismologists study aftershock sequences to  find out more about the mechanics of the main shock and rupture, and to  ascertain if stress in the earth's crust has been transferred onto other  faults in the region.

Scientists will also study satellite data to investigate surface  deformation in Canterbury as a result of the earthquake. Geologists from  GNS Science have travelled to Canterbury to investigate the geological and  environmental impacts of the quake, and to undertake a detailed ground  study.   Engineering seismologists from GNS Science will join colleagues from the  Building Research Association of NZ and Canterbury and Auckland  Universities to investigate the impacts on buildings and infrastructure in  Canterbury to find out how different construction types performed.

The information they gather will be fed into the engineering community to  help ensure structures are built appropriately to cope with stresses  caused by strong ground shaking. It will also help as older buildings and  structures are retro-fitted to improve their ability to withstand  earthquake shaking.

Much of the scientific response to the earthquake is being coordinated  under the GNS Science-led Natural Hazards Research Platform, set up by the  government a year ago to provide long-term funding for natural hazards  research.   Manager of the Platform, Kelvin Berryman, said post-earthquake  reconnaissance was one of the roles of the Platform, as well as developing  quantitative estimates of earthquake, volcano, landslide, tsunami, flood,  snow, and wind hazards in New Zealand.

"We have an obligation to learn as much as we can from this event to help  improve our understanding of earthquakes and their impact on society, and  to help ensure that New Zealand is well prepared for future earthquakes,"  Dr Berryman said.   To see more information on the earthquake go to our GeoNet site.

http://www.geonet.org.nz/ Specific information on the Darfield quake can be found here.

http://www.geonet.org.nz/news/article-sep-4-2010-christchurch-earthquake.html