Companies are facing a growing challenge in how to respond to the development of Corporate Social Responsibility (CSR).
Companies undertake CSR programmes for a variety of reasons; for example to strengthen stakeholder relationships, to differentiate themselves from competitors or to attract particular types of customers. CSR programmes can also counter the risk, both to sales and reputation, of attacks from activist groups by addressing the areas that might cause the company to be targeted and by building a bank of goodwill among stakeholders. With CSR rising up the agenda, it is increasingly becoming accepted that there is a commercial risk associated with failure to address those areas of a business that might be construed as socially irresponsible. All this is of interest to insurers and investors, who are starting to ask more questions of businesses on this issue. Getting CSR right is becoming an essential part of risk management.
CSR risks and opportunities come in many different guises, from stakeholders’ environmental concerns that exceed legal requirements to human rights issues indirectly associated with companies via their supply chain. CSR risks also include the broader issues of company reputation and brand value. Companies need to identify and quantify these risks effectively, and demonstrate they have done so. Financial stakeholders of companies, including directors, insurers, investors and lenders, need to be able to measure this new class of risk so effective strategies are implemented to contain and manage it.
It is increasingly accepted that it is inappropriate for companies merely to make a profit. The way profit is generated is under scrutiny as activists drill down into a business’ market behaviour, trade policies, employment relations, sourcing of raw materials, human rights and, most important for many, a company’s environmental credentials. If a company is considered exploitative in any of these areas, activists will place pressure on them through campaigns that can include everything from political lobbying, which can damage a company’s reputation and credentials among policy makers, to high profile media campaigns and even direct action. All can prove costly to companies both in the immediate and long term. CSR risks need to be understood as mainstream business risks.
There is some confusion, however. Many people do not have a clear understanding of what CSR actually means and there is no one single method of measuring CSR risks. Whilst many companies issue CSR reports detailing their good work and highlighting management of CSR risks, the form that these reports take varies enormously – from simple statements of intent through to full colour glossy brochures roughly approaching the size of “War and Peace”.
This confusion has, in turn, led to degree of cynicism amongst the general public about what CSR really means and whether companies do what they say they do. Much of CSR is deemed to be driven by the communications needs of the business.
Key stakeholders, the company’s shareholders, bankers and insurers, also demand that companies are clear in noting their CSR risks and in assuring that creative ways to manage them are implemented. The traditional methods of risk management in the insurance arena are risk transfer, risk retention and risk mitigation. Risk transfer by insurance is difficult as most CSR risks do not fall into the “usual” matrix of insurability. As a result, the financial consequences of these risks are carried by the company. Some CSR risks have the potential to bankrupt a company; risk mitigation seems to be the only plausible alternative.
Risk mitigation by clear management of CSR risks has been seen to have a beneficial effect on the company’s “bottom line”, and will save the company money as well. An Institute of Business Ethics report has suggested that companies with ethical commitments have 18 per cent higher profits on average than their competitors. In a survey by CSR Europe and Euronext, 51 per cent of fund managers and 37 per cent of financial analysts said they would put a premium on socially responsible companies. Research from the Chartered Institute of Personal Development (CIPD) and the Future Work Institute showed a clear connection between responsible business practice and a positive impact on the “bottom line” because it helps to attract, motivate and retain a talented and diverse work force.
Companies are wary about CSR but they are realising that clear disclosure of CSR risks to lenders and insurers can be good for the business. The changing regulatory background will further complicate things. The Department for Trade and Industry (DTI) has begun the process of introducing Operating and Financial Reviews (OFRs) as part of the annual reports of large companies. OFRs will contain information on a company’s relationship with its stakeholders, its environmental and community impact, corporate governance and risk management. This move to include non-financial elements marks a significant change from traditional financial reporting. The DTI established an OFR working group on materiality to provide guidance for directors on how to prepare and organise their company so that they are ready to provide OFRs. It will be up to the Boards to decide what constitutes materiality and therefore merits inclusion in the report. OFRs can be viewed as the first stage towards the institution of formal CSR reporting.
The main conclusion is, instead of seeking to undertake every CSR activity suggested by the vast swathe of CSR comment, companies need to start focusing on their core activities, consider and prioritise the CSR risks posed by those areas and devise their CSR programme in light of this information. Companies can also gain by setting a benchmark against which their competitors will be measured by communicating fairly to the financial audiences their CSR risks and what the company is doing about them. The financial community requires all risks to be minimised and this includes CSR risks. Finance and CSR need to be reconnected. Once a clear connection to the “bottom line” is illustrated, the public see CSR as less of at PR stunt and more like good business.
Co-authored by Dr Tauni Brooker, Director and CEO of ORM2.
Published in Insurance Day, July 2004