Socially responsible investment, or SRI, has emerged as a powerful movement, involving businesses as well as investors, dispelling earlier myths that it would remain a niche area and would underperform. This has been interlinked with developments in areas such as corporate governance and corporate accountability. Ethical investment has become big business, in fact, global funds under such management are now believed to amount to US $1.4 trillion (1). The growing profile of SRI has highlighted to shareholders and investors the fact that well-managed companies pay close attention to their impact on society as well as their boardroom procedures and traditional aspects of strategy and performance.
The drivers
There are some key drivers that have brought SRI to the forefront as a viable and desirable alternative to traditional investment practices. For example in the UK, the Pensions Act 2000 as well as developments in corporate governance (Turnbull report) specifically alluded to the importance of taking into account or at least being explicit about ethical, social and environmental factors in risk management and investment decisions. The Association of British Insurers issued guidelines making clear to companies that major investors want to know that the companies they invest in are managing social, ethical and environmental issues effectively. Similarly, the National Association of Pension Funds also joined in. Its corporate governance advice to members now routinely covers these issues. Finally in the 2000 Budget, the Chancellor asked Paul Myners, chairman of Gartmore Investment Management, to investigate possible distortions in institutional investment decision-making. Mr Myners published his report on 6th March 2001.
As well as the legislative and industry drivers, there is clearly pressure exercised on companies by consumers, NGOs and increasingly shareholders with emphasis on increased transparency, accountability and risk management. In the 1980s, students boycotted Barclays Bank for its tacit support of the South African apartheid regime. The 1990s saw companies such as Nike and Marks and Spencer under scrutiny for malpractice in their supply chain. And most recently there was the collapse of Enron, whose shockwaves rippled throughout the accounting world. Alongside these developments there has also been the rise of companies such as the Co-operative Bank, which have an explicit ethical standpoint, refusing to invest in companies linked with animal testing, arms manufacture or oppressive regimes. Such companies have used this positioning as competitive edge, communicating effectively their message to all stakeholders.
Furthermore - again in the UK - the shift from the state provision of pensions to individual stakeholders means individuals will have to take a greater personal responsibility for their own pension provision. This will mean institutional investors are going to increasingly have to take note of what they want.
Changing focus
All this means that this is no longer a specialist interest which can be left to environmental managers or community affairs staff. Companies' investor relations managers and senior executives need to be prepared to answer questions on social and environmental issues during routine meetings with their investors.
Traditional methodology used when making financial investment decisions has been modelled on financial facts and figures. However a significant percentage of a company's value is now seen to lie outside its balance sheet. Companies need to be able to effectively communicate these areas of "hidden" value, particularly to investors who will inevitably hold the majority of influential power and the purse strings.
Part of the problem is that it is often difficult to measure "sustainable business" in order to prove the long-term viability of ethical initiatives. One is dealing with "intangibles" such as environmental and social performance, supply chain issues, labour and employee relations , which are hard to put into bottom line figures in a consistent and comparable way.
Supply chain - individual approaches or shared values?
Take for instance the whole issue of company supply chains. This area has been a source of risk (reputational and financial) for companies such as the aforementioned Nike, but also a great source of innovation and competitive edge. Purchasing and distribution have traditionally been two of the unsung heroes of the modern business world. Yet, they are areas where British business seems to excel. Supply chain efficiency, especially in the food industry in the UK is at world-beating levels.
Yet now there is a new dimension. It is not enough to cut costs to the bone and deliver efficient consumer response. The qualitative issues that SRI raises also have to be considered - such as labour practices, environmental impact and the human rights records of countries where products are sourced. If we take the example of Unilever, one of the world's top makers of packaged consumer goods, they believe that to succeed requires the highest standard of corporate behaviour towards employees, consumers and the societies in which they operate. Unilever recognise that Corporate Social Responsibility (CSR) also gives them a 'competitive edge' over other companies that don't maintain CSR as policy. An example of their supply chain approach is their commitment to extend the use of eco-efficiency measures along their supply chain.
How can companies manage these issues and communicate them effectively to every organisation in the supply chain, to the investment community as well as other stakeholders? Carillion represents another example of a company committed to a rigorous set of environmental commitments. They assert that their vision is "to be a sustainable construction to services company which delivers growing shareholder value with transparency and accountability in environmental and social performance". Carillion are committed to employing new strategies such as working with regeneration and partnering with employment job centres to encompass environment, finance, supply chain, stakeholder communications and management targets in their overall business programme.
In our experience supply chain players need to surface and minimise the risks and maximise the opportunities. It is essential to create deeper relationships with suppliers and sub-contractors. Meaningful dialogue between the many parties in the supply chain is the only way to develop a deep understanding of the needs of each party, the issues and the constraints which each face. The way in which some companies have tackled this is by creating common standards through codes of conduct for their global operations to harmonise and make explicit their environmental, social and ethical standpoint along their supply chain. Thus, BT developed an initiative called "Sourcing with Human Dignity" and Sainsbury's issued a "Code of Practice on Socially Responsible Sourcing".
Participants in a recent Article 13 "round table" on this whole issue, made it clear that UK and global companies also need to look inside their own organisations to ensure that the links with the supply chain were made explicit. The group view was that it was critical to develop a better understanding among staff of the broad supply chain issues which need to be addressed. Each member of the chain needs to understand the issues and accept responsibility for dealing with them. But it is likely that outsiders will need to be brought in, both to manage the dialogue to best effect and to monitor performance. Nike now conducts a factory monitoring process across its global operations using external auditors to regularly monitor standards and areas of potential risk.
Risk and Opportunity
Part of the process is building trust with investors and enterprises focussed on bottom line results. This can be done by demonstrating that these issues that they may not have considered are not only important but could turn areas of risk, such as addressing pay and work conditions, into opportunity. This could deliver companies competitive edge over their rivals.
We have already discussed one way of delivering this competitive edge by engagement with a supply chain's stakeholders, who are increasingly demanding to see transparency in the market place and availability of information. This is increasingly making companies answerable to shareholders and stakeholders, rather than operating on their own.
One of the reasons companies take the engagement process so seriously is that there is always the implied threat that if, for example, the key shareholders can't be satisfied, that they will disinvest and they may choose to be public about what they are doing, which is a risk that no board of directors is prepared to take.
To conclude, it emerged from the Article 13 round table that engagement and effective management of supply chains helped companies create a "licence to operate" - in the eyes of its supply chain, investors, and the wider community.
There will still be a question in many executives' minds about the costs and benefits of all this. Like innovation, the connection between good performance on these issues and good financial performance is not straightforward. But the influences can be identified.
For example, a focus on environmental processes (cleaning up, cutting resource use) can have a positive impact on operating efficiency and shareholder value. Paying attention to human rights and supply chain standards will enhance brand value and reputation - although it may cost money. The message is brought home with the launch and performance of indices such as the Dow Jones Sustainability Group Index and the FTSE4Good.
SRI, supply chain management, and engagement with the so-called "soft issues", are no longer a niche concern. Increasingly they are being seen as a sign of leadership, good management and sustainable business success.
References:
1) Ethical Corporation Magazine, Feb 2002, p23
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