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Sustainable at every level? Reaching new heights through good values

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In the second of a series of reports commissioned by HSBC, we consider the extent to which businesses are incorporating responsibility in their business operations.

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Sustainable at every level? Reaching new heights through good values

  1. 1. SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values A report by The Economist Intelligence Unit Commissioned by
  2. 2. SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values Contents Chapter 1: The DNA of a responsible business 2 Chapter 2: Walking the walk 5 Conclusion 8 1 © The Economist Intelligence Unit Limited 2014
  3. 3. SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values 1 THE DNA OF A RESPONSIBLE BUSINESS “The social responsibility of business is to increase its profits,” wrote the Nobel-prize winning economist Milton Friedman. In his 1970 New York Times article he argued that corporate executives should serve their owners; spending company money on social responsibility initiatives, he said, equated to levying an unfair tax on the shareholders, employees and customers. There are those who still would agree with Mr Friedman. More and more, though, there has been a shift in attitudes as corporate leaders appreciate and accept their broader role in, and responsibility towards, society. The head of social innovation at French company, Danone, Jean-Christophe Laugée, argues that businesses are being given a “licence to operate” by stakeholders, including governments and consumers. These comments are echoed by Richard Gillies, group sustainability director at Kingfisher, owner of do-it-yourself chains such as B&Q in the UK and Castorama in France. Chart 1 2 © The Economist Intelligence Unit Limited 2014 The financial crisis of 2008 has been a significant factor in the shifting of opinions on the role of business in society. Although it marked the start of a period characterised by corporate cost-cutting strategies (and therefore also a decline in benevolent activities), it also shone the light on unfair, unethical and irresponsible business practices, resulting in low levels of consumer trust. The latest Edelman Trust Barometer found that just 21% of the general public surveyed trust business leaders to make ethical or moral decisions and only 19% trust them to solve social issues. The global nature of many social problems— water scarcity, for example—has put large, multinational businesses under the spotlight. And it is easy to see why: of the 100 biggest economic entities around the world, 40 are global businesses with revenue that exceeds the GDP of many national economies1. While some governments have international influence, public bodies in general are dwarfed by these large corporations in terms of global footprint and reach. A single company, however, cannot be expected to tackle all the problems faced by the society in which it operates. There is significant agreement among academics that, to incorporate responsibility in business operations successfully, companies ought to identify the ways in which their activities impinge on society, and which external factors affect their operations. A Harvard Business Review article on Creating Shared Value2 argues that the competitiveness of a company and the health of the communities around it are interdependent: both rely on each Trust in business leaders to do the following: (% of general population) 26% 21% 20% 19% Correct issues within industries that are experiencing problems Make ethical and moral decisions Tell the truth regardless of how complex or unpopular it is Solve social or societal issues Source: Edelman Trust Barometer, 2014. Margin width 1 Global Trends, Corporate cloud 2013: time for responsible capitalism, 2013. 2 Michael E Porter and Mark R Kramer, Strategy and society: the link between competitive advantage and corporate social responsibility, Harvard Business Review, 2006.
  4. 4. SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values other for their survival and wellbeing. Business should then work on the specific social issues where action can provide value for both the business and society. By selling a vision that extends beyond profit maximisation and generates benefits for both the organisation and the community, business leaders can build social capital—“the social structures and resources … which allow facilitating mutually beneficial, responsible action”3. To do this successfully, business leaders must establish strong relationships with both internal and external stakeholders, including employees, shareholders, politicians, non-governmental organisations and consumers. Core necessities As firms look to embed responsible practices (ethical, social and environmental) into their business models, a significant change to the way that companies behave and motivate employees will be required. Simply hiring a corporate social responsibility (CSR) director will not be enough. Kingfisher’s Mr Gillies sees his role as co‑ordinating between departments, not dictating and policing responsible business initiatives, as a wide range of employees needs to be engaged for a company to become more responsible. It is not just a question of cracking down on bad practices, but rather of creating a culture where this is unthinkable. It is not an easy task: the challenge is to create an environment where being responsible is seen as intrinsic to the company and its values, and not just as a box-ticking, add-on, compliance exercise. Companies can formalise and enforce a code of conduct, which defines acceptable behaviour and sets out possible sanctions for any infringement. They can also create a programme to promote corporate identity and values. The former can be perceived negatively since its principal aim is to enforce a certain type of employee behaviour. The latter is generally better received—it allows employees to identify with 3 © The Economist Intelligence Unit Limited 2014 the organisation’s culture and behave in a way that reflects these values of their own accord. However, the two are not mutually exclusive, and can complement each other4. Crucially, though, they must both be set and exemplified from the top. Failing to integrate the company’s objectives with its social responsibility values can lead to “greenwash”, where companies talk up their actions to the media while sometimes ignoring the bigger changes needed to become more responsible, according to Jean-Pascal Gond, professor of CSR at Cass Business School in London. The risk that companies run here is serious reputational damage when something does go wrong. For example, while everyone from supermarkets to clothing companies loudly cite the need for responsible sourcing, many still choose to manufacture in low-wage countries with questionable human rights records. Disasters such as the collapse of the Rana Plaza textile building in Bangladesh in April 2013 highlight the gap between the image that companies strive to portray through their marketing and the reality of their business practices. At the mercy of owners For listed companies, subject to fierce scrutiny of their earnings by investors every quarter, responsible behaviour can still take second place to rapid earnings growth. Although there is evidence that responsible business initiatives can yield a positive financial gain for companies, the benefits of these are rarely felt within three months of their launch, while their cost is immediate. In fact, it is striking that many of the firms cited by analysts as examples of those having a deeply rooted culture of social responsibility are privately or family-owned, and therefore removed from stock-exchange pressure, or have a share structure that limits that pressure. Responsible business practices need to flow deep into a company, and one way to ensure that is to have owners who look well beyond short-term financial results. 3 Thomas Maak, “Responsible leadership, stakeholder engagement, and the emergence of social capital”, Journal of Business Ethics, (2007) v74: 329-343. 4 Jane Collier and Rafael Esteban, “Corporate social responsibility and employee commitment”, Business ethics: A European Review, (2007) v16 n1: 19-33.
  5. 5. SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values One example is Novo Nordisk, a healthcare company that is stock-exchange listed in Denmark and the US, but has a share structure that keeps control (but not majority ownership) within a private holding company that sets strategy and company direction through a supervisory board structure. Its statutes commit it to trying to “conduct its activities in a financially, environmentally and socially responsible way”. This is a classic echo of the “triple bottom line” reporting approach, which involves publishing information on social and environmental achievements, as well as financial ones. Novo set up a CSR department six years ago and has won a series of awards for its efforts. Company insiders emphasise that this is how it has always done business, however, and accept that its ownership structure is central to its ability to place sustainability on an equal footing with short-term results. First and foremost this means trying to improve diabetes care, resulting in a commitment to research that has allowed it to outperform the market: sales have increased by more than 10% for three of the past five years, to more than US$15bn in 2013. Novo’s chief executive expects sales to double over the next five years. It has also won a series of sustainability awards and met a string of ambitious targets spanning human rights, animal ethics and energy efficiency. The company, for example, formed a partnership in 2004 with a Danish energy company, DONG, to reduce its levels of carbon dioxide (CO2) emissions from its global production by 10% in ten years. Thanks to the programme, Novo now produces less CO2 than in 2004 despite having significantly increased its production. The company is also saving Dkr45m (US$7.8m) per year after repaying investments. This is not to say that becoming a responsible business will be impossible for those companies that have a broader ownership structure. The challenge is to convince investors that the long-term value of being a responsible business 4 © The Economist Intelligence Unit Limited 2014 exceeds the initial costs that the business will have to endure. Unilever’s chief executive, Paul Polman, for example, refuses to post quarterly results, forcing the company’s investors to think more long term.5 A recent Accenture study, in which the consultancy interviewed and surveyed chief investment officers from signatories of the UN-supported Principles for Responsible Investment6, found that investors are well aware of the constraints they place on business. Nearly three-quarters (73%) believe that companies are struggling to inject sustainability to their core business because the investment community does not engage or recognise these efforts, while 71% say that short-term investments pose an obstacle to sustainability efforts. For the likes of asset managers and other institutional investors, what is required is a fundamental shift away from short-term incentives and reporting and toward more long-term strategies. Doing that is not so straightforward, however. Asset managers in the study mention that publicising too strong a focus on responsible investments could alienate those clients who have a more traditional view of what investors should look for in a business. Part of the problem is poor communication. Just 9% of the investors say CEOs do a good job of explaining the opportunities that arise from responsible business initiatives. There are efforts to address that. For example, a New York-based think tank, the Environmental Defense Fund, has worked with large private-equity firms to develop a tool that will allow investors to consider social and environmental factors in their decisions.7 A deep change in attitudes across the whole investor community is required, however, to ensure businesses are confident their sustainability initiatives will boost, not damage, their attractiveness to investors. 5 Paul Polman, “The remedies for capital”, McKinsey & Company, http://www.mckinsey. com/features/capitalism/ paul_polman. 6 Accenture, The investor study: Insights from PRI signatories, September 2014. 7 Sarah Murray, “Shareholder value: investors must learn to respect long-term thinking”, Financial Times, June 2013.
  6. 6. SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values 2 WALKING THE WALK The best responsible business initiatives integrate financial objectives with social responsibility. To slash missed payments in the poor city of Fortaleza in north-east Brazil, Coelce, a Brazilian electricity distributor, gave customers discount vouchers for collecting waste for recycling. The initiative helped the community by cleaning up the streets, reducing the amount of waste being sent to landfill and making electricity bills more manageable. It also helped Coelce: defaults fell and sales increased as people used the scheme to become official customers rather than siphoning off supplies illegally. There is recognition that responsible business initiatives must be core to company strategy, rather than being an add-on. Therefore, companies are looking to make their core practices sustainable, often building on existing activities and choosing issues that are not only central to their business, but in which they are significant enough a player to make a difference. Having a commitment to a single issue can also help to discourage a company from switching between whatever sustainability activities are currently de jour in the press. For example, brands within the Kingfisher group, such as B&Q, are heavy consumers of wood, therefore ensuring that supplies are resilient is essential to their long-term prosperity. With other big furniture sellers such as IKEA joining the drive to make wood supplies renewable, companies are creating the momentum for a global shift. Similarly, Danone recognises the need to tackle the issue of water supply—the company’s head of sustainability, Mr Laugée, 5 © The Economist Intelligence Unit Limited 2014 points out that a rapidly growing global population raises two big issues: first, the need to protect the watershed and access to water; and second, to secure agricultural supplies in a sustainable and humane manner. Both are crucial to the company’s “licence to operate”. United Biscuits has concentrated on securing good-quality supplies in an ethical and non-polluting way. Engaging employees The Commercial Group is a UK business services company that has grown by 50% since 2006 while integrating sustainable business practices throughout the firm—all the more impressive in the face of a shrinking market that has caused problems for bigger competitors such as Staples, a US office-supply multinational. “The key,” says its environmental strategist, Simon Graham, “is staff engagement.” It is a powerful example of how culture set from above is realised into tangible behaviour at the operational level. The company launched the Green Ambassador programme in 2008 to encourage staff to sign up to its sustainability agenda, by reducing their own footprints and that of their communities, thereby carrying on its founders’ commitment to the environment in particular. This has paved the way for today’s Green Angels, a team of five volunteers (including both junior and senior staff) who look for ways to foster Commercial’s ten sustainability commitments. They spend up to six months developing projects to bring transformational change to the business, with funding approved by the board and a project manager appointed to ensure that initiatives take off.
  7. 7. SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values The successes have been concrete: waste contaminants are down by 80% and waste is no longer being sent to landfill; the company’s carbon footprint has been slashed by three-quarters since 2006; and the firm has decided to pioneer the use of hydrogen fuel cell vans. Commercial says that these Green Angels projects have saved the company £200,000 (US$327,190) a year and that a recent survey found that 92% of employees support the company’s environmental aims. Importantly, all of this has been achieved without spending much money and, says Mr Graham, the company’s sales growth has been fostered by its sustainability drive, which fits well with many of its clients’ own agendas. Setting targets Companies are being careful to quantify the benefits and to set targets. That gives some good headlines, but also some impressive achievements: Danone and United Biscuits have made their products healthier by reducing fat and sugar levels as they embrace the need to consider their impact on the end consumer; Kingfisher’s B&Q also says that it has become the first major UK retailer to source all of its timber from well-managed forests; and Danone has slashed greenhouse gas emissions and cut water consumption by 46% since 2000. Setting targets and reporting on results also adds a layer of accountability and transparency. Better communication with external stakeholders is partly down to moves by international bodies such as the European Commission to require that companies report on their CSR activities. Some 95% of the world’s 250 biggest companies now produce a sustainability report, according to Thomson Reuters, and four out of five of those prepare them according to the Global Reporting Initiative guidelines approved by the UN Environment Programme in 2002. These moves can help investors better evaluate the benefits of responsible business practices. They also help to motivate employees, as they are set specific goals to work towards. 6 © The Economist Intelligence Unit Limited 2014 Suspicions of superficiality can linger, however, with concerns about who sets the areas to target, for example, and how impartial the audits are. Responsible growth The benefits of incorporating responsibility into a business model are not restricted to cost savings. Good practices can help to unlock new markets. For example, under the Accenture Development Partnerships scheme, employees accept lower salaries and are loaned out at marginal cost— Accenture foregoes overheads when charging fees—to give clients in developing countries access to the consultancy’s expertise at far less than the actual commercial cost. This is not only philanthropic, it introduces Accenture’s services to new companies, extends relationships with existing clients, and also helps Accenture to retain staff increasingly keen to see a social, as well as a financial, function to their role, says Gib Bulloch, executive director of the scheme. With the majority of multinationals’ growth coming from developing countries, taking this kind of a long-sighted view to unlocking their potential is becoming increasingly important, according to Mr Bulloch. For example, social development is a huge area of investment for these governments. Mr Bulloch believes that private companies should be working in partnership with public bodies to develop and improve services such as healthcare and education, realising business objectives while also meeting local social development goals. These new and fast-growing markets will also increasingly influence the behaviour of, and products produced by, multinationals. “More and more, products will be developed for emerging markets and then launched in richer countries,” he says, pointing to the introduction in Europe of mobile-phone banking developed for poorer countries. In fact, there is an indication that multinationals’ increasing reliance on emerging markets for growth might accelerate the shift towards more responsible business practices. Countries
  8. 8. SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values 8 SustainAbility, Changing track: Extending corporate leadership on sustainable development, June 2013. such as India are pushing responsible business priorities hard. In April 2014 India became the first country in the world to require companies to spend a proportion of their net profits on social development, building on the country’s family-owned companies’ tradition of philanthropy. Tata, an Indian multinational conglomerate, consistently scoops international awards for CSR excellence, for example. As much as responsible business can open up new opportunities, irresponsible business can be a source of great damage. A series of disasters have made companies more aware of the intangible risks that they can run if they fail to meet certain standards of behaviour, especially in terms of reputational damage. Companies including a coffee chain, Starbucks, and clothing retailer Primark, have seen sales badly affected by, respectively, scandals about tax avoidance and suppliers exploiting cheap labour. A company’s reputation and, therefore, business, can be severely damaged if the wider agenda of a responsible business is ignored. Baby steps While concrete and ambitious targets have been set and often realised, Danone, Kingfisher and United Biscuits admit that these are just the first steps. “Yes, we are rather late in launching,” says Kingfisher’s Mr Gillies, who joined the company last year after spearheading similar efforts at Marks & Spencer (a retailer widely regarded as one of the leaders in the field of responsible 7 © The Economist Intelligence Unit Limited 2014 business in the UK). Nonetheless, Kingfisher’s Net Positive programme, launched in 2012, is comprehensive and shows the shift in attitude happening at many big companies. In an initiative echoed by other firms such as Coca-Cola, IKEA and metals and mining giant, Rio Tinto, the programme aims to shift the sustainability idea from simply reducing the impact of a company’s actions to actively restoring the natural environment and strengthening society. However, Mr Gillies acknowledges that his company’s apparently ambitious programme is in effect a pilot project that will identify the specific areas to target subsequently. On the whole, there is an acceptance that incorporating responsibility into the core of the business remains at an early stage. If companies want to look beyond short-term financial results and towards their wider responsibility to the community, the environment and indeed employees they will need to build on these first steps and fundamentally change the way that they do business. For some, companies could even go one step further. Think tanks such as SustainAbility argue that responsible behaviour needs to be embedded in public policy, capital markets and consumption. The private sector, thanks to the scale and resources of its largest members, is well placed to act as a catalyst for the change required to create a holistically and inherently responsible political and economic system.8
  9. 9. SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values Conclusion Pressure from consumers, regulators and, in some cases, owners is feeding a debate within large companies over how to make their businesses more responsible and acceptable to a much wider group than their shareholders. Increasingly stringent requirements for reporting on responsible business practices have encouraged companies to look for areas where they can incorporate sustainability, such as the environment and supply chains in emerging markets. Many of the big players are starting to say the right things, but at the operational level change will take longer to happen. A similar shift towards responsible practice also needs to happen across policy making, capital markets and consumer behaviour to ensure a strong alignment between what businesses are trying to do and the environment in which they work. 8 © The Economist Intelligence Unit Limited 2014 Eventually, it is hoped, this shift in attitudes will create a significant change in business culture away from a narrow focus on financial results and towards a wider acceptance of the need to restore nature and nurture communities. Progress at company level is in its infancy, but commitment by owners, wide employee engagement and better communication with shareholders can bring results, if they involve a much broader and longer-term attitude to issues such as environmental protection and ethical supply-chain management. Furthermore, responsible business initiatives need not go against commercial interests. Done right, they can also benefit the company as much as they do society, by way of new business opportunities.
  10. 10. While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. and HSBC Bank Plc cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.
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