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SUSTAINABLE AT EVERY LEVEL?
Reaching new heights through good values
A report by The Economist Intelligence Unit
Commissioned by
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
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.
Global Trends, Corporate
cloud 2013: time for
responsible capitalism,
2013.
1
Michael E Porter and Mark
R Kramer, Strategy and
society: the link between
competitive advantage
and corporate social
responsibility, Harvard
Business Review, 2006.
2
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
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.
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 costcutting 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,
example—has put large,
Marginforwidth
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
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, nongovernmental 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.
Thomas Maak,
“Responsible leadership,
stakeholder engagement,
and the emergence of social
capital”, Journal of Business
Ethics, (2007) v74: 329-343.
3
Jane Collier and Rafael
Esteban, “Corporate social
responsibility and employee
commitment”, Business
ethics: A European Review,
(2007) v16 n1: 19-33.
4
3
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
© 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.
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.
Accenture, The investor
study: Insights from PRI
signatories, September 2014.
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.
Sarah Murray,
“Shareholder value:
investors must learn
to respect long-term
thinking”, Financial Times,
June 2013.
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
Paul Polman, “The
remedies for capital”,
McKinsey & Company,
http://www.mckinsey.
com/features/capitalism/
paul_polman.
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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.
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 goodquality 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.
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 threequarters 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.
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© 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
SUSTAINABLE AT EVERY LEVEL? Reaching new heights through good values
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 familyowned 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
SustainAbility, Changing
track: Extending corporate
leadership on sustainable
development, June 2013.
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© 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
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 supplychain 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.
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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